World Bank President says Gold has Role in next Monetary System

The current dollar-based global monetary system known as "Bretton Woods II" is on its last legs. We all know it, but what none of us know is what will replace it.

Inquiring minds should be interested to discover that World Bank President Robert Zoellick mentioned a role for gold in the development of a new monetary system to succeed "Bretton Woods II".

Please consider, The G20 must look beyond Bretton Woods by Robert Zoellick.

... Fifth, the G20 should complement this growth recovery programme with a plan to build a co-operative monetary system that reflects emerging economic conditions. This new system is likely to need to involve the dollar, the euro, the yen, the pound and a renminbi that moves towards internationalisation and then an open capital account.

The system should also consider employing gold as an international reference point of market expectations about inflation, deflation and future currency values. Although textbooks may view gold as the old money, markets are using gold as an alternative monetary asset today.

The development of a monetary system to succeed “Bretton Woods II”, launched in 1971, will take time. But we need to begin. The scope of the changes since 1971 certainly matches those between 1945 and 1971 that prompted the shift from Bretton Woods I to II. Serious work should include possible changes in International Monetary Fund rules to review capital as well as current account policies, and connect IMF monetary assessments with WTO obligations not to use currency policies to remove trade concessions.

Don't expect any serious movement along the lines of Zoellick's suggestion until there is a major currency crisis involving the US, Japan, or Europe. In the meantime, it is nice to see a role for gold floated in high places.

Mike "Mish" Shedlock
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Correct Translation of "Clueless" from German Reader; Geithner Backs Off His Own Plan

In German Finance Minister calls Fed "Clueless"; G20 Showdown with China; Why Geithner's "Non-Plan" is Nothing but Hot Air I quoted a Reuters article that called the Fed "clueless".

It seems there is a bit of a translation error to "clueless"

Michael from Germany writes ...

Hi Mish,
have been a follower of your writings for a very long time now - many thanks for all your work !

Please allow one remark to the "clueless" quote from German finance minister Schäuble.

While his comment was indeed very strong language for a German official towards the USA, the "clueless" quote is not the proper translation of what he said.

In German, he used the adjective "ratlos". Literally, that means "helpless", "at a loss what to do", "baffled", "perplexed". That is definitely less strong language than "clueless" - which I believe also implies that Bernanke does not understand how he got himself into the mess.

And "Ratlos" also does not have that colloquial touch to it.

Having said that, however, I cannot recall that German officials have ever commented any Fed decision less favourably than they did last week.

Hope that helps a bit,
Please do keep up your excellent work,
kindest regards from Germany,
Michael

Thanks Michael. Always happy to make a correction as appropriate.

Geithner Backs Off His Own Plan

As long as we are doing corrections, it seems Geithner, perhaps under pressure from China and emerging markets, has abandoned his plan to save the world via current-account targets.

Bloomberg reports G-20 Conflict Risk Eases as U.S. Says Surplus Goal Unrealistic

U.S. Treasury Secretary Timothy F. Geithner refrained from pushing for current-account targets while China softened its stance on the Federal Reserve’s quantitative easing days before a summit of the Group of 20.

“It looked like there was going to be quite a lot of conflict or lack of agreement going into the G-20 but this suggests there may be a bit more accord,” said Mitul Kotecha, the Hong Kong-based head of global foreign-exchange strategy at Credit Agricole CIB. “There is some toning down of the rhetoric on the Fed’s policy but in return, the U.S. will be looked upon to tone down” its push to shrink trade and investment imbalances.

While the Treasury chief said last month that 4 percent of gross domestic product was “likely to emerge as the basic benchmark countries look to,” he refrained from repeating that guideline in Kyoto. He instead noted policy makers have tried to address persistent trade and investment imbalances since the 1940s, and “it’s a process that’s going to take some time.”

Since we have had problems since 1940 and since the problems dramatically worsened after Nixon took the US off the gold window, it is safe to point out that the process has already taken one hell of a long time.

Now that Geithner has backed down off a plan that cannot possibly work, there is less chance of fireworks.

This is what I wrote earlier about Geithner's plan ...

Geithner's Non-Plan is Just Hot Air

Geithner's plan to limit current account surpluses and deficits to 4 per cent of gross domestic product is flat out silly. Actually there is no "plan", just hot air.

For starters, why would the surplus countries who want to increase exports agree to it? Even if they did agree to it, pray tell what is the enforcement mechanism?

Unless Geithner proposes an enforcement mechanism that can actually stick, there is no plan.

The key point here is there is no enforcement mechanism, nor any discussion of one. There has been no enforcement mechanism since Nixon closed the gold window. That is all you need to know.

Thus, G20 will fail to accomplish anything. However, the show might produce some exciting fireworks for a change, given that currency wars have escalated.

Fireworks may be on hold. It's too bad. We needed some. Now all we are likely to see is a bunch of lies regarding agreements to agree at later date.

Fireworks would be more entertaining and with some massive fireworks there would be a better chance (although still slim) of accomplishing something.

Mike "Mish" Shedlock
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German Finance Minister calls Fed "Clueless"; G20 Showdown with China; Why Geithner's "Non-Plan" is Nothing but Hot Air

Outside the blogosphere and into realm of high ranking government officials, it is rare to hear words like "clueless" to describe the Fed. That such talk is now occurring shows just how upset the rest of the world is at Bernanke's policies.

Reuters reports US Policy 'Clueless': German Finance Minister.

Europe needs to strengthen economic governance and agree on a permanent crisis resolution mechanism, all the more so given current U.S. economic weakness, German Finance Minister Wolfgang Schaeuble said on Friday.

France and Germany should maintain their leadership role in Europe, Schaeuble said, especially in order to harmonise its economic policy and bolster stability given current economic uncertainties.

These are being worsened by reckless policy in part from the the United States, Schaeuble said, sharpening his criticism of the Federal Reserve's program to buy an additional $600 billion worth of U.S. government bonds. Pumping more money into the economy will not solve the country's problems, he said, adding that the world needed U.S. leadership that was currently lacking.

"With all due respect, U.S. policy is clueless," Schaeuble said. "(The problem) is not a shortage of liquidity. Late on Thursday, Schaeuble said Germany would take up this point critically with the United States both bilaterally and at next week's G20 summit of industrialised and emerging nations.

G20 Showdown

The Financial Times reports China tees up G20 showdown with US

China has curtly dismissed a US proposal to address global economic imbalances, setting the stage for a potential showdown at next week’s G20 meeting in Seoul.

Cui Tiankai, a deputy foreign minister and one of China’s lead negotiators at the G20, said on Friday that the US plan for limiting current account surpluses and deficits to 4 per cent of gross domestic product harked back “to the days of planned economies”.

“We believe a discussion about a current account target misses the whole point,” he added, in the first official comment by a senior Chinese official on the subject. “If you look at the global economy, there are many issues that merit more attention – for example, the question of quantitative easing.”

China’s opposition to the proposal, which had made some progress at a G20 finance ministers’ meeting last month, came amid a continuing rumble of protest from around the world at the US Federal Reserve’s plan to pump an extra $600bn into financial markets.

Complaints about QEII Continue to Pile Up

The list of complaints about QEII is long and growing: South Korea, Hong Kong, Brazil, China, Volcker Complain about Bernanke's QE Policy.

Add Germany to the list.

Geithner's Non-Plan is Just Hot Air

Geithner's plan to limit current account surpluses and deficits to 4 per cent of gross domestic product is flat out silly. Actually there is no "plan", just hot air.

For starters, why would the surplus countries who want to increase exports agree to it? Even if they did agree to it, pray tell what is the enforcement mechanism?

Unless Geithner proposes an enforcement mechanism that can actually stick, there is no plan.

The key point here is there is no enforcement mechanism, nor any discussion of one. There has been no enforcement mechanism since Nixon closed the gold window. That is all you need to know.

Thus, G20 will fail to accomplish anything. However, the show might produce some exciting fireworks for a change, given that currency wars have escalated.

Addendum:

A German reader suggests that Reuters improperly translated the German adjective "ratlos" which literally, that means "helpless", "at a loss what to do", "baffled", "perplexed", as opposed to "clueless".

Also, Geithner is now backing off his plan to use current-account surplus mandates to save the world's economy.

Please see Correct Translation of "Clueless" from German Reader; Geithner Backs Off His Own Plan for details.



Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Sunday Funnies 2010-11-07 Reflections on Quantity vs. Quality

Reflections on Quantity vs. Quality



Mike "Mish" Shedlock
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Police may boycott NHL's Winter Classic; Winchester Union Shoots Self in the Head

Pittsburgh Post-Gazette reports Police may boycott NHL's Winter Classic

City police officers are threatening to boycott the Winter Classic in dispute with the Pittsburgh Steelers over holiday pay, raising questions about whether there will be adequate security at the nationally televised outdoor hockey game, which is due to draw tens of thousands of fans to Heinz Field on New Year's Day.

At issue is whether off-duty officers scheduled to work during the Jan. 1 Penguins game against the Washington Capitals will receive holiday pay, or 2 1/2 times their normal rate, which is what they are paid under their contract with the city to patrol on a holiday.

Even though it's a hockey game, the pay dispute involves the Steelers, who have a lease on Heinz Field.

The Steelers have proposed paying officers time-and-a-half, which is what they make working security at games that do not fall on holidays, said Sergeant John Fisher, who schedules 36 officers to work inside the stadium.

Mr. Fisher sent the officers an e-mail this week urging them not to work for anything less than holiday pay. He said he sent the note after conferring with Lieutenant Thomas Atkins, who schedules about 30 officers to work outside the stadium, directing traffic, among other duties.

"As of writing this, it appears as though we will not be working this event," Sgt. Fisher wrote. "Due to the fact that this is a major police holiday we have informed the Steelers and Heinz Field that the appropriate holiday pay rate is applicable. Heinz Field and the Steelers have balked at this rate and have indicated that they will not pay the same, they have taken a position where they want to dictate our pay rate to us and this simply cannot be permitted. ...

"I would implore all of you to stand together on this issue and not work this or any other detail, on a holiday, at a reduced rate. It would be unwise and foolish to break from this standard," he wrote. ...

What's unwise and foolish is for Pittsburgh to have an agreement with the police mandating double-time-and-a-half for holidays. It's no wonder Pittsburgh is having financial difficulties.

The Steelers ought to bid out security to the lowest bidder. I bet many private security guards would take the offer at time-and-a-half or perhaps even straight time.

Moreover, and not just for this event, Pittsburgh should outsource ALL traffic direction jobs to an outside firm. It does not take a police office to do this duty in the first place.

Public Unions vs. Private Unions

The problem with pandering to public unions is ordinary taxpayers suffer the consequences when politicians get in bed with unions. In private industry, when unions wreck the company it goes under. Alternatively, unions stupidly vote themselves into oblivion.

In a case of the latter, the Firearm blog reports Union negotiations fail. Olin (Winchester) moves 1000 jobs.

Olin Corp. is moving its Winchester Centerfire plant to Mississippi after the Association of Machinists and Aerospace Workers District 9. Union rejected their proposed contract for the second time. BND.Com Reports Olin to move 1,000 jobs to Mississippi after union says no to new contract

The Clayton, Mo.-based company said that its Winchester Centerfire division in East Alton and the unit's approximately 1,000 jobs will be relocated to a new 500,000-square-foot, state-of-the-art plant to be built in Oxford, Miss. The relocation is expected to take place over several years.

The union voted "no" Tuesday in the revote -- 593 to 470. The union also voted against this contract on Oct. 17 by a two-to-one margin. St. Peters said most workers refused to accept concessions because they believe the munitions manufacturer has been profitable.

Winchester Union Shoots Self in the Head

Bang. Just like that, 593 out of 1063 voted that it was better to have no job than take a pay and benefit cut.

Heaven forbid union members have to give up a 5th week of paid vacation. Lordy! Admittedly the 7-year wage freeze Olin demanded sounds bad, but not when the alternative is working at Walmart or wherever for minimum wages (assuming jobs can be found at all).

The smart thing to do would have been to accept the contract, keep the job, and if the opportunity arose, take a better job elsewhere. Instead it's goodbye Alton, Illinois; Hello Mississippi.

Olin was the sixth-largest employer in the metro-east. It will be impossible to replace those jobs.

In general, Illinoisans don't seem very bright. This is proof: 33% Tax Hike Will Hit Illinois; Another Stiffed Illinois Vendor Stops Servicing State

Mike "Mish" Shedlock
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Bold-Faced Lies of the Day from Geithner, Bernanke

How can anyone take blatant liars seriously? How can anyone not know Bernanke and Geithner are blatant liars?

I have not figured out the answer to those questions but I can point out another round of lies from both Geithner and Bernanke.

Bernanke's Lie of the Day

MarketWatch reports Fed chairman: Increasing inflation not a goal

Some Fed critics have accused the bank of pursuing an inflationary strategy by adding trillions of dollars of credit into the nation’s financial system. The Fed itself seemed to suggest inflation was too low in a policy statement two months ago.

Yet Fed Chairman Ben Bernanke said Saturday that the central bank’s decision this week to purchase $600 billion in Treasury bonds is solely aimed at keeping U.S. interest rates low so the economy can grow.

“We are not in the business of trying to create inflation,” Bernanke said at a forum in Georgia to discuss the role of the central bank in the U.S. economy.

Bernanke said prior actions indicated monetary policy was “insufficiently stimulative.” He said the possibility of deflation, or falling prices, has posed a bigger threat.

Of course the Fed is in the business of producing inflation. It is their first and foremost goal, just as it is in Japan. Consequences, such as asset bubbles be damned.

Bernanke belongs on the cover of Mad Magazine with his "What me Worry?" attitude about asset bubbles. He could not spot a housing bubble even though it was obvious to practically everyone on the planet except the other members of the Fed, real estate agents, and home builders.

Geithner's Lie of the Day

Bloomberg reports Geithner Says U.S. Won’t Use Dollar to Gain Economic Advantage

Treasury Secretary Timothy F. Geithner said the U.S. won’t use the dollar as a trade weapon and he repeated his support for a “strong dollar” that plays a central role in the global economy.

“We will never use our currency as a tool to gain competitive advantage,” Geithner told reporters today after a meeting of finance ministers from the Asia-Pacific Economic Cooperation group in Kyoto, Japan.

The Treasury chief said he believes the dollar, euro and yen are roughly in alignment with each other, and he said American policy makers understand the “special responsibility” the U.S. has for the world economy. “I’m happy to reaffirm again that a strong dollar’s in our interest as a country,” Geithner said.

If a strong dollar was in the best interest of the country, then Geithners would not be pressuring China to weaken it. Bernanke would not be out to destroy it.

I am delighted that Rand Paul won a senate seat. He will have a chance to stick it to Bernanke during the Fed Chairman's semi-annual testimony charade before Congress, formally known as the Humphrey Hawkins Testimony and Report.

Is Obama a Keynesian?

Let's try one more time. The last Youtube I posted was restricted.

This is one of the funniest things I have seen in a while.



Mike "Mish" Shedlock
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Is Obama a Keynesian?

This is one of the funniest things I have seen in a while.



Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Unicredit Debt Collection Scam "Serves" Fake Court Papers by Fake Cops and Fake Judges

This story is so outrageous that I cannot figure out why it has not gone viral on the internet. Unicredit America Inc, a debt collection firm, had people dress up (pretending to be police), serve fake papers to people requiring them to show up in court.

People showed up in a fake court for a fake hearing with a fake witness stand, and an individual in black pretending to be a judge.

Please consider Debt Collector Scam Reaches New Low: The Unicredit Bogus “Courtroom” Scam

It isn’t easy for consumers to protect themselves these days, from robo-signers, foreclosure-rescue scams, and all manner of abusive collection tactics, but the Unicredit scam may take the prize for sheer audacity. It seems that Erie, Pennsylvania debt collection agency Unicredit not only set up a fake courtroom, complete with phony judge, with which to bamboozle and intimidate, but it dressed up employees like sheriff’s deputies to “serve” faked court papers on consumers.

The Unicredit scam, as outrageous as it is, differs mainly in scope from tactics that are commonly used by creditors and collection agencies, whose stock in trade is to mislead, exaggerate, and intimidate.

And while I haven’t seen the pseudo-courtroom scam before, the pseudo-law enforcement official is nothing new.

It’s not always easy when you are scared and someone is breathing down your neck, but again, that is a debt collector’s stock in trade. The more urgent he makes everything sound, the more likely you won’t slow down to think, and ask yourself some practical questions.

The most important and most practical advice is to go see an attorney. If you’re being threatened with legal action, an attorney can tell you what really can (and can’t) happen. If you’ve already been intimidated or scammed into giving up something you shouldn’t have, an attorney can tell you how to redress the situation. An attorney can also help you come up with a plan for addressing persistent credit problems, explain your options, and tell you what you can do about it. Knowledge is power, and it is the best, and most effective weapon you can have in protecting yourself from scam artists of all kinds–even the ones you owe.

I concur with the advice of Dana Wilkinson, Attorney at Law who wrote the above. If you are facing financial difficulties, please see the article for additional tips on how to protect yourself.

For still more reasons on why you need to consult an attorney in these matters please consider

• Before Walking Away Consult An Attorney


• How to Find a Bankruptcy Attorney

Pennsylvania Attorney General Files Charges

How could anyone at Unicredit possibly think what they did was legal?

Straight from the Pennsylvania Attorney Generals website: Erie debt collection company sued; accused of using bogus "hearings" and fake "courtroom" to collect from consumers

Attorney General Tom Corbett today announced that a consumer protection lawsuit has been filed against an Erie debt collection company accused of using deceptive tactics to mislead, confuse or coerce consumers - including the use of bogus "hearings" allegedly held in a company office that was decorated to look like a courtroom.

Corbett said the civil lawsuit was filed by the Attorney General's Bureau of Consumer Protection against Unicredit America Inc., with corporate and business offices located at 1537 West 39th St., Erie, also identified as the "Unicredit Debt Resolution Center."

"This is an unconscionable attempt to use fake court proceedings to deceive, mislead or frighten consumers into making payments or surrendering valuables to Unicredit without following lawful procedures for debt collection," Corbett said. "Consumers also allegedly received dubious 'hearing notices' and letters - often hand-delivered by individuals who appear to be Sheriff Deputies - which implied they would be taken into custody by the Sheriff if they failed to appear at the phony court for 'hearings' or 'depositions'."

Corbett said that in conjunction with the lawsuit, the Attorney General's Office has also filed a petition for special and preliminary injunction, asking the court to freeze all Unicredit assets; prohibit the company from engaging in any debt collection; immediately cease all bogus hearings or depositions; and to provide detailed information about company bank accounts, assets and business records.

Question Authority

Max Keiser talked about this incredible scheme in Fake Markets! Fake Finance

Max Keiser and co-host, Stacy Herbert, look at the scandals of fake judges using fake deputies to collect fake debts in fake courts and of Irish austerity under imposed under fake pretences. In the second half of the show Max talks to David McWilliams about Ireland's first ever economics festival, Kilkenomics, and the financial and banking crisis that inspired it.

The video is 25 minutes but covers a wide variety of topics including "fake authorities" in the US and Ireland demanding repayments in fraudulent ways.

The video is well worth a listen in entirety.

Mike "Mish" Shedlock
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Jobs Expand by 151,000, Unemployment Steady at 9.6%; Birth-Death Methodology Changes for the Better; Reflections on the Numbers

Today the BLS reported jobs expanded by 151,000. This should not be totally unexpected as I noted last night in Gaming the Jobs Report that TrimTabs called for +95,000, ADP +43,000, and Gallup showed a surge in October hiring.

Moreover, recent ISM surveys were stronger than expected. The important question this morning is whether or not this surge is sustainable. I do not think it is, nor does TrimTabs.

Here is the Email alert from TrimTabs once again (sorry, no link).

TrimTabs

Sausalito, CA – November 3, 2010 – TrimTabs Investment Research estimates that the U.S. economy added 95,000 jobs in October, the first monthly increase since May.

“The economy clearly improved in October,” said Madeline Schnapp, Director of Macroeconomic Research at TrimTabs. “Unfortunately, the gains probably aren’t sustainable.”

Multiple indicators suggest the labor market perked up last month. Real-time tax data shows wage and salary growth accelerated, TrimTabs’ proprietary measure of online job postings jumped 5.6%, and initial unemployment claims fell to the lowest level since August 2008.

In a research note, TrimTabs argues that the economy will remain stuck in slow-growth mode. October’s employment increase likely owes to temporary factors such as inventory building. Also, a cheaper dollar boosted exports, and record low mortgage rates spurred refinancing activity.

“Economic growth is likely to stay sluggish because the private sector isn’t able to pick up the slack from waning government stimulus,” Schnapp noted. “State and local government budget crises and the weak housing market will be significant drags on growth for a long time.”

I strongly concur with that last paragraph in red above.

I had a typo in the headline number from TrimTabs yesterday (now corrected). The TrimTabs estimate was +95,000 not +75,000 as I had in the title. No changes were made to the body of my post.

Had I read that properly I would have upped last night's estimates higher by 20,000. I was very aware today's report might be on the hot side.

This is what I said ...

Anything from +40,000 to +110,000 seems like a reasonable guess. I certainly would not be surprised to see a number in the upper end of that range. Stores are hiring, Black Friday sales are starting 3 weeks early, and ISM reports seemed surprisingly strong.

Please see Recap and Reflections at the end of this article to put things into proper perspective as to what today's numbers mean.

BLS October Report

Please consider the Bureau of Labor Statistics (BLS) October 2010 Employment Report.

Nonfarm payroll employment increased by 151,000 in October, and the unemployment rate was unchanged at 9.6 percent, the U.S. Bureau of Labor Statistics reported today. Since December 2009,nonfarm payroll employment has risen by 874,000.

Unemployment Rate - Seasonally Adjusted



Nonfarm Payroll Employment - Seasonally Adjusted

Establishment Data



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Highlights

• 151,000 jobs added
  
• 5,000 construction jobs added
  
• 7,000 manufacturing jobs were lost
  
• 154,000 service providing jobs were added
• 27,900 retail trade jobs were added
• 46,000 professional and business services jobs were added
• 53,000 education and health services jobs were added
• 5,000 leisure and hospitality jobs were lost
  
• 8,000 government jobs were lost

Note: some of the above categories overlap as shown in the preceding chart, so do not attempt to total them up.

Index of Aggregate Weekly Hours

Production and non-supervisory work hours ticked up by .1 to 33.6 hours. Average hourly earnings rose $.07 at $19.17.

BLS Birth-Death Model Black Box

For those unfamiliar with the birth/death model, monthly jobs adjustments are made by the BLS based on economic assumptions about the birth and death of businesses (not individuals).

Birth Death Model Revisions 2009



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Birth Death Model Revisions 2010



click on chart for sharper image

Birth/Death Model Methodology

The big news in the BLS Birth/Death Model is the BLS is going to move to quarterly rather than annual adjustments.

Effective with the release of January 2011 data on February 4, 2011, the establishment survey will begin estimating net business birth/death adjustment factors on a quarterly basis, replacing the current practice of estimating the factors annually. This will allow the establishment survey to incorporate information from the Quarterly Census of Employment and Wages into the birth/death adjustment factors as soon as it becomes available and thereby improve the factors.

For more details please see Introduction of Quarterly Birth/Death Model Updates in the Establishment Survey

In recent years Birth/Death methodology has been so screwed up and there have been so many revisions that it has been painful to watch.

It is possible that the BLS model is now back in sync with the real world. Moreover, quarterly rather than annual adjustments can only help the process.

Please note that one cannot subtract or add birth death revisions to the reported totals and get a meaningful answer. One set of numbers is seasonally adjusted the other is not. In the black box the BLS combines the two coming out with a total. The Birth Death numbers influence the overall totals but the math is not as simple as it appears and the effect is nowhere near as big as it might logically appear at first glance.

Birth/Death assumptions are supposedly made according to estimates of where the BLS thinks we are in the economic cycle. Theory is one thing. Practice is clearly another as noted by numerous recent revisions.

Household Data

The number of unemployed persons, at 14.8 million, was little changed in October. The unemployment rate remained at 9.6 percent and has been essentially unchanged since May.

The number of long-term unemployed (those jobless for 27 weeks and over) was about unchanged over the month at 6.2 million. In October, 41.8 percent of unemployed persons had been jobless for 27 weeks or more.

Both the civilian labor force participation rate, at 64.5 percent, and the employment-population ratio, at 58.3 percent, edged down over the month.

Involuntary Part-Time Workers

The number of persons employed part time for economic reasons (sometimes referred to as involuntary part-time workers) fell by 318,000 over the month to 9.2 million, partially offsetting large increases in the prior 2 months. These individuals were working part time because their hours had been cut back or because they were unable to find a full-time job.

[Mish Note: In January the number was 8.3 million]

Persons Not in the Labor Force
About 2.6 million persons were marginally attached to the labor force in October, up from 2.4 million a year earlier. (The data are not seasonally adjusted.) These individuals were not in the labor force, wanted and were available for work, and had looked for a job sometime in the prior 12 months. They were not counted as unemployed because they had not searched for work in the 4 weeks preceding the
survey.

Among the marginally attached, there were 1.2 million discouraged workers in October, an increase of 411,000 from a year earlier. (The data are not seasonally adjusted.) Discouraged workers are persons not currently looking for work because they believe no jobs are available for them. The remaining 1.4 million persons marginally attached to the labor force had not searched for work in the 4 weeks preceding the survey for reasons such as school attendance or family responsibilities.

Table A-8 Part Time Status



click on chart for sharper image

There are now 9,154,000 workers whose hours may rise before those companies start hiring more workers, about where we were a year ago. The number is down from last month but massively higher than the reported 8,300,000 reported in January.

Table A-15

Table A-15 is where one can find a better approximation of what the unemployment rate really is.



click on chart for sharper image

Grim Statistics

The official unemployment rate is 9.6%. However, if you start counting all the people that want a job but gave up, all the people with part-time jobs that want a full-time job, all the people who dropped off the unemployment rolls because their unemployment benefits ran out, etc., you get a closer picture of what the unemployment rate is. That number is in the last row labeled U-6.

It reflects how unemployment feels to the average Joe on the street. While the "official" unemployment rate has held steady, at an unacceptable 9.6%, U-6 is much higher at 17.0%

Looking ahead, there is no driver for jobs. Moreover, states are in forced cutback mode on account of shrinking revenues and unfunded pension obligations. Shrinking government jobs and benefits at the state and local level is a much needed adjustment. Those cutbacks will weigh on employment and consumer spending for quite some time.

Expect to see structurally high unemployment for years to come.

Keep in mind that huge cuts in public sector jobs and benefits at the city, county, and state level are on the way. These are badly needed adjustments. However, economists will not see it that way, nor will the politicians.

Recap and Reflections

This is the first respectable jobs report in years. The reports earlier this year were padded by part-time census hiring. This report was all private hiring, a very good thing.

However, it is important to put this into perspective. It takes approximately 125,000 jobs a month just to hold the rate steady. Here we have +151,000 and a falling participation rate with the unemployment number flat. This apparent anomaly can be explained by the fact that unemployment numbers are derived from the household survey while the reported jobs number comes from the establishment survey.

The key point to remember is even if we were to see +150,000 jobs a month for the next year, it would not put a dent in the unemployment rate. In fact, if the participation rate rose, it could even go up.

Moreover, it is highly unlikely jobs rise by +150,000 jobs a month, on average, for a whole year.

This month's rise in jobs was fueled by retail hiring. Retail hiring is not sustainable. Nor is the rise in manufacturing. We might see a few more months of this (or not), but this is highly unlikely to be the start of something big or sustainable.

I still expect to see the unemployment rate back up above 10% in this cycle. While today's report may not be as good as it gets, it certainly is close to as good as it gets on a sustainable basis.

Expect to see the unemployment rate stubbornly high for a decade.

Mike "Mish" Shedlock
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R&D Spending Declines First Time in Decade

Corporations are reluctant to spend money, even research and development notes the Wall Street Journal article R&D Spending Drops at Major Firms

Research and development spending at major companies declined last year for the first time in more than a decade, according to a survey by management consulting firm Booz & Co. But R&D as a percentage of revenues was up slightly from a year earlier because revenues dropped at a faster rate than R&D spending.

Booz makes an annual study of the 1,000 publicly traded companies globally that spend the most on R&D, based on their public disclosures. The consulting firm, which has studied data going back to 1997, said 2009 was the first year to show a decline in total R&D spending among these companies.

The cuts last year were concentrated in auto, computing, electronics and industrial companies, some of the biggest spenders.

"The world-wide recession finally caught up with the world's top innovation spenders in 2009," the Booz report says, adding that "the most forward-looking companies will likely move quickly to restore the R&D cuts they made in 2009."

Total 2009 R&D spending by the companies surveyed declined 3.5% from a year earlier to $503 billion. But that worked out to 3.8% of 2009 sales, up from 3.5% in 2008.

Apple last year spent about 3.1% of its sales on R&D, or about half the typical level for computer and electronic companies, said Barry Jaruzelski, a partner at Booz, and yet Apple's R&D appears to be far more effective than that of many rivals.

The Jobs number came in hot today although the unemployment rate was flat. This should not be too surprising as ADP, TrimTabs, and Gallup all suggested a surge in October hiring as did recent ISM reports.

I will have more on jobs in just a bit.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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South Korea, Hong Kong, Brazil, China, Volcker Complain about Bernanke's QE Policy

A parade of countries have expressed grave concerns over the Fed's misguided Quantitative Easing policy.

South Korea Aggressively Considers Curbing Capital Inflows

On Wednesday South Korea Warns It's Close to Curbing Capital Inflows

South Korea on Thursday issued its strongest warning in months that it was close to taking steps aimed at curbing fund inflows, saying it would "aggressively" consider taking such measures.

"The government believes it needs to turn away from the perception that controlling capital flows is always bad and consider introducing measures to improve the macroeconomic prudence," the Ministry of Strategy and Finance said in a statement.

"The government will 'aggressively' consider implementing relevant measures, the ministry said after listing recent remarks made internationally in favor of capital controls.

The statement titled "a message to the markets" was issued hours after the U.S. Federal Reserve said it would buy billions more in government bonds by the middle of next year.

Brazil Central Bank Says QE Causes Distortions and Excessive Liquidity

Please consider Brazil's Meirelles: Fed's latest move on G20 agenda

The head of Brazil's central bank said on Thursday that the U.S. Federal Reserve's latest plan to lower domestic borrowing costs and jumpstart the ailing economy would cause further "distortions" in world markets and complicate his country's efforts to stem the rise of its currency.

"QE creates excessive liquidity that flows over to countries like Brazil," Meirelles said. "Definitely, for Brazil it does create a problem and Brazil will present proposals in that regard to several countries -- the U.S. and China -- to reach a different agreement not to generate so many distortions."

Hong Kong Monetary Authority Warns of QE Related Housing Bubbles

Bloomberg reports Fed Easing Worsens Hong Kong ‘Bubble’ Risk, Chan Says

The U.S. Federal Reserve’s expansion of stimulus will add to the risk of a housing bubble in Hong Kong and may force extra measures to cool prices, said Norman Chan, the head of the city’s central bank.

The Hong Kong Monetary Authority will “take measures that are specific to the housing market if necessary,” Chan said at a press briefing in the city today. “The risk of an asset bubble in Hong Kong’s property market is rising.”

Hong Kong has already tightened purchase requirements after home prices rose about 50 percent from the start of 2009 to the highest level since 1997, according to an index compiled by Centaline Property Agency Ltd.

The Fed’s move to buy another $600 billion of Treasuries, announced yesterday, will “definitely add pressure to the asset markets in emerging-market economies,” Chan said.

China Central Bank Says "Unbridled Printing is Biggest Risk to Global Economy"

A China central bank says U.S. dollar printing is huge risk

Unbridled printing of dollars is the biggest risk to the global economy, an adviser to the Chinese central bank said in comments published on Thursday, a day after the Federal Reserve unveiled a new round of monetary easing.

China must set up a firewall via currency policy and capital controls to cushion itself from external shocks, Xia Bin said in a commentary piece in the Financial News, a Chinese-language newspaper managed by the central bank.

"As long as the world exercises no restraint in issuing global currencies such as the dollar -- and this is not easy -- then the occurrence of another crisis is inevitable, as quite a few wise Westerners lament," he said.

Li Daokui, another academic adviser to the central bank, said loose money in the United States would translate into additional pressure on the Chinese yuan to appreciate. "A certain amount of capital will flow into China, either through Hong Kong or directly into the mainland," Li said.

Fed Governor Richard Fisher Blasts QEII

On October 7, Fed Governor Richard Fisher blasted the idea of QEII in To Ease or Not to Ease? What Next for the Fed?

In my darkest moments I have begun to wonder if the monetary accommodation we have already engineered might even be working in the wrong places. Far too many of the large corporations I survey that are committing to fixed investment report that the most effective way to deploy cheap money raised in the current bond markets or in the form of loans from banks, beyond buying in stock or expanding dividends, is to invest it abroad where taxes are lower and governments are more eager to please. This would not be of concern if foreign direct investment in the U.S. were offsetting this impulse. This year, however, net direct investment in the U.S. has been running at a pace that would exceed minus $200 billion, meaning outflows of foreign direct investment are exceeding inflows by a healthy margin. We will have to watch the data as it unfolds to see if this is momentary fillip or evidence of a broader trend. But I wonder: If others cotton to the view that the Fed is eager to “open the spigots,” might this not add to the uncertainty already created by the fiscal incontinence of Congress and the regulatory and rule-making “excesses” about which businesses now complain?

In performing a cost/benefit analysis of a possible QE2, we will need to bear in mind that one cost that has already been incurred in the process of running an easy money policy has been to drive down the returns earned by savers, especially those who do not have the means or sophistication or the demographic profile to place their money at risk further out in the yield curve or who are wary of the inherent risk of stocks. A great many baby boomers or older cohorts who played by the rules, saved their money and have migrated over time, as prudent investment counselors advise, to short- to intermediate-dated, fixed-income instruments, are earning extremely low nominal and real returns on their savings. Further reductions in rates earned on savings will hardly endear the Fed to this portion of the population. Moreover, driving down bond yields might force increased pension contributions from corporations and state and local governments, decreasing the deployment of monies toward job maintenance in the public sector. Debasing those savings with even a little more inflation than what is above minimal levels acceptable to the FOMC is unlikely to endear the Fed to these citizens. And if―and here I especially stress the word if because the evidence is thus far only anecdotal and has yet to be confirmed by longer-term data―if it were to prove out that the reduction of long-term rates engendered by Fed policy had been used to unwittingly underwrite investment and job creation abroad, then the potential political costs relative to the benefit of further accommodation will have increased.

Part of our cost/benefit analysis should include where the inertia of quantitative easing might take us. Let’s go back to that eye-popping headline in yesterday’s Wall Street Journal: “Central Banks Open Spigot.”

My reaction to reading that article was that it raises the specter of competitive quantitative easing. Such a race would be something of a one-off from competitive devaluation of currencies, a beggar-thy-neighbor phenomenon that always ends in tears. It implies that central banks should carry the load for stymied fiscal authorities―or worse, give in to them―rather than stick within their traditional monetary mandates and let legislative authorities deal with the fiscal mess they have created. It infers that lurking out in the future is a slippery slope of quantitative easing reaching beyond just buying government bonds (and in our case, mortgage-backed securities). It is one thing to stabilize the commercial paper market in a systematic way. Going beyond investment-grade paper, however, opens the door to pressure on a central bank to back financial instruments benefiting specific economic sectors. This inevitably leads to irritation or lobbying for similar treatment from economic sectors not blessed by similar monetary largess.

Why QEII Will Backfire

Let's review a snip from Three Reasons QEII Will "Backfire"; Pavlov's Dogs and the "No Choice" Argument Yet Again

Dr. El-Erian, CEO and co-CIO of PIMCO states several reasons why QEII will backfire.

1. The Fed is going it alone, without meaningful structural reforms
2. Emerging economies burdened by capital inflows in the wake of QEII will react with currency wars, protectionism, and capital controls
3. Resultant commodity price increases will increase input costs and reduce earnings of American companies

The position of El-Erian is interesting given that PIMCO founder, managing director and co-CIO endorsed QEII as discussed in Bill Gross' Arrogant Endorsement of Fed's QE Policy he calls History's Most "Brazen Ponzi Scheme".

Unintended Consequences of QEII

Mohamed El-Erian addresses the unintended consequences of Fed policy actions and the reasons Quantitative Easing will fail in QE2 blunderbuss likely to backfire.

....

Intended vs. Unintended Consequences

Add a junk bond bubble to the list of consequences (unintended or otherwise).

Bernanke is clearly misguided enough and arrogant enough to purposely blow a junk bond bubble as an "intended consequence", even though the housing bubble bust proves without a doubt the asininity of such policies.

Thus, it's hard to say if Bernanke wants a junk bond bubble or is merely willing to live with one.

Then again, Bernanke is dense enough to not have any clues about what is happening. He did not see the housing bubble, the recession, the huge rise in unemployment, and any number of other things that happened. In fact, he even denied there was a housing bubble.

In the academic wonderland in which Bernanke lives, it is perfectly possible he is oblivious to the bubbles he is creating.

However, looking at things from every angle, given that Bernanke Admits Targeting Stock Prices, I am leaning towards the first option: Bernanke is misguided enough and arrogant enough to purposely blow more asset bubbles as an "intended consequence", hoping he can deal with them later.

Bernanke Out of Control

Points number 2 and 3 are already in play.

2. Emerging economies burdened by capital inflows in the wake of QEII will react with currency wars, protectionism, and capital controls

3. Resultant commodity price increases will increase input costs and reduce earnings of American companies

Paul Volcker on QE

Please consider Volcker: future inflation risk limits QE effect

Former U.S. Federal Reserve Chairman Paul Volcker on Friday repeated his scepticism about the benefits of the Fed's latest quantitative easing, citing concern about long-term inflation.

He told reporters after a lecture in Seoul that short-term U.S. interest rates had almost no room to go down further, while long-term bond prices were under pressure from increasing concern about future inflation.

There is no way QEII can possibly do any good, and at least two current Fed governors know it. So does former Fed chairman Paul Volcker.

Bernanke claims to be a student of the Great Depression. The reality is he is an academic wonk with no real world experience in anything. He has proven three things however:

1. He will not listen and cannot be taught
2. He has no common sense whatsoever
3. He is dedicated to bubble blowing in response to crises

Other than that, Bernanke is perfectly suited for the job. On second thought, those traits are why he was appointed in the first place.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Ron Paul Questions Fed Authority, Vows Another "Audit the Fed" Effort

Ron Paul is back at it with another "Audit the Fed" campaign, this time with a House and Senate far more to his liking.

Please consider Ron Paul vows renewed Fed audit push next year.

U.S. Republican Representative Ron Paul on Thursday said he will push to examine the Federal Reserve's monetary policy decisions if he takes control of the congressional subcommittee that oversees the central bank as expected in January.

"I think they're way too independent. They just shouldn't have this power," Paul, a longtime Fed critic, said in an interview with Reuters. "Up until recently it has been modest but now it's totally out of control."

Paul is currently the top Republican on the House of Representatives subcommittee that oversees domestic monetary policy, and is likely to head the panel when Republicans take control of the chamber in January.

That could create a giant headache for the Fed, which earlier this year fended off an effort headed by Paul to open up its internal deliberations on interest rates and monetary easing to congressional scrutiny.

Rand Paul's Victory Speech

In case you missed it, please consider Rand Paul's victory speech.



One play of that video is all you need to hear to know that Bernanke's life is going to be a lot more miserable after this election.

Several senators were elected who are openly hostile to the Fed. Rand Paul is one of them. Tea Party candidates won 29 seats in the House. They too will make Bernanke miserable.

Some people claim the election will not change anything. I bet otherwise. But it will take time.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Gaming the Jobs Report: TrimTabs +95,000, ADP +43,000, Bloomberg +60,000, Gallup Sees Unemployment Rising to 9.7% to 9.9%

Friday's jobs reports will be out shortly. Here is how some see it, late Thursday evening.

Gallup

Gallup Finds U.S. Unemployment Likely to Be Up on Friday

Gallup analysis suggests the October unemployment rate that the government reports on Friday will be in the 9.7% to 9.9% range. This is despite the fact that unemployment, as measured by Gallup without seasonal adjustment, fell sharply to 9.4% at the end of October -- down from 10.0% in mid-October and 10.1% at the end of September. Most of this drop took place after the official Labor Department measurement period, suggesting the government's October report may not pick up this late-month decline.



Relationship to the Official U.S. Unemployment Rate

Gallup's end-of-October data suggest that the unemployment rate plunged during the last half of the month. However, most of the improvement took place after the measurement period for the government's jobs report, due out Friday. Over that period, Gallup's unemployment measure, which is not seasonally adjusted, increased from 9.4% in mid-September to 10.1% at the end of September and 10.0% in mid-October. As a result, Gallup analysis suggests the government's seasonally adjusted October unemployment rate is likely to increase into the 9.7% to 9.9% range when it is reported on Nov. 5.

Why the Decline in Unemployment?

In part, the sharp improvement in the unemployment rate and in underemployment during late October may be explained by the approaching holiday sales season. Halloween is becoming a bigger holiday and could be responsible for some added hiring. Further, some retailers are starting their Christmas sales early, anticipating a flat sales period, and could be adding jobs. Both of these possibilities are consistent with the ADP report that private-sector service jobs grew by 77,000 in October.

Another more speculative possibility involves Federal Reserve policy and the midterm elections. Many companies seem to have simply put a hold on new activities, including hiring, during late September and early October, as the economy seemed to be weakening more than expected and the business operating environment seemed more uncertain than normal.

Regardless of the reason -- and although it was too late to help political incumbents on Tuesday -- it appears that the jobs situation showed substantial improvement in late October. Now, it is up to the Fed and the new Congress to build on what appears to be some late October jobs momentum.

Gallup was wrong each of the last two months. Do they have it correct this month?

ADP

The ADP National Employment Report

Private-sector employment increased by 43,000 from September to October on a seasonally adjusted basis, according to the latest ADP National Employment Report® released today. The estimated change of employment from August to September was revised up from the previously reported decline of 39,000 to a smaller decline of 2,000. Since employment began rising in February, the monthly gain has averaged 34,000 with a range of -2,000 to +65,000 during the period. October’s figure is within this recent range and is consistent with the deceleration of economic growth that occurred in the spring. Employment gains of this magnitude are not sufficient to lower the unemployment rate. Given modest GDP growth in the second and thirds quarters, and the usual lag of employment behind GDP, it would not be surprising to see several more months of lethargic employment gains, even if the economic recovery gathers momentum.

ADP and Gallup say the same thing. More jobs, higher unemployment rate.

TrimTabs

Via email, no link available...

Sausalito, CA – November 3, 2010 – TrimTabs Investment Research estimates that the U.S. economy added 95,000 jobs in October, the first monthly increase since May.

“The economy clearly improved in October,” said Madeline Schnapp, Director of Macroeconomic Research at TrimTabs. “Unfortunately, the gains probably aren’t sustainable.”

Multiple indicators suggest the labor market perked up last month. Real-time tax data shows wage and salary growth accelerated, TrimTabs’ proprietary measure of online job postings jumped 5.6%, and initial unemployment claims fell to the lowest level since August 2008.

In a research note, TrimTabs argues that the economy will remain stuck in slow-growth mode. October’s employment increase likely owes to temporary factors such as inventory building. Also, a cheaper dollar boosted exports, and record low mortgage rates spurred refinancing activity.

“Economic growth is likely to stay sluggish because the private sector isn’t able to pick up the slack from waning government stimulus,” Schnapp noted. “State and local government budget crises and the weak housing market will be significant drags on growth for a long time.”

That low in initial unemployment claims vanished today with an adjusted initial claims total of 457,000, an increase of 20,000 from the previous week's revised figure of 437,000.

Bloomberg

The Bloomberg Survey average was +60,000.

The U.S. jobless rate held at 9.6 percent for a third month in October, according to a Bloomberg News survey before today’s Labor Department report. Payrolls likely rose by 60,000, the first increase since May, a separate survey showed.

Anything from +40,000 to +110,000 seems like a reasonable guess. I certainly would not be surprised to see a number in the upper end of that range. Stores are hiring, Black Friday sales are starting 3 weeks early, and ISM reports seemed surprisingly strong.

However, I do not think positive surprises will hold.

TrimTabs says it best "Economic growth is likely to stay sluggish because the private sector isn’t able to pick up the slack from waning government stimulus. State and local government budget crises and the weak housing market will be significant drags on growth for a long time."

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Trends in Rail Traffic

Rail traffic continues to recover, but from very depressed levels as noted on the Railfax Carloading Report.

Changes Since 2007


13-Week Moving Average Projections



Railfax has modified their site to use Tableau software. Controls allow you slide bars to see any timeframes you want. Inquiring minds will want to check it out. I selected a timeframe of 2007 on.

Interestingly, the top charts shows the recession bottom in summer of 2009 quite nicely.

I am a big fan of Tableau Software but that second chart is fantasy material, especially the projection for cyclical traffic.

The following table will help put things into perspective.



Total traffic is up 10.4% year to date vs 2009, but down 8.6% from 2008.
Autos are up 24.2% vs 2009 but down 25.4% vs 2008.

Some 17 months into a "recovery" we are not only below 2008 totals but 2007 totals as well. Moreover, much of the bounce we have seen has been inventory replenishment and the Fed knows it.

If the real economy was not fragile as eggshells (broken is actually more like it), there would not be a QEII.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Weekly Claims Show Job Stagnation for Entire Year

After movement in both directions over the past couple months, weekly claims are back where they have been for nearly a year, right around the 450,000 mark.

Please consider the Unemployment Weekly Claims Report for November 4, 2010.

In the week ending Oct. 30, the advance figure for seasonally adjusted initial claims was 457,000, an increase of 20,000 from the previous week's revised figure of 437,000. The 4-week moving average was 456,000, an increase of 2,000 from the previous week's revised average of 454,000.

The weekly claims numbers are volatile so it's best to focus on the trend in the 4-week moving average.

4-Week Moving Average of Initial Claims



The 4-week moving average is still near the peak results of the last two recessions. It's important to note those are raw numbers, not population adjusted. Nonetheless, the numbers do indicate broad, persistent weakness.

4-Week Moving Average of Initial Claims Since 2006



No Lasting Improvement for 12 Months

There has been no lasting improvement for nearly a year. Weekly claims have generally been in the 440,000 to 480,000 range with the 4-week moving average practically pinned to the 450,000 mark.

To be consistent with an economy adding jobs coming out of a recession, the number of claims needs to fall to the 400,000 level.

At some point employers will be as lean as they can get (and still stay in business). Yet, that does not mean businesses are about to go on a big hiring boom. Indeed, unless consumer spending picks up, they won't.

Questions on the Weekly Claims vs. the Unemployment Rate

A question keeps popping up in emails: "How can we lose 400,000+ jobs a week and yet have the unemployment rate stay flat and the monthly jobs report show gains?"

The answer is the economy is very dynamic. People change jobs all the time. Note that from 1975 forward, the number of claims was generally above 300,000 a week, yet some months the economy added well over 250,000 jobs.

Also note that the monthly published unemployment rate is from a household survey, not a survey of payroll data from businesses. That is why the monthly "establishment survey" (a sampling of actual payroll data) is not always in alignment with changes in the unemployment rate. At economic turns the discrepancy can be wide.

Where To From Here?

Four weeks ago the weekly claims print was 475,000. That number will roll off the 4-week moving average next week. Thus any number lower than 475,000 will cause the 4-week moving average to drop.

Assuming we get a print of 450,000, next week's 4-week moving average will decline to ... drum roll please ... 450,000.

As measured from weekly claims, the economy has been stagnant for a year. However, there is upward pressure on the number in light of cutbacks by state and local governments.

Mike "Mish" Shedlock
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October Retail Sales a "Strange Brew"

Retailers report luxury sales are up but so are sales at Walmart and Costco. Meanwhile other stores like JC Penny and Kohl's are using the old standby of blaming the weather for lack of sales.

Promotions started early this year because of lack of demand, hardly a sign of strength. Moreover, October is a weak month. Given that sales last year were especially weak, year-over-year comparisons are suspect.

Thus, it's hard to make much of anything from retail sales reports in an aggregate sense, but there are some interesting trends at individual store levels.

The New York Times reports Retailers Tally a Mixed October as Sales Rose 1.6%

At the 28 stores tracked by Thomson Reuters, an index that excludes the nation’s largest retailer, Wal-Mart, there was a 1.6 percent increase in sales at stores open at least a year. That met analysts’ expectations, and marked the 14th month of increased sales. But the positive results have been compared with months last year that had significant declines because of the economic downturn.

Several retailers, including J. C. Penney, Kohl’s, Stage Stores, Macy’s and Stein Mart, blamed unusually warm weather for their results, saying it lessened interest in cold-weather clothing.

Discount retailers posted the best results over all, with an average increase of 3.8 percent from a year ago. Costco led that category, with a 6 percent rise in sales.

A resurgence in luxury spending seemed to have legs, with the two higher-end department stores — Saks Fifth Avenue and Nordstrom — reporting the highest increases among the department-store category. Saks’s sales were up 8.1 percent, and at Nordstrom’s full-price stores (as opposed to its discount outlets), sales rose 4.8 percent. But Dillards, Bon-Ton Stores, J. C. Penney, Kohl’s and Stage Stores all reported declines from last year, and the latter three missed analysts’ expectations.

The biggest decline was the teenage retailer Hot Topic. Sales at stores open at least a year fell 8.5 percent, and that was as compared to a 2.6 percent decline from October a year ago.

Ken Perkins, the president of the consulting firm Retail Metrics, called it a "strange brew" in a note to clients.

Selective Shopping

The Wall Street Journal mentions "selective shopping" in Retailers Showing Mixed October Sales Results

"There is a market-share war that is heating up as we move into the holiday season and some retailers evidently are already pulling out the big guns, creating winners and losers," said John Long, retail strategist at Kurt Salmon Associates.

Aeropostale Inc. appears to be a victim of the pricing wars among teen retailers, posting a 2% drop in October same-store sales when analysts expected a 3.1% rise. The company is being pinched as other chains that sell teen apparel, like Abercrombie & Fitch Co. and American Eagle Outfitters Inc. have been lowering prices, encroaching on Aeropostale's corner of the market.

The results are giving a taste of what retailers may expect for Christmas, more selective shopping from consumers who are still not comfortable with the economy. Projections for holiday season sales vary, ranging from a slight loss to over 4% growth, reflecting even economists' uncertainty about the season.

The situation has also caused some retailers to already begin promoting Christmas. Sears Holdings Corp. is already advertising "Black Friday" specials. Toys R Us is promoting its catalog of holiday toys and gadgets. In a sign of the kind of approach many retailers may take this holiday season, the Toys R Us catalog has an application for smartphones and is Internet-friendly.

Explaining the Strange Brew

It seems easy enough to figure the surge in luxury spending can be attributed to the stock market rally. However, the good news pretty much seems to end there.

Walmart is up but J. C. Penney, Kohl’s, Stage Stores, Macy’s and Stein Mart all blame the weather.

Teen Sales Telling

The teen retailer segment was anemic with the exception of Zumiez which reported a 21.5 percent increase. However, last year the store had a decline of 8.9 percent. Perhaps a reflection of age, I have to admit I have never seen a Zumiez store but I certainly have been in many Abercrombie & Fitch, American Eagle Outfitters Inc, and Hot Topic stores (the latter out of curiosity).

Given the number of struggling families where every penny counts and given high teen unemployment, one should not be surprised by the poor performance in the teen group (discounting Zumiez as an outlier).

Late October Surge

The above articles mentioned a surge in late October spending. That surge was picked up in a Gallup survey. However, Gallup claims a pickup in spending in late October is the typical pattern. See Gallup Surveys Shows Anemic October Consumer Spending, No Pickup in Christmas Spending Plans for details.

Consumer Squeeze

That Walmart and Costco are doing well is a sign of a consumer squeeze, not a sign of strength.

All of this points to a mediocre Christmas.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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33% Tax Hike Will Hit Illinois; Another Stiffed Illinois Vendor Stops Servicing State; Common Sense in Tucson and Delta Airlines

Illinois has a $13 billion and growing deficit. The current backlog of bills approaches $6 billion. The state has not paid some suppliers for seven months. In response some vendors have stopped doing business with the state.

Please consider Another vendor quits doing business with Illinois

Records show the Illinois Department of Corrections was forced to scramble this week when a vendor refused to deliver foam food trays to Menard Correctional Center because it hadn’t been paid. Industrial Soap Co., which holds the master contract for the foam trays, “will not deliver due to delinquent invoices,” prison officials noted.

The St. Louis-based vendor wouldn’t discuss the contract situation Tuesday, but records show the company is owed about $166,000 dating to last year.

In order to avoid gaps in meal service, state officials gave another company a $36,000 emergency contract to keep the foam trays in stock.

The trays are needed to serve meals to the 3,400 inmates because they have been mostly locked in their cells since mid-October due to rising violence in the maximum-security facility.

The state is facing a $13 billion deficit that could grow larger by next year. The current backlog of bills is listed by Comptroller Dan Hynes at nearly $5.6 billion. The state owes at least one vendor for services dating back to March.

Earlier this year, a company that provides ammunition to help train new guards stopped delivering bullets because it was owed money. Another company that supplies eyeglass lenses also stopped shipping the stock until it was paid.

33% Tax Hike Coming to Illinois

Illinois voters likely returned Governor Pat Quinn to office. Their reward will be a 33% tax hike, if Quinn gets his way.

The election is still undecided 2 days later. Quinn's lead is 16,000 or so out of over 3.6 million cast. Absentee ballots have yet to be counted. However, the math looks improbable for challenger Bill Brady.

The problem for Brady is he barely got 20% of the vote in a packed Republican primary. 80% of Republicans wanted someone else. Brady generated little enthusiasm, and none from me, except for one thing: He was not Quinn.

For most voters, that was not enough.

Chicago voted overwhelmingly for Quinn, 86% to 14% or so. His solution is to the mess is a proposal to raise state taxes by 33%.

Congratulations to Delta

The Star Tribune reports Delta attendants say 'no' to union

Flight attendants at Delta Air Lines narrowly rejected union representation in the first of three votes to organize the majority of employees at the world's second largest airline.

The results, announced shortly after the close of voting Wednesday, were 9,544 votes against the union, and 9,216 in favor of the Association of Flight Attendants (AFA) or other unions. The margin was 328 votes, or 1.7 percent.

AFA President Pat Friend said Delta's management ran "the largest anti-union campaign that this country has ever seen" and the union would challenge the fairness of the election and seek a revote. Delta rejected the union's claims as "ridiculous" and said it looked forward to integrating its workforce two years after the merger of mostly nonunion Delta and heavily unionized Northwest Airlines

If the result stands, it means that 7,200 former Northwest flight attendants, including 1,900 based in Minnesota, will no longer be represented by the union or be covered by their existing contract. Delta said it will announce a transition plan for those workers at a later date.

Common Sense in Tucson

Common sense ruled in Tucson where voters rejected a tax hike give away to public union workers. The Arizona Daily Star reports Tucson City Manager: 400 workers face layoff.

A day after a city sales tax hike was soundly rejected by voters, Tucson City Manager Mike Letcher and Mayor Bob Walkup announced an estimated 400 city workers could be laid off.

He said those layoffs will include police officers and firefighters if there is not enough attrition in those departments.

Both Walkup and Letcher said the public was clear that they wanted to see more cuts, and Letcher blamed the sales tax increase's failure on a national movement by voters who are demanding smaller government.

Voters are not necessarily demanding fewer workers, they simply want more for their money. Not a single city worker has to be laid off. All that has to happen is for the unions to lower salaries and pensions to meet the budget.

This is not the voters' fault, 100% of the blame for the layoffs go to the unions.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Three Reasons QEII Will "Backfire"; Pavlov's Dogs and the "No Choice" Argument Yet Again

Dr. El-Erian, CEO and co-CIO of PIMCO states several reasons why QEII will backfire.

1. The Fed is going it alone, without meaningful structural reforms
2. Emerging economies burdened by capital inflows in the wake of QEII will react with currency wars, protectionism, and capital controls
3. Resultant commodity price increases will increase input costs and reduce earnings of American companies

The position of El-Erian is interesting given that PIMCO founder, managing director and co-CIO endorsed QEII as discussed in Bill Gross' Arrogant Endorsement of Fed's QE Policy he calls History's Most "Brazen Ponzi Scheme".

Unintended Consequences of QEII

Mohamed El-Erian addresses the unintended consequences of Fed policy actions and the reasons Quantitative Easing will fail in QE2 blunderbuss likely to backfire.

The Fed faces three problems, with its solo role being the first. Having warned in late August in Jackson Hole that “central bankers alone cannot solve the world’s economic problems”, Ben Bernanke, the Fed’s chairman, is now leading an institution that is virtually on its own among US policymakers in meaningfully trying to counter the sluggishness of the US economy and the stubbornly high unemployment.

The rest of the world does not need this extra liquidity, and this is where the second problem emerges. Several emerging economies, such as Brazil and China, are already close to overheating; and the eurozone and Japan can ill afford further appreciation in their currencies.

Despite polite rhetoric to the contrary in the lead up to the Group of 20 leading economies summit in Korea this month, other countries are likely to counter what they view as an unnecessarily disruptive surge in capital flows caused by inappropriate and short-sighted American policy. The result will be renewed currency tensions and a higher risk of capital controls and trade protectionism.

The third issue relates to the gradual erosion of America’s central role in the global economy – including as the provider of both the world’s reserve currency and its deepest and most predictable financial markets. No other country or multilateral institution can displace the US, but a combination of alternatives can serve to erode its influence over time. No wonder commodity prices surged higher and the dollar weakened markedly in anticipation of QE2, pointing to increased input costs for American companies and unwelcome pressures on their earnings.

Pavlov's Dogs and the "No Choice" Argument Yet Again

Although I agree with the three major points above, I certainly do not concur with El-Erian's opening gambit "Given the high market expectations, the US Federal Reserve had no choice but to announce a second tranche of quantitative easing".

Pray tell who set those expectations if not the Fed? Moreover, given the market reacted like Pavlov's Dogs to the announcement, the Fed could have and should have toned down market expectations.

Finally given that the Fed produced a bubble in junk bonds and sent commodity prices soaring the Fed had every reason to disappoint the market today.

For more on junk bonds please see ...

• Thanks to Fed, Bubble Builds in Junk Bonds; We Know How Bubbles End


• Mad Dash Into Junk Sets October Record

Intended vs. Unintended Consequences

Add a junk bond bubble to the list of consequences (unintended or otherwise).

Bernanke is clearly misguided enough and arrogant enough to purposely blow a junk bond bubble as an "intended consequence", even though the housing bubble bust proves without a doubt the asininity of such policies.

Thus, it's hard to say if Bernanke wants a junk bond bubble or is merely willing to live with one.

Then again, Bernanke is dense enough to not have any clues about what is happening. He did not see the housing bubble, the recession, the huge rise in unemployment, and any number of other things that happened. In fact, he even denied there was a housing bubble.

In the academic wonderland in which Bernanke lives, it is perfectly possible he is oblivious to the bubbles he is creating.

However, looking at things from every angle, given that Bernanke Admits Targeting Stock Prices, I am leaning towards the first option: Bernanke is misguided enough and arrogant enough to purposely blow more asset bubbles as an "intended consequence", hoping he can deal with them later.

Missing the Obvious

I touched on the one obvious reason QEII will fail in QEII Announced, Fed Set to Buy $600 Billion in Bonds, Reinvest $250 Billion More; Fed Micromanaged Economy to Oblivion; No Miracles Coming

Doubts? What Doubts?

There is little doubt, at least in this corner, that the plan cannot possibly work. Corporate borrowing costs are the lowest in history and that hasn't spurred hiring. Will another quarter of a point lower matter? Will QEII even lower rates that much?

Simple explanations as to why QEII will fail are best: "Money’s Already Quite Cheap"

With mortgage interest rates at all time lows, is this supposed to help housing? Why?

It is sad but true economic thinking these days that the "Fed had to do Something". Why does it make sense to do something, just for the sake of doing, when it should be crystal clear that doing just adds to problems down the road.

Fed Micromanaged Economy to Oblivion

The Fed has clearly micromanaged this economy to oblivion. Greenspan's experiment short-circuited the 2001 recession but the expense was the biggest housing bubble in the history of the world, not just in the US, but globally.

A global recession soon followed.

Now on misguided calls to "do something" the Fed is blowing a bubble in commodities that cannot possibly help margin strapped small businesses.

An excerpt from $30 Billion Offer No One Wants - Small Businesses Hit by Deflation will show why. ....

No One Has To Do Anything

It is disappointing to see El-Erian perpetuate the myth the Fed had to do something when one of the biggest reasons we are in this mess is a activist Fed under both Greenspan and Bernanke felt the need to do something about LTCM, Y2K, the Dot-Com bubble, housing, motherhood, and apple pie.

At least El-Erian is not defending what Gross calls a "Ponzi Scheme" to the same foolish extent that Bill Gross did. More importantly, El-Erian makes it clear exactly what some of the consequences are, while the Gross article sounds like "jumping the shark".

Structural Reforms

El-Erian said "Without meaningful structural reforms, part of the Fed’s liquidity injection will leak right out of the US and result in yet another surge of capital flows to other countries."

I agree, but I rather doubt we are talking the same language. This country needs to ...

• Scrap Davis-Bacon
• End public union collective bargaining
• End the public union stranglehold on the cities and states
• Fix the pension problem
• Even the playing field between big and small businesses on corporate income taxes
• Get the hell out of Afghanistan
• Reduce military spending
• Rein in entitlements
• Stop being the world's policeman
• Balance the budget
• Return to constitutional money
  

Fed Fights Battle that Cannot be Won, Should Not be Fought

Given that Congress is unlikely to do many, if indeed any of those things, the Fed is fighting a battle that cannot be won and should not be fought.

We are in this mess because the Fed micro-mismanaged the economy at every critical juncture while attempting to smooth over various fiscal insanities, counter bad Congressional policies, as well as deal with the repercussions of its own monetary insanities, on a delayed chasing-its-tail basis, in a global economy that waits for no one.

Is it any wonder the Fed failed in dual mandate of price stability and maximum growth?

For more on the silliness of the Dual Mandate as well as a rebuttal to the notion "Don't Fight the Fed" please see Krugman and the Inevitable "I Told You So" - Tim Duy "Bad Things Happen When You Fight the Fed"; Final End of Bretton Woods 2?

With that key idea in mind, there are two more structural reforms glaringly lacking in the above list: Abolish the Fed and End Fractional Reserve Banking.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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