How the Jobs Numbers Increased by a Phantom 151k, yet Rate Stays at 9.6% plus GRIDLOCK, QE2 and more from Barrons.
Up and Down Wall Street | SATURDAY, NOVEMBER 6, 2010
Is the Crowd Wrong on QE2?
By ALAN ABELSON
This round of quantitative easing might surprise its critics. Don’t knock gridlock. The magic of seasonal adjustment.
AFTER DULY ACKNOWLEDGING that he and his party took a shellacking last Tuesday, President Obama gritted his teeth and sought to make nice to the triumphant shellackers by inviting a quartet of Republican congressional leaders to break bread at the White House next Thursday.
Shrugging off warnings from his tear-stained inner circle that he was trying to pet a barracuda, Mr. Obama also dismissed the notion that his inspiration for extending the olive branch to the GOP grandees was a political ploy, all decked out with smiles and photo ops, supposedly showing the citizenry how eager he was to bridge the partisan divide. Who could possibly entertain such a nasty thought?
For their part, the legislators were loath to pass up a free meal or violate an unalterable Republican policy to bite the hand that feeds you if it’s attached to a Democrat (deviants face the risk of dismemberment by the tea party). Still, it amazes us that their suspicions weren’t aroused when they had to check their firearms at the door, and leave behind the tasters who typically accompany them.
The vast majority of election postmortems dourly prophesied that Washington is headed for a couple of years of political gridlock. But our greatest fear is not that we’ll get gridlock, but that we won’t. We’ve long been a fan of legislative stasisâ€”on the theory that what they can’t do won’t hurt youâ€”and nothing we’ve heard from either the victors or the losers in last week’s contest induces us to reconsider. Quite the contrary.
The overriding feature of this year’s midterm election and, for that matter, all the elections held in this century, is the mercurial mood of that part of the population that decides who wins. What’s striking is the ease with which these key ballot-casters change preferences, and the relish with which they punish office holders who they feel have disappointed them.
That these swing voters, nursing even a modest grievance, are increasingly inclined to hopscotch from one party to the other can’t have eluded the notice of even the dimmest politician (take your pick, there are plenty to choose from).
More to the point, perhaps, nothing raises the consciousness of a pol as the threat of losing his job, and the pesky slice of the electorate described above manifestly lack a clear idea of what they wantâ€”except that it’s not what they have. In 2008, they went big-time for Mr. Obama’s promise of change. In 2010, they bolted practically en masse to the Republicans, lured by promises of change.
Our fear, then, is that against all odds and despite bloodcurdling vows of settling for nothing less than unconditional surrender, the warring sides of Congress will contrive to effect change. And by doing so, instead of leaving bad enough alone, they’ll manage to make things worse, quite conceivably infinitely worse, with lugubrious consequences for the economy, the markets and the populace.
But, hey, we’re an optimist: If you can’t depend on Congress to do nothing other than rant, what can a man believe in? So be prepared to welcome, for at least a two-year stay, good old gridlock.
WHATEVER YOUR POLITICAL LEANINGS (take note, if you haven’t already, that it’s linguistically incorrect to talk about political convictions; the correct phrase these days is political leanings, which never fails to summon up for us images of poor souls whose bodies are permanently fixed at an awkward slant), the election wasn’t without its redeeming message: Money can buy anything except public office.
Make that money cannot always buy public office, since the whole shebang this time around cost a tidy $4 billion or thereabouts. But according to a compilation by the Center for Responsive Politics, quoted by Bloomberg, of the 58 candidates who shelled out their own moneyâ€”nearly $160 million in totalâ€”in an attempt to snare a seat in Congress, 30 lost in primaries or threw in the towel before the final count.
Moreover, candidates for state office spent even more lavishlyâ€”a combined $344 millionâ€”and any number of them had nothing to show for their dough but old campaign buttons and calluses from excessive hand shaking. The total, of course, was swelled by Meg Whitman, of eBay fame, whose ample bank account took a modest nick of $141 million, spent on her losing bid to become governor of California, and Linda McMahon, the professional wrestling queen, who dropped $46.6 million in her unsuccessful run for senator from Connecticut.
Ah, well, they can draw consolation from the fact that in its present parlous condition, the economy needs every buck it can garner, so their free-and-easy spending was not entirely in vain. It’s possible, we suppose, that they’d rather be millions richer than magnanimous. In which case, we’re constrained to offer our heartfelt condolences.
THAT THE ELECTION RESULTS pleased investors does not, we admit, constitute breathtaking news. For months, the polls have been predicting a Republican sweep in the House and gains in the Senate, and for once, at least, the polls turned out to be pretty much on the money. And to borrow the Street clichÃ© of the day, the outcome had been discounted by the markets for quite a spell before the vote was tallied.
What really sent the averages bounding to their best prices in two years was confirmation by the Federal Reserve that it was launching its second try at quantitative easing and pledging to inject $600 billion of stimulus between now and the end of June into the still-parched financial system. In the process, it hoped to stir the inflation devil, which by Mr. Bernanke’s measure (apparently, he hasn’t had to buy any food or gasoline lately) has been slumbering peaceably, and crank up the frustratingly sluggish recovery.
The announcement gave the marketsâ€”commodities as well as equities, foreign as well as our ownâ€”a shot in the arm, while further hammering the bruised and battered dollar. This latest outbreak of euphoria, inspired partly by the scent of future inflation, lasted a whole day or two, helped along by panicky shorts scrambling for cover. Friday, things settled down a bit.
The Street consensus was that QE2 would have very little positive impact. It would intensify the pressure on the greenback and irritate foreign friends and whatever (China, if you can believe it, complained about “currency manipulation”). It also, we were assured by assorted stock-pushers, enhanced the attraction of equities, presumably as a cheap inflation hedge.
Such widespread agreement doesn’t mean the crowd is necessarily wrong. But it makes us wonder. It also prompted us to read with some care the contrary opinion of Northern Trust’s Paul Kasriel and Asha Bangalore, that “QE2 is likely to be more successful than QE1.” (Which, in itself, isn’t saying much.)
We don’t have space enough to offer more than some snippets from the full report, but hope you’ll get the flavor. Paul and Asha point out that QE1 covered the 16 months ended March 2010, during which stretch the Fed’s outright holdings increased by a net of only $200 billion, while other elements of Fed credit shrank by a net $1.3 trillion, including an $875 billion contraction in the commercial-banking system’s credit. The net change in credit in the first round of QE came to -$675 billion, which explains why its effect was so feeble.
By contrast, they reckon that during the next seven months of QE, it’s conceivable that the combined Federal Reserve and commercial-system credit could increase by more than 5%, the most since March 2009. That wouldn’t be enough to spark a boom in nominal aggregate demand, they concede, but it would “help prevent the economy from slipping back into a recession in the face of substantial headwinds emanating from the housing and state/local government sectors.”
Not a panacea for what ails us, but avoiding a double dip is no small thing, either.
THE JOBS REPORT FOR OCTOBER was released by the Bureau of Labor Statistics on Friday, and at first blush was surprisingly strong, much stronger, indeed, than expected. Payrolls expanded by 151,000 and the two previous months’ were revised upward. But hold the hurrahs. The unemployment rate was stuck at 9.6%, and, toss in the underemployed and the rate remains at an elevated 17%.
Moreover, the household version of the employment picture was a real bummer, showing an employment drop of 330,000. That especially weird disparity between the household and the payroll reports made us do a double-take. Happily, the always astute Stephanie Pomboy of MacroMavens provided a quickie explanation:
“The seasonal bar which the payroll data must jump was (inexplicably and dramatically) lowered from prior Octobers.”
Thus in October 2009, the BLS set the bar at 870,000 jobs, similar to the 840,000 it anticipated in October 2008. This year, by contrast, it lowered the bar to 768,000. Mumbo, jumbo, payrolls presented “an upside surprise” of 100,000.
According to John Williams at Shadow Government Statistics, the BLS’ fiddling with the figures via what he calls “seasonal-factor games” actually created 200,000 phantom jobs last month. John cites such finagling as the reason his prediction of an October decline and a rise in the jobless rate was wrong. It also explains why seasonally adjusted payrolls were revised upward by 110,000 in September including 56,000 in August.
As we’ve observed before, those seasonal adjustments sure are magical: They can make it snow in the Sahara and be hot as blazes in the middle of winter in Siberia.