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More BLS Mess and the Continuing CDS Crisis


Future earnings are going to be under stress as the economy slows.

Editor's Note: The 'Ville is proud to introduce John Mauldin, president of Millennium Wave Advisors, as our newest professor. Please join us in welcoming him into our community.

After a wild last week in the markets, there is so much to write about, it is hard to know where to start. The headline number says jobless claims fell 20,000. That would be good news, if it were true. Sometimes you need to look behind the curtain to see how these statistics are made. As we will see, claims were actually up by 26,000. I wrote in my annual 2008 predictions that the big story of the year would turn out to be credit default swaps and counter-party risk. I will admit to thinking it would take more than a few weeks for that to happen. And the Senate is hampering the ability of the Fed to work, and doing so for blatant political purposes, in an effort to reduce the independence of the Fed. There is that and a lot more to cover in what should be an interesting letter.

Democrats Ready to Politicize the Fed

Good friend and fishing buddy David Kotok recently brought a very disturbing item to my attention, and feel I need to pass it on. Senator Chris Dodd, Democrat from Connecticut, he who aspires to be president, is seriously hampering the ability of the Fed to respond to the current crisis and threatening the independence of the Fed in the process, all for a little partisan gain. His fellow Democrats are going along with him.

Basically, there are two vacant seats on the Fed. President Bush has nominated two very qualified people with distinguished records and backgrounds who have hands-on experience in real-world banking, as opposed to being academicians. These are not political appointments, but serious economists.

Dodd refuses to allow these nominations, or any others, to move forward. Plus, Dodd has let it be known that he will not hold a confirmation vote on current Fed governor Randy Krozner, whose expertise is mortgage markets, when his term ends January 3.

Under current rules, since there are now just five Fed governors instead of the normal seven, you cannot have just three governors on a conference call, as that would be a violation of the public meeting rules, since three would constitute a quorum and potential majority. That clearly makes communication difficult. It also means that the current governors, who already have tight schedules, have to take on extra duties.

Why would Dodd do this? He has made it clear that he is not happy with Fed policy, as has his counterpart in the House, Barney Frank; so some of this is just personal pique. They want the Fed to respond to their political goals. But some of it is clearly partisan. If there is a Democratic president, they would be able to immediately nominate three new governors, and would not have to reconfirm Ben Bernanke as chairman, which means he would leave and the new president would appoint the chairman.

Dodd clearly wants a say in this, and wants a Fed that will pay attention to his politically driven needs. This would mean the Fed would be short-staffed for at least another 18 months, which is not a good thing. The Fed does more than just hold eight meetings and set monetary policy. It has real work that needs to get done.

Whoever the new president is, they will get to nominate who they like as governor terms come to an end. But to act as Dodd is currently doing threatens the independence of the Fed, which is a critical part of the economic world. You can criticize the Fed and its policies, and I often do, but every right-thinking person agrees that Fed policy should not be set in Congress and subject to political whim. The last time we had a Fed chairman who let politics suggest policy was William Miller under Jimmy Carter, and that did not turn out well.

Dodd is sending a message that is not appropriate. These should not be political appointments. These appointments have serious economic consequences. Shame on Dodd for holding hostage an economy which is in crisis for his own political advantage, and shame on a Democratic Senate leadership which goes along with him.


The Bureau of Labor Statistics, or BLS, reported that jobless claims dropped a significant 21,000 in the last week to 310,000 and down by 56,000 in the last four weeks. As a Bear Stearns analyst wrote: "Although claims are volatile early in the year, and in recent years have been prone to upward revision, the magnitude of the decline in initial jobless claims in the first two weeks of the year suggests that job creation did not deteriorate further in January."

However, this claims data does not square with the employment numbers which came out last week and showed a significantly weaker jobs picture. Note that continuing claims is in a decided rising pattern, while initial claims seem to have turned back down.

Click to enlarge.

So what gives? It seems that BLS statistics, like making sausage, is a very messy process. The key factor here is that the number (301,000) is seasonally adjusted. This means the BLS smoothes the data on an annualized basis, which makes the number less volatile from week to week. And as you might guess, that process of seasonally adjusting looks at prior data points and projects future trends

This of course leads to large revisions at turning points. For example, the BLS is now indicating it expects to revise the year ending in March of 2007 downward by some 300,000 jobs. And you can expect further downward revisions as time goes on.

But let's return to the initial claims data. Every week I get an analysis of the claims data from long-time reader John Vogel. Mostly it is not very exciting, but he does a very thorough job of examining the actual data and comparing it to previous years. Stick with me here as I run through a few numbers.

Last week there were actually 521,280 initial claims. That number rose to 547,637 this week. So why didn't the seasonally adjusted number rise? Because in week three of previous years the number dropped, often considerably. In 2007 the number was essentially flat. But in 2006, the drop in the third week was 116,000 and in 2005 it was 226,000. There were also big drops in 2004 and 2003, 187,000 and 172,000 respectively.

So, when you smooth the number out by making seasonal adjustments, you expect a large drop in week three from week two. Except that we did not get that drop, we got a rise of 26,000, which is clearly not the trend for the last five years. That also squares with last week's employment survey which shows job weakness.

So, why use the seasonally adjusted number? Because the actual number is very volatile. Last week's number was considerably lower than the years of 2003-5, by an average of 175,000 or so. That would be considered good, yes?

But this week's number is the highest since 2002. That would be considered bad, of course. What it really means is that the BLS numbers should be taken with a huge grain of salt around periods when the economy is changing, as it is now. And using them to make a case that the economy is not weakening, as a number of pundits did, could be considered misleading. But now, gentle reader, if that did not put you to sleep, you know more than most pundits.

Let me make a quick point. The staff at the BLS does a very good job in a very difficult environment. As time goes on, they revise their statistics into something that is accurate and useful. But to use the data as it is initially reported to make investment decisions is not a wise thing. The data is not intended for that purpose.

Continued on Page 2.
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