(1) the fact that January’s report (released this past Friday) was largely the result of a huge statistical adjustment and that while it may appear “suspicious”, it seems to happen this way every January; and

(2) it seems like the trend in the unemployment rate from December to January (the period in which we make statistical adjustments) seems to have predictive value for the entire year.

Part 1: The Huge Statistical Adjustment

What a report!  We created 243,000 jobs in January.  Our unemployment rate has dropped to 8.3%.  It’s really phenomenal news.  The happy headlines run rampant.

I spent a bit of time looking at these numbers.  I want to tell you why they look so odd, yet why I’m not really concerned about this.  I should start by saying that I’m neither an economist nor a statistician.  I know what you’re thinking…“stop bragging Sandy.”

I should also preface these comments by saying that we’ve had a significant amount of good news recently.  Weekly claims for unemployment insurance have dropped – and that’s a huge positive.  In Q4, we saw significant growth in the private sector.  Those two facts are consistent with the positive jobs report.

Let me start with some quick background for those of you who don’t regularly look at the jobs report.  The report is actually two surveys.  First, there is a household survey that is used to calculate the unemployment rate.  Second, there is a payroll survey where businesses tell us how many people are on their payrolls.

You should also know that on the first Friday in February, the January employment report is released.  Each year, this is the report which shows significant statistical changes.  The payroll data has been revised as a result of an annual benchmarking process and the updating of seasonal adjustment factors.  The household data reflects updated population estimates.  These adjustments result in such large changes that it’s hard to know what to make of the numbers.

Here’s some of the strangeness (regarding the employment situation)…

1.  In the payroll report, they show numbers that are “not seasonally adjusted” and those that are seasonally adjusted.  If you look at the number of people employed in December 2011 (NOT seasonally adjusted), there are 132.95MM jobs.  In January 2012, there are 130.26MM jobs.  In other words, it shows a loss of 2.689MM jobs!  I don’t think that anyone believes that we lost 2.7MM jobs in January.

2. The numbers that I just described are then seasonally adjusted.  The seasonally adjusted numbers show that there were 132.166MM people working in December and 132.409MM people working in January.  In other words, we created 243,000 jobs.  This is all seasonal adjustment.  It turns out that this huge seasonal adjustment (from losing 2.7MM jobs to reporting a gain of 243K jobs) is not unusual.  It’s happened in many of the January reports in past years. The way this strikes me is that the news is positive, but we could have reached any number that we wanted through our statistical adjustment.  As I told Jenny, “you think that I lost hair in January, but on a seasonally adjusted basis, I actually gained hair.”

3. The unemployment rate without a seasonal adjustment increased from 8.3% in December to 8.8% in January.  Including the seasonal adjustment (which is what is reported in the news), the unemployment rate dropped from 8.5% to 8.3%.  Again, this is very usual.

4. The household survey shows a participation rate of 63.7% (seasonally adjusted).  Without adjustment, it’s 63.4%.  Realize that the seasonally adjusted number averaged closer to 66% prior to the recession (and was as high as 67%).  The participation rate drops as people become discouraged and don’t look for a job.  If our participation rate had been 66%, our unemployment rate would be 11.4% and we would have 18MM unemployed people.  Of course, there’s no question that people drop out of the labor force during every recession.

5. The total number of people not in the labor force has grown by 2.6MM people during the past year.  Our population estimate says that we have increased our work-age population by 3.565MM people during the year.  Yet, 2.6MM people during the year have dropped out of the work force.  One way of thinking about this is that 73% of the increase in working-age people are not in the labor force.  Typically, that’s 34% (if you think about a 66% participation rate).    That’s discouraging.

6. The number of people who are working part-time but want full-time work has increased from 8.098MM to 8.23MM (from December to January).  That’s an increase of 132,000 people.  Part-time workers are counted as employed.  Think of that as half of the 243K employment gains.  To some extent, this dampens the excitement about the job creation – if we’re creating part-time jobs.

Part 2: As January Goes…So Goes the Year

Here’s my really important thought…I looked at the past 60+ January reports – when revisions are made.  More than 90% of the time, the directional trend from December to January was predictive of the annual trend in unemployment.  In other words, when the January report showed a drop in the unemployment rate (from the December rate), the following December unemployment rate was normally lower than the prior December.  Similarly, when the January report (after revisions) showed a higher unemployment rate, the following December normally had a higher unemployment rate than the prior December.  In other words, the December to January trend has some predictive value.

Just to be clear, I’m saying that since the January 2012 unemployment rate (8.3%) is lower than the December 2011 unemployment rate (8.5%), it seems likely that the December 2012 rate will be lower than 8.5%.

I should point out that I haven’t researched whether these adjustments were always made in the January report all the way back to 1948.  In addition, there are some years that I did not consider (if the January rate was the same as the prior December rate or if the December to December rate did not change).  Finally, while you could argue that the December-to-January directional change gives the year a head start (when comparing December-to-December), small changes in the unemployment rate tend to be statistically insignificant and I wouldn’t expect this to lead to something that happens 90% of the time.  But, to be clear, I haven’t run any statistical tests.  It’s something I find interesting…but not interesting enough to keep me from watching the Super Bowl with my son.  So I’m headed to the television room.  Go Giants!

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EUROPE

It was big news that the European Court of Justice will be empowered to impose fines on euro countries running excessive deficits. Fines will be capped at 0.1% of gross domestic product.  Big deal…if the US had been fined, our deficit would have moved from 8.7% of GDP to 8.8%.  It’s like telling an alcoholic that if he drinks too much, we’re going to raise the cost of his beer by a nickel.  That should stop him.

Spain’s GDP fell .3% in Q4.  This is the first decline in the past two years.  Their deficit was 8% of GDP in 2011 (similar to that of the US).

The second bailout package from the euro zone to Greece is expected to be in excess of $172 billion.  I’m sure that they’ll spend it wisely (maybe on protests or something else useful).

Yields on two-year Portuguese bonds rose above 21%.  In other words, no one expects this to be paid in full.  Their ten year bond has risen 4% to 16.4% in the past two weeks.

Portuguese five-year credit default swaps were being quoted 39.5 points up front. This means it costs $3.95 million at the start of the contract, plus $500,000 a year, to cover $10 million of debt for five years.

ASIA

Japan has $14 trillion of debt – almost the same as the US, but Japan’s economy is half our size.  The price for insuring $10 million of Japanese sovereign debt for five years was $155,000 at a recent peak in mid-January.  That is well below the $222,000 premium investors paid for France and $530,000 for Italy at that time. Still, the current level represents a jump from $110,000 two months ago, and just $90,000 in July. The total net amount insured through credit-default swaps is $9 billion – a small amount, but 40% larger than a year ago.   Japan’s ten year debt yields just 1%.

Japan is expected to have a debt-to-GDP ratio of 230% by 2013.  In 2012, Italy is at 128%, Greece is 159% and the US will reach 107%.

According to the IMF, the yuan rose more than 8% in 2011 and the annual rate of appreciation accelerated to almost 20% in the last three months of the year.  The rise vs. the dollar is expected to slow to 2 to 3% this year (vs. 4.8% in 2011).

US

The CBO projects that we will run a $1.1 trillion deficit (7% of GDP) in FY 2012 (an improvement from our $1.3 trillion deficit that we’ve run each of the past two years).   The deficit is projected to drop sharply after that because they base their model on the assumption that the Bush tax cuts will lapse, we’ll cut payments to Medicare providers by 30%, we’ll let the Alternative Minimum Tax affect millions of people and the tooth fairy will work his normal magic under our fiscal pillow.  Without these assumptions, the CBO predicts that the deficit will average 5.4% of GDP between 2013 and 2022.  Of course, that implies that our debt-to-GDP ratio will start on a lovely Greek cruise toward 150%.

The ten-year Treasury bond is yielding 1.8%.  Or you can lock in 2.94% for thirty years.  Interestingly, the Conference Board shows that consumers expect a 5.5% inflation rate for the next year.  I’m not sure where they got that number from.

I’ve been surprised to see unemployment dropping with such slow economic growth.  But, maybe the explanation is that the private sector is expanding at a decent clip (and hiring people) while the government is contracting (and they’re slower to fire).  For 2011 as a whole, U.S. GDP grew by only 1.7 percent. But gross private product, which excludes government expenditure, grew by 2.7 percent. In the fourth quarter, the private sector grew at a 4.5 percent annual rate.

Chrysler Group LLC will announce next week it will add more than 1,600 production workers at an Illinois assembly plant.  New hires will earn $15.78 / hour.

The Dow Jones Industrial Average pushed up to nearly a four-year high last week and has advanced 3.6% so far this year.  The KBW Bank Index, an index of 24 U.S. commercial lenders, has surged 8.9% this year after a 24% drop in 2011.

The Fed surveyed 56 domestic banks and virtually all (53) said that lending conditions to big and midsize firms were unchanged over the past three months. The remaining three said they had “tightened somewhat.”

More than half of banks in the U.S. that make loans to European banks tightened standards, with nearly 20% saying terms had been tightened considerably.  Even more are tightening standards when lending to nonfinancial companies that have significant European operations.

Personal income increased 0.5% in December from November.  This is the largest monthly increase since March.  The gain was largely the result of a .4% increase in wage and salary income.  Yet, spending was flat (and decreased when you consider inflation).  The personal saving rate rose to 4% (from 3.5% in November).

For November, the Case-Shiller indexes (of 10 and 20 cities) both fell 1.3% from the previous month. Nineteen of the 20 major U.S. metropolitan markets covered by the indices in November saw prices decline from October, with just Phoenix showing an increase.  (Phoenix’s prices couldn’t go much lower.)  Atlanta, Las Vegas, Seattle and Tampa posted new index level lows.  Year-over-year, the indexes are down 3.6% (10 city) and 3.7% (20 city).  Atlanta is down 11.8% YOY.

The GAO says that reducing the dollar bill with a dollar coin would save $5.5 billion over thirty years.   Senators Harkin, McCain and two others are introducing legislation to get rid of the dollar bill.

The Conference Board’s consumer confidence index dropped from 64.8 in December to 61.1 in January.  The assessment of current conditions dropped from 46.5 to 38.4.   People remain much more optimistic about the future.

George Soros predicts that America will experience riots that will lead to dramatically curtailed civil rights.  He thinks that the global economic system could collapse.  He also suggests that we have retrenchment in the developed world that could lead to a decade or stagnation.  He says that the best case is deflation and the worst case is a collapse of the financial system.  (I wish the interviewer would have asked who he likes in the Super Bowl.)

RANDOM

The Salvation Army’s “Red Kettle” campaign raised $147.6 million, up nearly 4% from 2010 and 6% from 2009.

Charitable contributions hit a peak of $311 billion in 2007 before dropping the next two years.  In 2010, it was back to $291 billion.

No one wants to go to Mexico. The number of visitors to Hawaii rose 3.8% to 7.28 million from 7.02 million in 2010.  There was a 2.3% increase in visitors from the U.S., double-digit percentage gains from Canada and Australia and a 5% decline in visitors from Japan (probably resulting from their earthquake / tsunami).

There has been a 99% drop in small to mid-size animal sightings in the Everglades.   Analysts suggest this is because of a growing python population.  (Author Matt Taibbi has noticed that there are no animals in New York and has blamed it on Goldman Sachs.)

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EUROPE

Greece’s debt-to-GDP is currently 160%.  The goal is for it to be 120% in 2020.  While many people think that it will be closer to 135% in 2020, what makes anyone think that Greece will be okay at 120%?

Spain has an unemployment rate of 22.85%.  The average unemployment rate in the euro zone is 10.3%.  It makes our situation look great.

The ECB made $640.88 billion of three-year loans to hundreds of euro zone banks.  The banks can either buy government bonds, make loans or hold the cash as reserves.  While paying 1% for the money, many banks are simply holding the cash as excess reserves (earning .25%) – losing money, but wanting to appear safe.

Portugal’s five-year bond rose to 20.27% and the ten-year bond yielded 14.36%.  Five-year credit default swaps are priced at 14.30%.  This means that you pay $1.43 million per year to insure $10 million of debt.  The expectation is that Portugal’s investors will go to the same barber as Greece’s investors and will receive a 50% haircut.

Kenneth Rogoff (Harvard; widely known for his research on debt) said that after Greece’s debt is restructured, there is a high probability that Portugal, Ireland and Spain will follow.

The ECB’s balance sheet has assets worth 2.7 trillion euros.  This is the equivalent of approximately 30% of euro-zone GDP.  The Fed’s assets equal $2.9 trillion – which is about 19% of US GDP.  Since 2007, the ECB’s balance sheet has doubled and the Fed’s has tripled.

ASIA

Japan’s debt is approximately $14 trillion – more than 200% of their GDP.  Prices on credit default swaps are increasing.  Yet, their ten year bond is still yielding only 1%.  Their debt is primarily held by the Japanese people (and pensions) and it is denominated in yen (that they can print).

US ECONOMY

Q4 GDP increased 2.8%.  That is an acceleration from Q3 (1.8%) and Q2 (1.3%).  For the year, GDP grew 1.7%, which was slower than the 3% growth in 2010.  Much of the Q4 growth was due to replenishing inventory.  Final sales only grew .8%.

After the 1980s recession, the US had five consecutive quarters of growth in excess of 7%.  That is the type of growth that is necessary to return to full capacity utilization.

Sales of new homes dropped to 302,000, the lowest number since the Census Bureau began tracking this in 1963.

The percentage of state and federal prisoners who are 50 or older will reach one-third by 2030 (according to the ACLU).  States spend an average of $70K to incarcerate someone 50 or older – nearly three times what it costs to house a younger prisoner.  Of course, the increase in cost is related to health care costs.  This is being used to argue to release older prisoners.  Who is going to be paying for their health care if we release them?

COMMODITIES

Open interest in 13 key commodities dropped from 10.7 million contracts to 8.7 million contracts in the past year.  The question is whether the drop in open interest reflects a lack of interest and precedes a price drop.

The EU is banning Iranian oil imports (600K / day) as of July 1^st.  This is almost 6% of EU oil consumption.  The assumption is that Saudi Arabia will replace the production.

REGULATION – CEO COMPENSATION

At 21 large companies that went through bankruptcy, the CEOs earned more than $350 million in salary, bonuses, stock grants and severance for the periods that their companies were under Chapter 11 bankruptcy protection or just afterward.  There are laws limiting “retention bonuses”, but these were called “incentive compensation.”  This is why regulation doesn’t work.

POLITICS

Here’s a great Gingrich comment from Thursday’s debate: “We discovered, to our shock, Gov. Romney owns shares of both Fannie Mae and Freddie Mac. Governor Romney made $1 million off of selling some of that. Governor Romney has an investment in Goldman Sachs, which is, today, foreclosing on Floridians.”  Romney responded by saying that the investments were in a blind trust and he didn’t make the investments (they were made on his behalf).

Is this what the Republican primary has come to?  One guy is making it sound like you are evil for investing in particular public companies and the other is sounding guilty by trying to deny having invested in Fannie, Freddie and GS.  Truly absurd.  Of course, it’s even more absurd when the accuser has been a consultant for Freddie.  Next, I expect Gingrich to say, “We discovered, to our shock that Mitt Romney looked at another woman.”  Then, Romney will start defending himself.

RANDOM

Costa Crociere has offered passengers $14,460  each as compensation for lost baggage and trauma on their ill-fated cruise ship.

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Slide 1: GDP, Unemployment and Growth Projections

1. Growth projections have dropped for this year and increased for next year.  The highest projection included in the central tendency is that growth will reach 4% in 2014.

2.  Unemployment projections have also decreased.  The expectation is that our unemployment rate will be between 6.7% and 7.6% at the end of 2014.

3. Inflation expectations are below the 2% target.  In one Fed announcement (released this week), they clearly stated that there was an inflation target of 2%.  This had always been assumed, but it was made perfectly clear this week.

Slide 2: FOMC Participants – When Will Rates Rise?

1. Five out of 17 participants think that rates will increase in 2014.

2. Six think it will happen earlier (three this year and three next year).

3. Six think it will happen later (four in 2015 and two in 2016).

Slide 3: Future Fed Funds Rates

1. In this chart, each dot represents where the FOMC participants believe the Fed funds rate will be at the end of each year.  Notice that the participants think of the “normal” Fed funds rate to be near 4% (in the future).  With 2% inflation, that implies a 2% real rate.

2. Notice that several expect the Fed funds rate to be approaching 3% by the end of 2014.  Several others expect the rate (in 2014) to be where it is today.

Is This All Consistent?

When putting together the “central tendency”, the Fed excludes the three highest and three lowest estimates.  But, they include these “outliers” in the “range” – so we know what they are.  If you look at the most optimistic estimates for growth, they are 3%, 3.8% and 4.3% for the next three years.

It strikes me as surprising to think that participants expect such low growth to bring our unemployment rate down to 6.7%.  If we have some growth, I would expect people to re-enter the labor market and this would keep the unemployment rate at higher levels.  If we don’t have significant growth, there’s little reason to expect the unemployment rate to decrease.

It’s also surprising for me to think that these low growth estimates will allow the FOMC to raise rates (as some expect it to approach 3%).  In addition, we’d be raising rates at a time when inflation expectations are low (no estimates are above 2% for the next three years).  Obviously, the FOMC would like to see rates at a higher level so that they would be able to use the Fed funds rate to implement monetary policy again.  (The Fed funds rate has lost its effect when it’s at zero.)  But, it’s hard to see how we’re going to get there based on these estimates.

One final thought…if we do have inflation of 1.5% – 2% for the next five years, that means that investors are locking in a negative real yield when they buy five-year Treasury bonds (which are yielding .77%). That gives you an indication of the fear in the market (and / or the effect of the Fed).

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Today’s quick thought…

Recently, I’ve been reviewing the Senate testimony of Laurie S. Goodman (Amherst Securities).  She testified in September and her testimony seemed very similar to the Fed’s white paper on housing (released in January).  Here are a few key numbers from her testimony:

There are approximately 80 million houses, but only 55 million have mortgages.

Of those 55 million, approximately 8% of the loans are classified as nonperforming (60+ days delinquent).

Another 7% are performing now, but have been delinquent in the past (and this is a bad sign – these people have a high “re-default rate”).

Another (separate) 5% are more than 20% underwater.

Another 10% are between zero and 20% underwater.

She estimates that another ten million foreclosures could occur over the next six to eight years.  Of course, the risk is that foreclosures could push prices lower, pushing more people underwater (where they owe more than their house is worth).  People who are slightly underwater don’t strategically default.  But, strategic default becomes a more significant option when a borrower is underwater by a larger amount.

These potential problems explain why we have to take action in order to stabilize home prices.  The current idea being promoted is that we need to bring large investors into the market to turn houses into rental properties.

See exhibit below.

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1. The total number of employees on nonfarm payrolls remains about 6.1 million workers fewer than at the start of the recession, a dramatic shortfall.

2. Auto sales fell dramatically below scrappage in 2009, the most recent year for which data are available.  That was historically unprecedented, showing the severity of the auto sector downturn.  Auto sales remain roughly in line with the scrappage trend, suggesting that December’s sales rate is easily sustainable and has room to run somewhat higher.  See chart below.  (This speaks to pent up demand.)

3. Consumer sentiment seems to have improved, though remaining far below pre-recession levels.  Higher consumer confidence bodes well for purchases of big-ticket items, such as autos, furniture, appliances and homes.

4. The National Association of Realtors reported that housing affordability rose to an all-time high.  (Home prices are low and mortgage rates are at all-time lows.)  See chart below.  In addition, the ratio of the cost of buying a house compared with the cost of renting one has fallen dramatically over the past five years and now is close to historical averages.

5. While 620 is generally considered a prime borrower, the median FICO score for prime borrowers has risen about 40 points to around 770.  Thus, a prospective homeowner must have a much higher credit rating than in the past to qualify for a loan.  See chart below.

6. Equity in household real estate peaked at $13.3 trillion in Q1 of 2006 before plummeting to $5.5 trillion in Q3 of 2011 (in 2005 dollars).  See chart below.

7. During this time period, household debt fell to 113% of disposable personal income, a level not seen since 2004.  Net borrowing fell as consumers defaulted on loans, paid down debt and took out fewer loans.

Comparing Wartime Deficits With Our Current Deficit:

1. Wartime deficits are explained by large temporary increases in defense expenditure.  However, revenue also increases – which results in a post-war fiscal surplus.  Today, we have higher expenditures and lower revenue.  Two-thirds of the increase was due to transfers.  Revenue fell by 2.8% of GDP as a result of tax cuts, credits, rebates and depressed economic activity.

2. Output during the three wars increased significantly, whereas it is currently below trend.

3. Inflation increased substantially during all three wars.  After WWII, high inflation was used to reduce the real value of accumulated debt.

4. Deficits are expected to continue until the end of FY 2014.  By 2016, outlays (net of interest payments) are estimated to fall to about 19.8% of GDP, which is still 1.4 percentage points higher than the average from 2004 to 2008.  Assuming revenues climb to 19.3% of GDP, debt held by the public will reach 68% of GDP, which would more than double interest payments in terms of output.  These developments will create strong incentives to use inflation to reduce the financial burden of fiscal liabilities.  An even greater incentive is the fact that over half of the debt is held by foreign and international investors.  This “is a troubling scenario that should not be lightly dismissed.”

Quick Football Comment

How ‘bout those Giants?  Pretty exciting finish.  But, the game was ruined by Williams fumbling twice.  I never enjoy seeing a game decided by a big mistake (let alone two mistakes by the same player).  With that said, I’m excited for the Super Bowl.

Jim Harbaugh is clearly a great coach.  But, did you watch when he shook hands with Coughlin after the game?  Harbaugh hardly said anything.  He pretty much ran by Coughlin, shook his hand (while still moving) and ran off.  Then, he wouldn’t do an interview (with the network) after the game.  Good role model.  I was watching the game with my nine-year-old and I replayed the handshake to show him how not to behave.

All comments (above) are from the following Fed pieces:

Fiscal Policy in the Great Recession and Lessons From the Past, by Fernando M. Martin

Twelfth Federal Reserve District Fed Views, by Eric Swanson (Jan. 12, 2012)

Where Are Households in the Deleveraging Cycle, by R. Andrew Bauer and Betty Joyce Nash

______

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1. Inflation expectations are low.  Several Fed Presidents and Fed Governors have predicted that inflation will be below 2% for the next year.  This is significant for many reasons:

A. we could start to have fears of deflation

B. low inflation means that for a given nominal interest rate, the “real interest rate” (the rate of interest excluding inflation) is higher.  In other words, if you can get a 4% loan and the inflation rate is 3%, your real rate of interest is 1%.  If there is no inflation, the real rate is 4%.  Since the Fed is doing all it can to reduce nominal rates, they would like to see some (limited) inflation to keep the real rates lower.

C. low inflation means that the Fed believes it can do more to stimulate the economy without worrying about inflation.  Whether you agree with this or not, this is how the Fed is thinking right now.

See below for a chart on inflation from Boston Fed President Rosengren.  It shows the drop in inflation during the past six months compared to the prior six month period.

2. SF Fed President John Williams recently spoke and forecast 2.5% GDP growth for the year.  But, he said that there is one risk that would cause the economy to perform much worse – Europe.  Specifically, he said, “European leaders have been working to solve this problem and they may be able to muddle through.  But, if they fail, all bets are off.”  There’s a happy thought.

3. It sure seems like the Fed is starting to jawbone for more action.  Some comments from SF Fed President Williams about the unemployment situation include, “the unemployment rate is still shockingly high” and “the level of unemployment is a national calamity that demands our attention.”

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1. The weekly claims for unemployment insurance moved back up to 399K.  It seems consistent with the employment report (where 42K of the 200K jobs created were in the “messenger and courier” business).  See slide below.

2. Many people are working part-time even though they want full-time work.  These are people who have had their hours cut or just can’t find full-time work.  It’s a sign of the weakness in the labor market.  See slide below.

3. The next slide shows just how much deeper this labor market recession has been.  It will take significant growth to get this line back to even.

4. Unlike the prior recession (2001 – 2002), this recession has seen small firms lose employees to a greater extent than large firms.  This is consistent with the idea that financing is very difficult for small firms.  See slide below.

5. You can see that some of the states with the most significant decreases in home value have also experienced the highest unemployment rates.  We could attribute this to lots of reasons such as the reverse wealth effect (driving consumption down).  But, it’s also possible that the drop in home values is hurting the ability to start a new business – since home equity loans often provide the financing for new ventures.  See slide below.

All of this helps to reinforce why the labor market will continue to be slow to recover.

Have a great week.

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I thought that this was the oddest stat in Friday’s employment report:

There were 200K jobs created.  One-fourth of them (50K) were in “transportation and warehousing.”  “Almost all of that gain (42K jobs) occurred in the couriers and messengers industry.”

Analysts are saying that this is a seasonal issue (maybe the seasonal adjustment is wrong) or that it reflects the fact that people are shopping online.  But, it sure is odd.

Quoted in Houston Chronicle

I was quoted in The Houston Chronicle last week.  It also appears online and you can read it here.  I was interviewed about the recent Fed announcement that they would start publishing their interest rate forecasts.

Here were all of my thoughts (that I described to the author, Loren Steffy):

I think that it’s difficult to know the effect of this.  We already know
what the market believes that the Fed will do with the Fed funds rate –
we can tell this through the Fed funds futures contract.  It will be
interesting to see what happens when there is a release that shows that
the FOMC has different expectations than the market.  Will the market
change or will the market think that the FOMC members are wrong?

We have always had limited transparency and this is just making it
slightly more visible.  In the past, Fed Presidents and Fed Governors
have given speeches to let the market know what they are thinking and
where policy is headed.  Now, it will be more explicit and it will
involve the more distant future.  The fact that they’re predicting
further into the future means that there will be more mistakes.

Overall, I think that the increased transparency is consistent with what
the Fed has been doing through Chairman Bernanke’s press conferences,
the announcement that they would likely maintain a near-zero Fed funds
policy for a specific amount of time and more detailed minutes of the
FOMC meeting.

Based on these changes, the Fed seems to be increasingly focused on
their ability to impact expectations.  It’s hard to say whether that is
because they think they can have a positive impact on the economy, avoid
a panic or just think that transparency is the right thing to do.  But,
as Richmond Fed President Lacker pointed out two weeks ago, “Monetary
policy is often credited with entirely too much influence on real
growth.”

In my opinion, the change will not be huge.  Ultimately, we’d be a lot
better off if Congress would let us know when we could expect to end the
gridlock and reduce the deficit.

 
The Game

It’s hard to say much after a game like Alabama played.  It’s actually a lot more fun to talk trash before the game.  For the record, I actually thought that there was a very good chance that LSU would win this game.  During the season, LSU reminded me a lot of Alabama two years ago and Auburn last year.  There were times that Alabama (two years ago) and Auburn (last year) looked bad.  Yet, they always found a way to win.  LSU looked bad a few times this year, but they always found a way to win.  Everyone talked about how Alabama would have won on November 5^th if they had hit their field goals.  But, you really couldn’t be sure – because LSU seemed like they would score in games when they had to score.  Tonight though, it was Alabama’s night.  It was a great night for Alabama fans.  Of course, I’m just happy that I won’t receive the barrage of LSU emails that I thought were likely.

Roll Tide!

Have a great week.

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Today, three quick topics on today’s blog:

1. McCombs alumni — join me in Dallas on Wednesday

2. improvement in banks

3. party like it’s January 7, 2010

McCombs Alumni — Join Me in Dallas

I’m speaking this Wednesday night (January 11^th) in Dallas at a McCombs alumni event.  Join us.  Here is the link.  (In the coming months, I’ll also publicize events in Austin, Washington DC and New York.)

Improvement in Banks

Fed Governor Elizabeth Duke gave a great speech on Friday with her thoughts on the economy and housing.  (I’ll discuss housing later this week.)  She made a great point that banks are in much better condition than they have been in a long time.  Banks are crucial to economic growth.  In the past, we’ve discussed research that shows that recessions accompanied by a financial crisis are more severe and recoveries are slower.  Below, I describe her thoughts and display her slides.

Some reasons for optimism:

1. Financial institutions in the US have stronger capital positions and can withstand stress.  See chart 14.

2. Bank deposits have grown substantially.  This reduces banks’ dependence on more volatile wholesale funding.  See chart 15.

3. Loan balances have increased but are well below their peak.  There is substantial liquidity available.

4. Credit quality (nonperforming assets, delinquencies and charge-off rates) is improving.

5. Banks are actively seeking loan growth to improve profitability.  A survey of loan officers shows that there are fewer banks tightening standards on commercial and industrial loans.  (It’s not an impressive chart, but it’s an improvement.)  See chart 16.

6. Spreads on business loans have stopped increasing.  See chart 17.

These are all small steps, but they are consistent with the cyclical recovery that we’ve been experiencing.  Of course, this could all come undone due to problems in Europe.  In addition, we have huge long-term structural issues that are not improving.  But, we’re not going to improve if the banks aren’t healthy and lending.

Party Like It’s January 7, 2010

As you read this blog, I’m partying like it’s January 7, 2010.  If that date doesn’t mean anything to you, that’s the last time that Alabama won the national championship.

Big game tonight.  I’m nervous.  I went to the game the last two times that the Tide won the national championship (Jan. 1993 and Jan. 2010).  I’m not going to be at the game tonight.  (If we lose, maybe you Tide fans will pay for my trip next time?)

Let me say something that will really annoy the LSU fans.  This is something that annoys them even more than “the keg is empty – you’re going to have to have something else with your cereal.”  Here it is…you’d be nothing without Saban.  In the two seasons before he resurrected LSU football, you were 7-15.  Monday night is a great night for you to pay homage to him.  Roll Tide!

Have a great week.

If you enjoy this blog, please forward it to others who may be interested.

If you want to receive these emails, here’s how:

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IMPORTANT: if you don’t receive the email in step 3 or you don’t click on the link, you won’t be on the list.  Sometimes, people who use corporate emails get blocked (it’s probably 50% of the time).  So if you don’t get the email, you know you need to use a personal email.