Central Perk

sâmbătă, 8 februarie 2014

Mish's Global Economic Trend Analysis

Bank of America and City Official Fraud Enters the Detroit Bankruptcy Equation; Fair Settlement Reviewed Again

Posted: 08 Feb 2014 12:34 PM PST

Corruption, fraud, and bankruptcy are often found together. Such is the case with Detroit. I have seen allegations and suggestions of fraud, but a recent article shows that fraud by Bank of America, city officials, or both is now a given, and likely provable in a court of law.

Does that change my view on what constitutes a "fair" settlement?

Before answering, let's take a look at the charges as presented in Democracy Watch: Swaps, COPs & Lingering Questions.

In 2005, the city of Detroit faced a monumental dilemma: It desperately needed to borrow more than $1.4 billion to help shore up its two pension systems, but doing so would far exceed the legal limit on the amount of debt it could amass.

The solution arrived at by the administration of then-Mayor Kwame Kilpatrick was to sidestep the law by turning to something called certificates of participation, or COPs, which are similar to municipal bonds. But instead of borrowing the money directly, Kilpatrick and his crew – following the advice of investment bankers who would reap massive profits from the deal – set up two nonprofit "service corporations," which in turn created trusts that would sell the COPs to investors. Technically, it was these two nonprofits that were obligated to ensure repayment of the debt. The city then entered into a contract with the nonprofits – both of which were controlled entirely by city officials -- agreeing to pay them for services rendered. In other words, they were mere shells.

Was there fraud here? And if so by whom? At this point I am not sure. Let's continue.

Last Friday, lawyers representing the city filed a federal lawsuit claiming that the deal was illegal from the start, and because of that Detroit should not be required to continue paying off the debt. The case is now in the hands of U.S. Bankruptcy Judge Stephen Rhodes.

The lawsuit came as a complete surprise to most people, even those who have been following the bankruptcy proceedings closely. Until this point, attention in this aspect of the bankruptcy proceedings has been focused instead on interest rate swaps, a controversial side deal to the COPs transactions.

A type of hedge, these swaps were essentially a very high-stakes gamble. In effect, the city bet that interest rates were going to rise over time. If they did, the banks would be on the hook for the increased costs. Instead, the economy crashed in 2008, and interest rates fell to almost nothing. As a result, the cost to the city has been about $300 million in payments to what are known as the swap counterparties – Bank of America/Merrill Lynch and UBS, an investment bank based in Switzerland.

Again, I am still in the same place. This deal may very well be illegal, but I am not sure why. If it was illegal, did both parties knowingly enter a fraudulent deal, one party, or neither party. I strive to be fair to all sides.

For the better part of a year, the city has been trying to end the swaps. The banks claim that the cost of doing so should be about $300 million, and that the city is in a bad negotiating position because, even in bankruptcy, the swap payments are secured by casino tax revenues (as a result of another deal, struck in 2009).

That last paragraph is where fraud comes into play, but the article did not yet mention why. The story gets more interesting at this point.

Back in July, Detroit Emergency Manager Kevyn Orr announced that the two banks had agreed to a settlement that required the city to shell out $230 million, or about 75 cents on the dollar -- compared to the roughly 20 or 25 cents on the dollar so-called unsecured creditors, such as the city's pensioners, are reportedly in line for. But Judge Rhodes rejected the proposal, ruling that it was too generous to the banks. So the city and the banks returned to the bargaining table in December, this time with U.S. Judge Gerald Rosen serving as mediator. A new settlement was quickly arrived at, with the city agreeing to pay the two banks $165 million – money that it would have to borrow, driving the bankrupt municipality even deeper into debt. Orr maintained that the deal was crucial, because Detroit desperately needs that casino tax revenue.

But in January, Rhodes rejected that second deal as well. Part of the reason for doing so was his determination that the city, if it were to sue the banks, would actually have a good chance of succeeding – on a number of fronts. First of all, a very strong case can be made that the law prohibits using casino taxes to pay off such a debt. There is also a case to be made that, among other things, the swap deal involved fraud and therefore should be voided.

For judge Rhodes to push this back at Orr twice, something I did not realize had happened, is strong evidence something foul is at play. Is Orr watching out for Bank of America/Merrill Lynch interests not Detroit city interests?

While on the witness stand in early January, Orr testified that the city's chances of winning a court battle over the swaps were "more or less 50-50."

A coin flip.

The potential upside to litigating instead of negotiating is huge. If the swap deals are judged to have been invalid from the beginning, instead of having to pay $165 million more, the city could possibly recoup the $300 million it's shelled out so far. That's a swing of $450 million in Detroit's favor. And even if the city only succeeded in having the swap debt classified as "unsecured" rather than "secured," as the banks claim it is, then the banks, instead of being entitled to full repayment, would have to settle for dimes on the dollar, just like all the other unsecured creditors.

If it were to lose, though, the city would be on the hook for the full amount.

Under Oath

What has come out in the bankruptcy proceedings, though, is that the chances of successfully challenging the swap payments are actually considerably better than the 50/50 scenario that Orr declared in court. That's certainly the position held by Judge Rhodes, who pointedly told attorneys for the city that it was possible to both litigate and negotiate. Some of strongest evidence that the city could indeed prevail if it filed a lawsuit against the banks comes, ironically, from Orr himself.

Caroline Turner English is an attorney who represents Ambac, one of the creditors standing in line for a payout in the bankruptcy case. During the deposition taken on the last day of 2013, English pressed Orr to go into detail about the various ways the swap deals might be challenged. Based on input from his legal team – headed by lawyers from Jones Day, the law firm where Orr was a partner until his appointment as emergency manager in March of last year – Orr laid out eight separate causes of action that could be the basis for negating the swaps.

Under persistent questioning from English, Orr – himself an attorney – at one point in the deposition reluctantly admits that, in his estimation, each one of the potential claims had an equal chance of success. "I think on all of these claims, whatever their legal theory, all of them were basically 50/50 chance [sic] of success because for each claim there was always a corresponding risk that the claim would not be successful."

English didn't let up, asking Orr after he explained the basis for each potential claim, "So, you ascribe a 50/50 chance of success on this claim then, too?"

"Generally speaking, yes."

Which brings us momentarily from the court of law to the law of probabilities.

Each time you flip a coin, there's an equal chance it will come up either heads or tails. But there are formulas that let you calculate the likely overall outcome once you start stringing those flips together. So, what are the odds that, out of eight consecutive flips, a coin would come up tails every time?

About 99 to 1.

Not Quite. Given the claims are all likely related, if the first one fails, the rest might quickly fail as well. So I highly doubt 99-1 is the correct math. That said, the odds of winning something should be substantially greater than 50-50.

For the sake of argument, and to be conservative let's say 75-85%. Nonetheless, Orr has his supporters.

Lawsuits, however, are much more complicated than a simple coin flip. Which is why some experts say that Orr's desire to negotiate a settlement is the prudent approach.

Wayne State University Law Professor Bartell, for one, gives him high marks for the way he has handled the situation so far.

"From all I can tell, he [Orr] has bargained very hard," says Bartell.

I suggest it's clear Orr did not bargain hard. That the bankruptcy judge rejected Orr's proposal twice is proof enough for me.

Some others, however, have been questioning why Orr has been so willing to push for settlement deals that Judge Rhodes has twice rejected as far too generous to the banks. Part of the reason for their concern is the fact that Jones Day – Orr's former firm – represents Bank of America in matters with no direct relation to this case. (A majority of the Detroit City Council essentially waived any conflict of interest concerns when it approved hiring Jones Day to lead the restructuring of the city last year.)

In addition to representing Bank of America/Merrill Lynch, Jones Day reported in material submitted to the city last year that it also has a "client relationship" with UBS. In subsequent court documents, it revised that disclosure, saying that "it does not represent UBS AG, although it does represent other entities related to UBS AG."

"Detroiters have the basic right to competent and loyal legal representation, as well as democratically accountable local government, as we proceed through the largest municipal bankruptcy case in U.S. history," asserts Detroit attorney Tom Stephens in a piece he wrote for the lefty publication CounterPunch. "Jones Day and Orr are mercenaries plagued by conflicts of interest, who have repeatedly demonstrated their lack of candor, integrity and faithfulness to our interests. They should be fired and replaced by competent professionals who are in a position to truly represent Detroit."

There is certainly reasonable cause to assume Orr may not be doing what is best for the city. That may be on purpose, or happenstance. Either way, there are clear grounds for suspicion.

Who Knew What When?

I suspect both Bank of America and the city officials knew that pledging casino receipts was questionable if not fraudulent. If it could be proven the parties knew it was fraud, then everyone involved should be facing criminal charges.

Unless the law is quite clear, proof may be difficult to come by. Either way, I can see why both sides would not want a trial, because fraud charges are bound to come out. Perhaps Orr is aware, and is protecting not Bank of America/Merrill Lynch, but rather former city officials.

Regardless, if pledging casino receipts is illegal, even if there are no fraud charges, the loan becomes unsecured, not secured.

I strongly suspect that is the worst that could happen to Detroit were this to go to court.

Question of Fairness

Does any of this change what I said in Controversy in Detroit: What's a Fair Settlement of Bondholder and Pension Obligation Claims?

In terms of "how" a fair settlement is reached, the answer is not really. Yet, fraud may greatly influence settlement amounts and percentages. Here is the key snip.

Both the pension obligations and bondholder debt are unsecured debt.

Why not treat both pensioners and bondholders equally? The proposal currently on the table is for pensions to get 50 cents on the dollar (a 50% haircut) and bondholders 20 cents on the dollar (an 80% haircut).

I have a simple proposal. Give everyone 35 cents on the dollar (a 65% haircut). Neither side would be happy, but the ruling would be fair.

Essential Math

The $230 million Orr wanted to give Bank of America was 75 cents on the dollar. Thus, the actual amount owed is in the neighborhood of $307 million.

I see no way a court would return money already repaid back to Detroit unless the fraud was entirely one-sided, which I doubt. However, It seems highly likely a court would rule whatever the amount the city still owes is unsecured debt.

Final Thoughts

If there is fraud, I want to see criminal charges, whether on city officials, Bank of America officials, or both.
If all then unsecured creditors are treated equally, throwing that $307 million in the pot, might mean something like 40-45 cents on the dollar to everyone involved, not the 35 cents I originally proposed.
Whatever the math is, all unsecured debt should be treated similarly.

All eyes are on Judge Stephen Rhodes who appears to be doing a brilliant job. Orr's performance is questionable (once in favor of Bank of America, once in favor of Detroit pensioners). The best one can say about Orr, is that his actions are not completely one-sided.

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

The President spoke. Now:

# # #

Sat. February 8, 2014

The President spoke. Now:

When President Obama took the stage to deliver this year's State of the Union, he told the American people that he intends for 2014 to be a year of action. He said:

"…What I offer tonight is a set of concrete, practical proposals to speed up growth, strengthen the middle class, and build new ladders of opportunity into the middle class. Some require Congressional action, and I'm eager to work with all of you.

But America does not stand still -- and neither will I. So wherever and whenever I can take steps without legislation to expand opportunity for more American families, that's what I'm going to do."

Those weren't just lines in a speech. It's been just 11 days since the State of the Union. In that time, the President has:

Directed the Department of the Treasury to create starter "myRA" accounts that will make it easier for Americans to save for retirement.
Ordered a government-wide review of federal training programs to make sure Americans get in-demand skills for good jobs.
Taken executive action to assist millions of long-term unemployed Americans -- and more than 300 companies have already committed to the Administration's best practices for hiring and recruiting the long-term unemployed.
Announced a major new commitment that will connect more than 20 million students to high-speed Internet -- and the private sector stepped up to the plate with more than $750 million in commitments to help make it happen.

And next Wednesday, he'll be using his pen again.

Don't take our word for it. See for yourself what action looks like -- and if you're ready for a year of action in 2014, let the President know you're in.

Families across the country deserve action that gives them a fair shot at getting ahead and creating better lives for themselves.

The President's going to do everything in his power to make sure they get it.

Take a look, pass it on, and let the President know you're going to be fighting with him in 2014.

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Weekly Address: Expanding Opportunity for the American People

Featured

Weekly Address: Expanding Opportunity for the American People

In this week's address, President Obama says he will do everything he can to make a difference for the middle class and those working to get into the middle class, so that we can expand opportunity for all and build an economy that works for the American people.

Click here to watch this week's Weekly Address.

Seth's Blog : Exhaustive lists as a reliable tool for unstucking yourself

Exhaustive lists as a reliable tool for unstucking yourself

When in doubt, or when it's just not good enough, make an exhaustive list.

Every complaint someone might have about a particular product
Every media outlet that might be interested in your story
Every time you've ever been rejected and what it has cost you
Every successful product in this category that you've ever used, and why
Every person you know who might help you reach the person who can help
Every reason your current project might not work
Every person you've ever met who would be perfect for this job
Every person who deserves a thank you note
Every animal that might be part of a name for this product
Every reason you can think of to use what you've made
Every successful restaurant within three blocks

The challenge of every is that it's exhausting. You have to go to the edges, and that act, the act of going beyond the obvious, is where innovation lies.

[And for a marketing-focused jolt, check out Bernadette Jiwa's new book.]

• Email to a friend •

vineri, 7 februarie 2014

Mish's Global Economic Trend Analysis

Paper Tiger: German Constitutional Court Bows Before Draghi as Higher Judge and Jury
Ominous Looking Picture in Healthcare and Education Jobs
Boom Bust Video with Mish: Why Is the Sky Green?
Nonfarm Payrolls +113,000, Median Bloomberg Estimate 180,000; Huge March 2013 Employment Revision
Rise of Eurosceptics in Netherlands Prompts Serious Discussion of "Nexit"

Paper Tiger: German Constitutional Court Bows Before Draghi as Higher Judge and Jury

Posted: 07 Feb 2014 06:27 PM PST

In a 6-2 ruling, German Court Defers to Draghi as Euro's Judge and Jury.

Germany's supreme judges have decided to let Mario Draghi be the euro's monetary judge, at least for now.

While doubting the legality of the European Central Bank's 2012 bond-buying plan that defused the euro crisis, the top German court conceded yesterday that it is powerless to impose a veto. It bowed to a future judgment by the European Union's high court, leaving Draghi's pledge to do "whatever it takes" to save the euro unquestioned for a year or more.

"This German court, which everyone's so frightened of, turns out to be a bit of a toothless tiger," Charles Dumas, chairman of Lombard Street Research, a London-based consulting firm, said in a Bloomberg Television interview. "They're copping out."

By a vote of 6-2, the German judges sided with the Bundesbank -- which plays the role of an economic supreme court in the German imagination -- in arguing that Draghi's ECB overstepped its authority in rolling out the bond-buying initiative known as Outright Monetary Transactions, or OMT.

At the same time, acknowledging that Europe's largest economy is bound by EU laws, the court stopped short of overstepping its own authority and asked for a ruling from the European Court of Justice in Luxembourg, made up of judges from all 28 EU countries.

Paper Tiger

The German court found OMT to be unconstitutional but instead of doing anything about it, the court bowed down before the European Court of Justice in Luxembourg.

If this is the kind of toothless action the court is going to take, it may as well disband. Here is a fitting musical tribute.

Link if video does not play: Sue Thompson-Paper Tiger-1965

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

Ominous Looking Picture in Healthcare and Education Jobs

Posted: 07 Feb 2014 11:22 AM PST

Month in, month out, recession or not, there has been a strong uptick in the number of healthcare and education jobs. Until now. A few charts will show what I mean.

Education and Health Services Employment 1990-Present

It's hard to tell much from that picture other than things look very rosy. Let's have a look in percentage terms.

Education and Health Services Employment Percent Change

Now let's hone in on the past year.

Education and Health Services Employment 2013-Present

No Growth!

Education and Health Services Employment Monthly Change in Thousands

The chart appears as if there were several instances of negative numbers in 2003, but a download of the actual data shows the only other negative number in the entire series of data dating back to 1990 occurred in 2003-07-01.

I strongly suspect 2003 was affected by a number of teachers strikes. I could find examples in the Chicago area and in Washington State. I bet there were others. Here is a link regarding Washington: School Board Sues to End Teacher Strike.

Month-to-Month Table (in Thousands)

Date	Change From Previous Month
1990-01-01	#N/A
1990-02-01	36.3
1990-03-01	41.9
1990-04-01	32.6
1990-05-01	37.4
1990-06-01	40.1
1990-07-01	32.5
1990-08-01	34.3
1990-09-01	32.6
1990-10-01	31.7
1990-11-01	28.6
1990-12-01	35.0
1991-01-01	44.6
1991-02-01	30.6
1991-03-01	32.9
1991-04-01	34.0
1991-05-01	20.5
1991-06-01	45.6
1991-07-01	28.8
1991-08-01	39.7
1991-09-01	32.9
1991-10-01	29.8
1991-11-01	25.3
1991-12-01	37.0
1992-01-01	31.7
1992-02-01	21.2
1992-03-01	20.3
1992-04-01	22.4
1992-05-01	23.5
1992-06-01	25.2
1992-07-01	26.6
1992-08-01	16.7
1992-09-01	20.8
1992-10-01	30.4
1992-11-01	33.1
1992-12-01	23.7
1993-01-01	25.8
1993-02-01	26.4
1993-03-01	14.9
1993-04-01	30.2
1993-05-01	33.7
1993-06-01	23.9
1993-07-01	20.0
1993-08-01	23.2
1993-09-01	31.0
1993-10-01	22.5
1993-11-01	16.1
1993-12-01	16.1
1994-01-01	21.7
1994-02-01	15.7
1994-03-01	33.2
1994-04-01	27.8
1994-05-01	21.1
1994-06-01	21.4
1994-07-01	29.0
1994-08-01	25.6
1994-09-01	20.0
1994-10-01	20.2
1994-11-01	17.4
1994-12-01	26.4
1995-01-01	20.4
1995-02-01	29.6
1995-03-01	27.3
1995-04-01	17.9
1995-05-01	13.7
1995-06-01	29.7
1995-07-01	21.5
1995-08-01	28.4
1995-09-01	24.6
1995-10-01	20.1
1995-11-01	28.3
1995-12-01	26.5
1996-01-01	3.7
1996-02-01	39.4
1996-03-01	29.2
1996-04-01	21.5
1996-05-01	25.5
1996-06-01	23.9
1996-07-01	21.0
1996-08-01	18.7
1996-09-01	22.7
1996-10-01	24.1
1996-11-01	25.9
1996-12-01	18.3
1997-01-01	29.3
1997-02-01	17.8
1997-03-01	21.9
1997-04-01	29.1
1997-05-01	26.1
1997-06-01	7.5
1997-07-01	24.7
1997-08-01	12.6
1997-09-01	15.7
1997-10-01	20.8
1997-11-01	16.7
1997-12-01	26.4
1998-01-01	4.4
1998-02-01	10.4
1998-03-01	11.4
1998-04-01	12.6
1998-05-01	19.4
1998-06-01	12.4
1998-07-01	6.7
1998-08-01	12.2
1998-09-01	18.7
1998-10-01	15.1
1998-11-01	10.9
1998-12-01	10.2
1999-01-01	3.4
1999-02-01	24.4
1999-03-01	14.2
1999-04-01	19.7
1999-05-01	5.4
1999-06-01	9.5
1999-07-01	11.1
1999-08-01	13.0
1999-09-01	5.4
1999-10-01	12.9
1999-11-01	13.8
1999-12-01	11.7
2000-01-01	13.1
2000-02-01	12.0
2000-03-01	10.7
2000-04-01	8.9
2000-05-01	15.0
2000-06-01	19.5
2000-07-01	28.0
2000-08-01	22.1
2000-09-01	25.0
2000-10-01	17.7
2000-11-01	18.4
2000-12-01	30.3
2001-01-01	36.8
2001-02-01	33.7
2001-03-01	28.0
2001-04-01	27.4
2001-05-01	29.7
2001-06-01	41.3
2001-07-01	38.3
2001-08-01	32.5
2001-09-01	25.2
2001-10-01	28.5
2001-11-01	27.1
2001-12-01	33.1
2002-01-01	31.4
2002-02-01	30.1
2002-03-01	27.8
2002-04-01	24.5
2002-05-01	17.9
2002-06-01	21.2
2002-07-01	20.5
2002-08-01	35.3
2002-09-01	45.5
2002-10-01	28.8
2002-11-01	28.6
2002-12-01	13.2
2003-01-01	25.4
2003-02-01	22.9
2003-03-01	21.9
2003-04-01	30.5
2003-05-01	23.2
2003-06-01	19.9
2003-07-01	-9.0
2003-08-01	18.2
2003-09-01	13.7
2003-10-01	23.0
2003-11-01	18.7
2003-12-01	27.0
2004-01-01	17.5
2004-02-01	8.8
2004-03-01	36.6
2004-04-01	30.2
2004-05-01	25.2
2004-06-01	15.7
2004-07-01	15.6
2004-08-01	18.8
2004-09-01	15.7
2004-10-01	31.9
2004-11-01	17.3
2004-12-01	20.0
2005-01-01	8.5
2005-02-01	24.2
2005-03-01	15.7
2005-04-01	25.5
2005-05-01	29.4
2005-06-01	30.2
2005-07-01	35.5
2005-08-01	23.0
2005-09-01	21.9
2005-10-01	10.9
2005-11-01	26.1
2005-12-01	13.6
2006-01-01	32.2
2006-02-01	22.9
2006-03-01	30.3
2006-04-01	15.0
2006-05-01	23.0
2006-06-01	22.2
2006-07-01	29.2
2006-08-01	21.5
2006-09-01	33.0
2006-10-01	24.5
2006-11-01	27.2
2006-12-01	38.8
2007-01-01	22.9
2007-02-01	30.4
2007-03-01	26.1
2007-04-01	36.8
2007-05-01	26.0
2007-06-01	38.1
2007-07-01	26.8
2007-08-01	34.8
2007-09-01	32.9
2007-10-01	28.7
2007-11-01	17.0
2007-12-01	27.2
2008-01-01	35.1
2008-02-01	28.0
2008-03-01	30.6
2008-04-01	35.6
2008-05-01	26.2
2008-06-01	24.9
2008-07-01	31.1
2008-08-01	22.2
2008-09-01	13.4
2008-10-01	19.2
2008-11-01	27.8
2008-12-01	23.3
2009-01-01	13.6
2009-02-01	24.3
2009-03-01	7.1
2009-04-01	10.6
2009-05-01	32.3
2009-06-01	25.8
2009-07-01	17.6
2009-08-01	20.1
2009-09-01	21.4
2009-10-01	25.3
2009-11-01	19.5
2009-12-01	16.6
2010-01-01	15.8
2010-02-01	16.0
2010-03-01	32.8
2010-04-01	11.9
2010-05-01	15.6
2010-06-01	17.4
2010-07-01	18.8
2010-08-01	24.1
2010-09-01	8.5
2010-10-01	27.1
2010-11-01	26.3
2010-12-01	26.8
2011-01-01	2.8
2011-02-01	17.0
2011-03-01	28.7
2011-04-01	30.0
2011-05-01	13.8
2011-06-01	29.0
2011-07-01	25.5
2011-08-01	27.4
2011-09-01	31.1
2011-10-01	16.6
2011-11-01	6.5
2011-12-01	8.4
2012-01-01	28.6
2012-02-01	32.0
2012-03-01	24.0
2012-04-01	12.9
2012-05-01	31.2
2012-06-01	9.1
2012-07-01	14.4
2012-08-01	10.7
2012-09-01	33.8
2012-10-01	26.4
2012-11-01	17.6
2012-12-01	27.5
2013-01-01	5.3
2013-02-01	23.1
2013-03-01	11.1
2013-04-01	29.7
2013-05-01	12.9
2013-06-01	17.1
2013-07-01	4.1
2013-08-01	43.2
2013-09-01	2.7
2013-10-01	22.8
2013-11-01	29.6
2013-12-01	2.4
2014-01-01	-0.4

Back-to-back poor months, the last one negative, do not make a trend. Looking ahead, if this is a start of a new trend, it rates to be very ominous for the employment picture.

For more on the latest jobs data, please see Nonfarm Payrolls +113,000, Median Bloomberg Estimate 180,000; Huge March 2013 Employment Revision

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

Boom Bust Video with Mish: Why Is the Sky Green?

Posted: 07 Feb 2014 07:59 AM PST

This week I had the pleasure of being back on RT, this time with Erin Ade.

Link if video does not play: Mike Shedlock and Jim Bruce on US, Fed & minimum wage.

The title of this post "Why is the Sky Green?" comes from a comment in the video that I made regarding my February 3, article Why are Taxpayers Subsidizing Big Mac Buyers?

My favorite topic we discussed was actually deflation and economic prospects in Europe. The producers decided to split things in half, and the second part will come later. I will post it when it arrives

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

Nonfarm Payrolls +113,000, Median Bloomberg Estimate 180,000; Huge March 2013 Employment Revision

Posted: 07 Feb 2014 07:07 AM PST

Initial Reaction

Big Miss: Nonfarm Payrolls rose by 113,000. The Median Bloomberg estimate was +180,000. December was revised up a tiny bit from 74,000 to 75,000. Beneath the surface, things actually look better for a change. The household survey shows a gain of employment of 638,000. That said, revisions were in play.

Huge March 2013 Revision

Nonfarm employment for March 2013 was revised up by 369,000 (347,000 on a not seasonally adjusted basis). The benchmark revision incorporates a large non-economic change that resulted from a reclassification of 466,000 jobs from private households (out of scope by CES definition) to services for the elderly and disabled (in scope for CES).

Blaming the Weather

Once again economists were caught totally unaware by bad weather.

MarketWatch reports "The latest report may have been influenced by other unusual factors that render it less reliable as a bellwether of labor-market trends: extremely cold and snowy weather and the government's annual "benchmark" update on how many jobs were created in the past year. Economists polled by MarketWatch had forecast a gain of 190,000 jobs."

Apparently economists did not realize it has been cold and snowy. Alternatively, they predicted 180,000 to 190,000 jobs even though they knew it was cold and snowy. Which is it?

December BLS Jobs Statistics at a Glance

Nonfarm Payroll: +113,000 - Establishment Survey
Employment: +638,000 - Household Survey
Unemployment: -115,000 - Household Survey
Involuntary Part-Time Work: -514,000 - Household Survey
Voluntary Part-Time Work: +434,000 - Household Survey
Baseline Unemployment Rate: -0.1 to 6.6% - Household Survey
U-6 unemployment: -0.4 to 12.7% - Household Survey
Civilian Non-institutional Population: +170,000
Civilian Labor Force: +523,000 - Household Survey
Not in Labor Force: -355,000 - Household Survey
Participation Rate: -0.2 at 62.8 - Household Survey

Additional Notes About the Unemployment Rate

The unemployment rate varies in accordance with the Household Survey, not the reported headline jobs number, and not in accordance with the weekly claims data.
In the past year the population rose by 2,252,000.
In the last year the labor force fell by 239,000.
In the last year, those "not" in the labor force rose by 2,2533,000
Over the course of the last year, the number of people employed rose by 1,840,000 (an average of 153,33 a month)

The population rose by over 2 million, but the labor force fell by over a quarter-million. People dropping out of the work force accounts for much of the declining unemployment rate.

January 2014 Employment Report

Please consider the Bureau of Labor Statistics (BLS) January 2014 Employment Report.

Total nonfarm payroll employment rose by 113,000 in January, and the unemployment rate was little changed at 6.6 percent, the U.S. Bureau of Labor Statistics reported today. Employment grew in construction, manufacturing, wholesale trade, and mining.

Click on Any Chart in this Report to See a Sharper Image

Unemployment Rate - Seasonally Adjusted

Employment History Since January 2003

click on chart for sharper image

Change from Previous Month by Job Type

Hours and Wages

Average weekly hours of all private employees was flat at 34.4 hours. Average weekly hours of all private service-providing employees was flat at 33.2 hours.

Average hourly earnings of production and non-supervisory private workers rose $0.06 to $20.39. Average hourly earnings of private service-providing employees rose $0.06 to $20.17.

Real wages have been declining. Add in increases in state taxes and the average Joe has been hammered pretty badly. For 2013, one needs to factor in the increase in payroll taxes for Social Security.

For further discussion of income distribution, please see What's "Really" Behind Gross Inequalities In Income Distribution?

Birth Death Model

Starting January, I dropped the Birth/Death Model charts from this report. For those who follow the numbers, I keep this caution: Do not subtract the reported Birth-Death number from the reported headline number. That approach is statistically invalid. Should anything interesting arise in the Birth/Death numbers, I will add the charts back.

Table 15 BLS Alternate Measures of Unemployment

click on chart for sharper image

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

Notice I said "better" approximation not to be confused with "good" approximation.

The official unemployment rate is 6.6%. However, if you start counting all the people who 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.

U-6 is much higher at 12.7%. Both numbers would be way higher still, were it not for millions dropping out of the labor force over the past few years.

Labor Force Factors

Discouraged workers stop looking for jobs
People retire because they cannot find jobs
People go back to school hoping it will improve their chances of getting a job
People stay in school longer because they cannot find a job
Disability and disability fraud

Were it not for people dropping out of the labor force, the unemployment rate would be well over 9%.

Synopsis

On the surface this was a second bad jobs report. Beneath the surface, things looked much better. However, the improvement in household employment dates back to a massive upward revision from March 2013 of 369,000. That revision is not indicative of the current state of hiring patterns.

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

Rise of Eurosceptics in Netherlands Prompts Serious Discussion of "Nexit"

Posted: 06 Feb 2014 11:47 PM PST

Eurozone exit talk first started with "Grexit" (Greece exit). It progressed to "Spexit" (Spain exit), and now talk centers on "Nexit" (Netherlands exit).

Before anyone else claims the names, let me propose "Frexit" and "Fexit" (France exit) as well as "Sexit" a sexy sounding alternative for Spain Exit.

So far the "exit" scorecard remains on zero, but eventual exits are likely. No one can be assured of the timing or catalyst, but eurosceptcism is on the rise in a huge way.

Nexit?

In the Netherlands, opposition leader Geert Wilders outlines case for a Dutch 'Nexit' from the EU.

Geert Wilders, leader of the far-right Freedom Party (PVV) that is leading in Dutch polls for May's European parliament elections, presented a study on Thursday that claims the Netherlands would be better off if it left the EU and he urged voters to support his call for "Nexit".

The study, by the consultancy Capital Economics, claims the Dutch economy would quickly emerge from its sluggishness to brisk growth, generating billions of euros – or new Dutch guilders – in fresh revenues for debt-laden households.

Mr Wilders is one of a handful of populist leaders in the EU – including Marine Le Pen in France; Nigel Farage in Britain and Alexis Tsipras in Greece – whose sharp anti-Brussels rhetoric has helped push them into either first or second place in public opinion polls ahead of May's Europe-wide vote.

The Netherlands is one of the founding members of the EU, and has long been seen as a core supporter of a more integrated Europe. Yet public opinion polls reveal growing support across the country for a renegotiation of powers with Brussels over a number of policy areas, including access to domestic welfare for other EU citizens.

Mark Rutte, Dutch prime minister, in June presented a list of 54 competencies that should remain with national governments rather than be given to the EU, a plan many in Brussels have viewed as the Liberal premier's attempt to fend off the challenge from Mr Wilders.

"Nexit means that we no longer have to pay billions to Brussels and weak southern European countries," added Mr Wilders. "We can save billions by liberating ourselves from EU regulations. We can end the mass immigration and stop paying welfare checks to, for instance, Romanians and Bulgarians."

Mark Pragnell, one of the authors of Capital Economics' report, said the Netherlands would be significantly richer if it left the EU and the single currency, despite a short period of volatility.

Capital Economics, a London-based economic research firm, has become a leading voice for eurozone break-up, last year winning a £250,000 prize from a British think-tank for its proposal on how to end the single currency.

What's the Point?

Financial Times columnist Gideon Rachman asks What's the point of calling for a Nexit?

Wilders is after the protest vote, and he will get it – just like Marine Le Pen's National Front and the UK Independence Party of Nigel Farage. All three movements have an excellent chance of topping the polls or at least upsetting the political apple cart in their respective countries.

Here lies the significance of Wilders's call for "Nexit" – or Dutch exit from the EU. As an economic argument, it does not stand up at all: the Netherlands is so deeply integrated into the eurozone and the EU single market that Nexit makes no more sense than "Brexit" for the UK or "Grexit" for Greece.

Bias, Irony, and One Size Fits All Silliness

One can stop reading right there understanding full well the extreme bias in what Rachman wrote. Given that Rachman is a columnist and not a news reporter, bias is to be expected.

But please note the extreme irony in his statement: Nexit makes no more sense than "Brexit" for the UK.

The fact of the matter is that "Brexit" happens to make perfect sense for the UK.

There is not going to be a two-speed EU with some countries in the Eurozone and others not. One is going to be either in or out. Sitting on the fence forever won't happen. Neither French president Francois Hollande nor the UK liberals will allow that.

The moment the UK fully commits to the eurozone, all kinds of financial stupidities are bound to happen, including financial transaction taxes that are bound to cripple London. Moreover, the UK would be subject to the "one size fits Germany" interest rate policy of the EU.

A valid (albeit clearly out of context) interpretation of Rachman's statement is as follows:"Nexit makes sense, because Brexit makes perfect sense".

Addendum:

It's important not to leave the Fed out of these exit scenario discussions. I revise my copyright for "Fexit" to mean Fed Exit, while retaining use of "Frexit" for France. Of course we all know the Fed has no exit strategy other than to hold all the assets it accumulated to maturity.

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

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