The Trifecta

2011 December 4
by SJ Leeds

You’re Going to Love This!!!

I’ve written earlier about an academic paper concerning politicians earning excess returns (here’s the link) and the 60 Minutes story on this issue.  Now, there are two Senate bills and a House bill that would prohibit Senators and Representatives from trading on information that they’ve gathered as a result of their political business.  Here’s the part that I LOVE…the legislation would require Congressmen to report their trades within 90 days.

When Congress decided to crack down on corporate executives, they decided that immediate disclosure was really important.  They passed Sarbanes Oxley which requires insiders to report trades within two days!  Yet, as they discuss a bill about their own behavior, they are giving themselves 90 days.

If you want even more perspective on how absurd this is, think about the law prior to Sarbanes Oxley.  At that point, insiders had to report trades by the tenth day of the month following the trade.  That means that, at the very longest, insiders had 40 days to report their trades.  This was too long and it was reduced to two days.  Yet, for politicians, apparently 90 days will be soon enough.  Where do these Congressmen come from?  How can we send them back there?


Propping Up the EU

We all saw what happened this past week with central banks and the stock markets.  Six central banks made a coordinated effort to prop up the EU.  Of course, there were six banks (and China) involved, but it was primarily a Fed action.  The Fed agreed to loan dollars to other central banks (particularly the ECB) at a lower rate.  Then, the ECB will loan the dollars to European banks.  As a result, the market rallied.

Of course, I’m just a pessimist.  But, to me, this is like giving cash to a drug addict so that he can get his fix and feel better in the short term.  Then, when our drug addict seems to temporarily feel better, we kid ourselves that we have solved his problem.  Maybe the only thing that would make my analogy better would be if it were another drug addict that loaned money to the suffering drug addict.   These countries (including the US) have long-term issues.  Adding liquidity is a short-term fix, but it does nothing to solve the underlying problems.


The Employment Report

Lets go for the trifecta and include a third pessimistic story.  If you do a Google search for “lowest unemployment rate”, you’ll pull up approximately 2,000 stories that were published in the past two days.  Headlines across the country announced that our unemployment rate has dropped to 8.6% — the lowest since March 2009.  Let me give you a few quick things to think about:

1. the labor force participation rate (the percentage of work-age people who either have a job or are looking for a job) dropped this month from 64.2% to 64% (see chart below).  The participation rate dropped because people were either discouraged or didn’t look for a job in the past four weeks (so you’re not counted as participating).  If the participation rate had not changed, the unemployment rate would have been 8.9%.


2. if the labor participation rate was 66% (it was higher than this prior to the recession), our unemployment rate would be 11.4%.

3. if you want a good indication that the report is misleading, realize that the number of employed people as a percentage of the entire population hardly changed this month (see below).  This number is not skewed by people dropping out of the labor force.


4. we added 140K jobs in the private sector and lost 20K jobs in the public sector.  But we’re not creating high-paying jobs.  We added 50K jobs in retail, 22K in leisure and hospitality (this was actually comprised of 33K jobs in food and drink and some losses in other places) and 17K in health care.  So, it’s fair to say that 100K (of the 120K jobs created) came from retail, food and drink and health care.

5. the bottom line is that the labor market is getting better, but it’s not nearly as positive as the low unemployment rate would have you believe.  Use your common sense: 2 – 3% growth (some of which results from productivity gains) is not going to be enough to fix our labor markets.  In addition, while our participation rate is dropping, many of these people will eventually return to the labor market.



Have a great week.


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