California's UI Trust Fund Trend

source: http://www.edd.ca.gov/about_edd/pdf/qsui-Fund_Balance.pdf

When the Great Financial Fraud recession hit in 2007, the California UI Trust Fund had about $2 billion. This is money paid by businesses to fund unemployment checks when workers get laid off. It is a joint federal/state program, but the state collects and pays the lions share. The Trust Fund ran out of money in January, 2009. It was only able to continue paying unemployment claims by borrowing money from the federal government. When the recession was declared over in the summer of 2009, the Trust Fund had a negative $2 billion balance, and it continued to dig a giant hole over the next few years bottoming in April, 2011 with a balance of over NEGATIVE $11 billion.

That is not the kind of Trust Fund you want to inherit. California continues to rely on federal assistance to pay any unemployment claims at all, and it also now gets to pay interest on all the borrowed money. Look at the recent crowing about how strong California is doing financially. From CNN,

After multi-billion dollar shortfalls in recent years, the state's budget has finally straightened out. California expects to take in $2.4 billion more in revenue than it will spend this fiscal year, which ends June 30. After paying off a shortfall from last year and setting aside funds for upcoming obligations, it's on track to end the year with a $36 million surplus.

Wow! Except for that $8.6 billion hole in the UI Trust Fund. If it stays on (polynomial) trend AND there is no new recession, the Trust Fund will no longer be insolvent by early 2016, and will recover to the 2007 level by mid-2016. The crowing seems a little premature to me. Let's celebrate when the state gets back to even.

Median Duration trend channel

This is the same data from 2013 as the previous post, just with a 2nd order polynomial trend line channel. The channel is very thin here, and it could break either way, but the trend in both channels is up. (hat tip to Stagflationary Mark for the XL pointers on the channel)

Median duration of unemployment ticks up again

source: Federal Reserve of St. Louis (FRED)

The headline employment number beat expectations for November with 203,000 jobs added. The U-3 unemployment rate dropped from 7.3% to 7.0%. However, the median duration of unemployment ticked up again to 17.0 weeks. The report was generally strong, but some of the indicators like median duration went the wrong way. The two month moving average moved up again and we moved further away from the upper bound trend line for 2013.

The median needs to drop below the upper trend line again. Outside of recessions, the median duration is typically below 8.0 weeks. A rising median duration is a seriously bad sign for the economy, indicating a recession 6 out of the last 6 times.

The 80% Vast Majority President

I am astonished that the President has declared victory for HealthCare.gov with a success rate of 80%. HHS claims an up time now of around 90%, so really the success rate at any given time can be expected to be 0.9 * 0.8 or 0.72 (72%).

I am guessing this aspiration is also in the new federally mandated Common Core education standards being pushed onto states. If we can get our best and brightest kids to aspire to get 72% in all subject areas, we have achieved success! They could get a special "vast majority" achievement trophy or presidential medal. Awesome C-, little Johnny. You are ready to run the Department of Health and Human Services!

This high standard set by the Presidential bully pulpit may ripple across the nation.

Police can expect the vast majority of their 911 telephone calls, bullets, and radios to work.

Firefighters can expect 80% of the hydrants to work.

The vast majority of sewer lines, water lines, and electricity will work in homes. A full 80%!

Phones calls, texts, and Internet service will work 80% of the time.

The vast majority of food in grocery stores will not be rotten.

Gasoline pumps will work 80% of the time.

Checks, credit cards, and ATMs will work 80% of the time.

You can expect air to stay in your tires at least 80% of the time.

80% of buildings and bridges will not collapse on themselves.

I am so excited about the new 80% vast majority world that is in store for us.

Obama declares victory for HealthCare.gov

According to Politico,

the Obama administration said Sunday that it achieved its goal of making HealthCare.gov work for the “vast majority” of users after the disastrous start of enrollment in the president’s signature health law.

"Vast majority" is defined as 80% of people that visit. Let's see, how about 80% of your checks clear the bank, or 80% of your credit card transactions work. Is that acceptable if the "vast majority" of your transactions work? Four out of five? I can't think of a single commercial web site where it is considered successful if it works 80% of the time. In fact, I can't think of another public web site with a bar that low. That is an arbitrary and terrible precedent. However, it is what the government does when it abjectly fails. Declare victory and go home. Mission accomplished!

Median Duration of Unemployment Turns Up

source: Federal Reserve of St. Louis (FRED)

After peaking in June, 2010 at 24.8 weeks, the median duration of unemployment appears to be in a bottoming process. The low was 15.7 weeks in July, 2013 and it has not approached that level over the last three months. Zooming in on 2013 makes it more clear.

Red line is the moving average, green line is the upper trend

The median needs to drop below the upper trend line again. Outside of recessions, the median duration is typically below 8.0 weeks. A rising median duration is a seriously bad sign for the economy, indicating a recession 6 out of the last 6 times.

Black Friday Sale starts now!

This is not my idea. This was the subject of an email I received today from Dell. The exact subject line was:

★ We couldn’t wait for Black Friday! ★ Black Friday Sale starts now!

I was OK with waiting, but apparently Dell could not wait. The big stars in the subject were a nice touch, though it smacked of desperation. We are exactly 10 days away from the actual Black Friday. I can only guess that Dell is worried that not enough people will be shopping on Black Friday without a push. With the stock market at new record highs every day, I can't imagine people would not want to spend some of their new found and permanent wealth.

I looked at Dell's deals, but nothing seemed even slightly interesting. I think I'll wait until Black January.

ObamaCare: Panic, Arbitrary Enforcement, Chaos

Six weeks after the launch of HealthCare.gov and the beginning of the ObamaCare implementation, it is starting to degenerate into chaos. Has any administration and Congress combination been so dysfunctional since the Civil War?

Let me try to grasp the key events of the last three months.

1. Republicans try half a dozen legal efforts to delay the individual mandate in ObamaCare
2. Republicans threaten to shut down the government and allow the country to default on its debt to stop it
3. Democrats put up a united front and threaten to allow the country to default on its debt if any changes are made to ObamaCare
4. HealthCare.gov launches in the middle of the fight and is an complete disaster, allowing only 6 people to enroll the first day
5. Republicans partially shut down the government, then fold with nothing gained
6. Deeper issues are exposed on HealthCare.gov, Obama deflects the "glitches" and promises to have the site fixed by the end of November
7. Millions of individual health policies that don't meet the requirements of ObamaCare are cancelled
8. Obama claims that cancelled policies were defective and inferior and people will have better plans if they are ever able to get through the bug ridden system
9. The few that can find replacements on the health exchanges find much higher prices
10. First month total enrollment in all states totals 106,000 (even counting those with an unpurchased plan in their shopping cart)
11. Democrats start to abandon Obama, his approval ratings tank to all time lows
12. Obama panics and tries to unilaterally undo the millions of cancellations for 2014, effectively delaying the individual mandate in ObamaCare! (see bullet point 1). Hey, King George could change any laws he saw fit as supreme ruler, why can't Obama?
13. The Insurance Commissioner for Washington state rejects undoing the policies and claims it will will destabilize the insurance market

The people that rammed the health care law through in 2010 now don't like key elements of it. The main exchange for 36 states remains bug infested 6 weeks after launch. The supreme leader picks and chooses which parts of the law to uphold based on the how the political winds are blowing each day. In the Health Care games, may the odds be ever on your side.

State insurance commissioner rejects Obama’s proposal to extend canceled policies

Lawlessness: what this morning’s Obamacare announcement means

Twitter Fritter v.1

Fritter verb. 1. To reduce or squander little by little: frittered his inheritance away. See Synonyms at waste.

Today was the IPO of Twitter, Inc., a dotcom company that lets you send short messages and read the short messages of many others at once. The stock had a monster opening day closing at $44.90 per share giving Twitter a market capitalization of $24.93 billion. Good for Twitter!

I did not participate in the euphoria, partly because Twitter is a company that has never made a profit in 7 years of operation. It has consistently lost money every quarter of its existence. The current earnings per share are -$1.11 (negative). They can probably make it up in volume. What Twitter has, like many dotcom companies of the late 1990s, is eyeballs. Yeah, that is the true measure of value when picking a stock, how many eyeballs do they have? (sarcasm alert).

Now that they are public, the lucky investors will get to see quarterly reports of the revenue, expenses, and profits, if any ever materialize. Of course, nothing matters now for the owners if they were smart enough to sell massive shares into the euphoric IPO. They can retire and walk away. For fun, I plan to track the total profits of Twitter for the life of the company and see how it compares to the market valuation of $24.93 billion. I am hoping that the first quarterly report will show at least $1 billion in profits, but I am somewhat skeptical. I will make inflation adjustments annually.

To be fair, I won't count any of their last 7 years, or 28 straight quarters of losses. We'll start with a clean slate of zero. Good luck, Twitter!

HealthCare.gov: Boat of Gloat v.5b

The failure of HealthCare.gov is epic and groWING. We are 25 days past the live date and the number of enrollments are still at a trickle. The administration is trying to stifle all reports of actual enrollments because they are in a fog and because it is embarrassing.

The House of Representatives held a hearing on what went wrong this week and there were several vendors present, all pointing fingers at one another and at the government, who was apparently in charge of integration testing, or end-to-end testing. We've also learned that there are major flaws in every major part of the system regardless of the claims of the vendors. Worse than the technical problems, the management failures at all levels of this project are classic and numerous. A nice case study for academics to pour over for a generation.

There is so much goodness to discuss (by goodness, I mean badness), it can make one dizzy. Today, I want to focus on the data corruption issues with the electronic enrollments being sent to insurers, for those lucky few that make it all the way. To understand what is happening, you need to start in 1996 with the enactment of HIPPA. HIPPA was supposed to simplify and speed up health care transactions, and improve patient privacy. A set of data standards were published for all health care organizations to use for standard transactions like: enrollment, disenrollment, claims, payments, benefit inquiries, etc. Each transaction was assigned a number. An electronic enrollment is an 834 transaction. A claim is an 837 transaction. An eligibility inquiry is 270 and the response is a 271 transaction.

The data specification for each transaction type, when printed, fills a large binder. I implemented and maintained an EDI claims system for dental billing from 2003-2004 so I know many of these formats intimately. In general, each transaction consists of a set of variable length records. There is usually a header record to start, followed by a variable number of information record types or segments, followed by a trailer record. The headers and trailers are easy. The segments are variable length, with a variable number of elements, separated by asterisks (*). Segments are separated by tildes (~). Beyond deciphering the correct format, each insurer may or may not have been in 100% compliance with the standard. Some required extra segments or special values in certain elements or they would reject the transaction. It was not enough to be in 100% compliance with the standard, you also had to handle the quirks of each insurer's IT and transmission requirements. All transactions were supposed to be encrypted (we used PGP) and files were exchanged via FTP or dial up. I worked with about 25 different insurance companies and it was a nightmare. HealthCare.gov has to deal with hundreds or maybe a thousand on the back end. Major nightmare.

Here is what a partial HIPPA transaction looks like:

ISA*00* *00* *ZZ*CALIFORNIA-DHCS*ZZ*777888999 *111025*1127*^*00501*000000001*0*T*:~GS*BE*CALIFORNIA-DHCS*777888999*20111025*112755*1*X*005010X220A1~ST*834*0001*005010X220A1~BGN*00*DHCS834-DA-20110712-777888999-001*20111025*11275500****2~QTY*TO*6~N1*P5*California Department of Health Care Services *FI*68-0317191~N1*IN*Medical Plan 123*FI*777888999~INS*Y*18*001*AI*A*C**AC~REF*0F*12345678C~REF*1L*111111111~REF*23*0;20100204;~REF*3H*11101111111373;;~REF*6O*Q;;A;Y;A;11;78~REF*F6*010203040A~REF*DX*B5555;E777;20110323~NM1*IL*1*MCGEORGE*GEORGE*G~PER*IP**TE*7025551212~N3*777 GEORGE AVENUE APT 222~N4*LOS ANGELES CA*CA*900201111**CY*19~DMG*D8*19570709*M**:RET:2106-3~NM1*31*1~N3*PO BOX 12345~N4*LOS ANGELES CA*CA*900481234~HD*021**HLT*123;01~DTP*348*D8*20110901~DTP*349*D8*20110930~REF*17*D;49101;;;~REF*9V*3;2;2~REF*CE*10;001;80;301;;;;~REF*RB*10~REF*ZX*19~HD*021**HLT*123;01~DTP*348*D8*20110801~DTP*349*D8*20110831~REF*9V*3;2;2~REF*CE*10;301;80;301;;;;~REF*RB*10~REF*ZX*19~HD*001**HLT*123;P4~DTP*348*D8*20110701~DTP*349*D8*20110630~REF*9V*3;1;2~REF*CE*14;001;80;891;;;;~REF*ZX*19~INS*Y*18*001*AI*A*E**AC~REF*0F*23456789E~REF*1L*222222222~REF*17*201205;~REF*23*1;20061214;~REF*3H*193NXXX7772101;SMITH AMY;038~REF*6O*A;;A;Y;;11;~NM1*IL*1*PLANK*FRAN*M~PER*IP**TE*2135551212~N3*THIS IS LINE ONE OF THE ADDRESS*123 FRANCIS LANE~N4*LOS ANGELES CA*CA*900391111**CY*19~DMG*D8*19841125*F**:RET:2106-3~HD*021**HLT*123;01~DTP*348*D8*20110901~DTP*349*D8*20110930~REF*17*N;49201;;;~REF*CE*3N;401;;;;;;~REF*RB*3N~REF*ZX*19~HD*021**HLT*123;01~DTP*348*D8*20110801~DTP*349*D8*20110831~REF*CE*3N;401;;;;;;~REF*RB*3N~REF*ZX*19~HD*021**HLT*123;01~DTP*348*D8*20110701~DTP*349*D8*20110731~REF*CE*3N;401;;;;;;~REF*RB*3N~REF*ZX*19~HD*021**HLT*123;01~DTP*348*D8*20110601~DTP*349*D8*20110630~REF*CE*3N;401;;;;;;~REF*RB*3N~REF*ZX*19~HD*021**HLT*123;01~DTP*348*D8*20110501~DTP*349*D8*20110531~REF*CE*3N;401;;;;;;~REF*RB*3N~REF*ZX*19~INS*Y*18*001*AI*A*E**AC~REF*0F*34567890D~REF*1L*333333333~REF*17*201203;~REF*23*8;20050531;~REF*3H*197JQQQQ555103;WHITE JESSICA;051~REF*6O*A;;W;Y;;56;~NM1*IL*1*PUNTER*GUNTHER~PER*IP**TE*9165551212~N3*69001 BRIAN WAY~N4*SACRAMENTO CA*CA*958141234**CY*19~DMG*D8*19900817*M**:RET:2054-

When you read about insurers getting bad data for enrollments, they are getting 834 HIPPA EDI transactions that don't work in their systems. In some cases it is bad data, meaning the format might be OK, but the data is incorrect. In some cases, the format might be right, and the data might be right, but the insurer is not 100% compliant so it fails in their system. In some cases, the format might be wrong, but the data is right. In other cases, the format might be wrong and the data may be wrong. Multiplied by as many insurers as receive transactions from HeathCare.gov. And this is only one small part of the processing on the back end.

Kathleen, this boat's for you!

HealthCare.gov: Boat of Gloat v.5a

I found this article, Bad Government Software, at baselinescenario.com from James Kwak:

Ezra Klein, one of the biggest supporters of Obamacare the statute, has already called the launch of Obamacare a disaster, and it looks like things are now getting worse: as people are actually able to buy insurance, the data being passed to health insurers are riddled with errors (something Klein anticipated), in effect requiring applications to be verified over the phone.

Oh, my. I hope the insurance comapanies staffed up to verify millions of applications by phone.

I wanted to find out who built this particular example, and I found Farhad Manjoo’s WSJ column, which fingered CGI, a big old IT consulting firm (meaning that they do big, custom, software development projects, mainly for big companies).

Why is so much software so bad? There are lots of reasons. Writing good software is hard to begin with.* Big, custom projects are unique by definition, so they are sold as promises, not as finished products. Every vendor promises the same thing, so the one who promises to do it at the lowest cost often wins; when the project turns out late, bad, and over budget, too many executives have too much invested in its success to admit defeat. Consulting firms, which bill by the hour, make money by staffing projects with lots of people at relatively low cost, which is absolutely the wrong way to develop software; the productivity differentials in software are so vast that you can often get ten times as much output (of quality software) for less than twice the price, while a bad developer will do more harm than good to a project.

All completely accurate, echoing many of my observations and repeated real life experience. What happens to the most awful big systems? The best outcome is it gets shut down and abandoned with lessons learned and a few careers ended. That is possible with in-house systems because the rest of the world doesn't have to know. With a system that has been unleashed on the unsuspecting public, it can't just be abandoned. It has to be fixed or replaced while running, neither of which is ideal or easy, Both are expensive. CGI, and each vendor involved will probably rake in mad stacks trying to fix the bugs, depending on how their contracts werw structured.

As others have noted, the failure of healthcare.gov is not unique in the annals of government technology projects. But it is surprising that the Obama administration—which has tried to build a reputation for competence—did so spectacularly badly on its flagship project. Most likely, there were just not enough people in the chain of command who had enough understanding of technology to realize that things were going horribly wrong, which is a pretty clear management failure on the part of the administration.

Bazinga!

To make matters so much worse, the President still doesn't understand the scope of the software disaster. He thinks the vendors hired by HHS to create this frankenstein can slip in a couple of patches, like an Apple IOS update, and everything will start working. That analogy shines a spotlight on his lack of understanding of software development. A better analogy would be Duke Nukem Forever.

Extraordinary Mismeasures

source: http://www.treasurydirect.gov/NP/debt/current

Since May, the official debt of the US government was frozen. It didn't change a penny despite billions in new bills, notes, and bonds issued. Then, from October 17 to October 18, it jumped $328 billion overnight. Instead of adding to the official debt, the Treasury used what it calls "extraordinary measures" to report money owed to other programs, like federal and military pensions, to fill in the hole not reported as debt. As shown during the shutdown and debt ceiling scare, the government cannot operate any longer without massive additional borrowing. It is accepted that large deficits (despite the shrinking YoY deficit) are essentially a permanent feature of the US government, that US debt can always be rolled over easily (unless Congress prevents it), and that all this debt issuance is good for the world.

If that was true, how did the world survive before 1975 when US deficits became permanent (except for one bubble stock capital gains year at the end of the 1990s)?

HealthCare.gov: Boat of Gloat v.5

Ten days after the open enrollment started on the ACA (Obamacare) HealthCare.gov web site, Politico describes it as a "train wreck" (full disclosure: the piece was written by a National Review editor). News organizations of every political slant can plainly see the disaster it has been and continues to be. From the Politico link:

The rollout of Obamacare has been so disastrous that even “Daily Show” host Jon Stewart was plainly mystified and unconvinced when Sebelius came on his show the other day to offer soothing explanations and reassurances. Stewart gently expressed his frustration that there is “a level of incompetence that is larger than what it should be,”

and...

Nancy Pelosi infamously said that we had to pass the law to find out what’s in it. But the then-House speaker erroneously assumed, evidently, that people would be able to get onto the government-run exchanges created by the law. So far the law’s implementation has been as ugly as its passage.

As a professional software developer (among other things) with 28 years of experience in both private and public sectors, I happen to have expertise in this field. In fact, four years ago, I wrote an open enrollment system for a public agency with complex flexible benefits covering health insurance, dental insurance, vision insurance, health and dependent savings accounts, deferred compensation, long term disability insurance, and life insurance. The system is still running today, and while the scales are not comparable, my system has enrolled more people this year that the states of Maryland (326), Iowa (5), and Hawaii (0) combined. I understand system development, analysis, design, testing, tuning, documentation, and deployment from conception to production. Creating good software is very hard. If you haven't done it for a living, it is easy to underestimate and hard to appreciate.

I've had the unfortunate experience to be pulled into a large failing government project (Blue Cross and Blue Shield of Florida, Medicare Part B) many years ago. I witnessed amazing incompetence, especially at the management level, that torpedoed the 90 hour/week efforts the programmers were suffering. In that project, out of 9 different virtual systems, no one could identify which was production. There were 6 test systems, all out of sync with each other, and 3 remaining systems, any of which "might" have been the production system. Programmers would apply their updates to the 3 possible production systems, frequently overwriting updates from other programming teams. The ticketing system worked intermittently and databases went down without warning. It was chaos when I started the engagement, and chaos when I left. The firm I worked for at the time collected huge consulting fees for the effort, but very little got permanently fixed over that 6 month period.

This kind of scenario might be playing out behind the scenes at Healthcare.gov. There are probably numerous contractors that built various pieces of the system (I know Experian is one of the culprits) at a cost, so far, of over $600 million. But contractors sometimes have little control or incentive to get the get the whole system working. They are focused on their part and collecting time and materials on a can't lose contract. What I'm suggesting is that it could easily be 6-12 months before the system is stable and performing as expected. Bringing in outside experts at this stage won't help and might even be counterproductive. Blame is being passed around and the work environment is probably toxic.

Obama might have saved himself a huge embarrassment if he had allowed the individual mandate to be delayed a year as the Republicans first wanted. Instead, he forced America to use the half baked, wheezing, hot mess that is the current system. For that, the President and Department of Health and Human Services have earned the Boat of Gloat.

Other opinions:

Obamacare Disaster Predictions Coming True - Even Howard Dean Agrees

Why Obama’s tech-savvy team couldn’t make Obamacare glitch-free

Obamacare Is a Disaster and Democrats Own It

Another Democrat Calls ObamaCare Implementation a "Real Disaster"

Obamacare ‘disaster,’ or routine maintenance?

Will glitches derail Obamacare?

FICO: Debt falls for most, rises for poor

source: http://www.fico.com/en/Company/News/Pages/09-26-2013-FICO-Labs-Data-Shows-17-Percent-Rise-in-Debt-Among-Late-Paying-US-Consumers-Since-2007.aspx

While most consumers are still reducing debt, those already behind on payments have piled on more since 2007 (17% more). According to the FICO report, total consumer debt has dropped, but those at the back of the debt treadmill are falling off the end. The credit system is structured so that the least creditworthy pay the highest rates. Once you get behind on payments, the system will grind you down.

The FICO report of a net decline in consumer credit is at odds with the Federal Reserve report which shows a not seasonally adjusted net increase of over $200 billion since 2008. The FICO report was based on credit records of about 19 percent of the population which is usually enough to be statistically valid. Both reports showed a big increase in student loan debt.

Political Economy

I added two political links, politico.com and politicalcalculations.com, to the blog list to emphasize the importance and inseparable nature of politics and economics. The economy determines how much wealth is produced, but politics determines how it is distributed.

Glaring examples are tax law (mortgage deductions, business expenses, earned income credit), accounting rules, fiscal stimulus, austerity, farm and oil subsidies, military contracts, section 8 housing, SNAP (food stamps), unemployment, ACA, etc. Governments at all levels shape laws to encourage or punish behavior as they see fit. Laws are used as social engineering tools with big economic consequences for the political winners and losers.

The best tracking charts and forecasts on the economy can tell you something about the size of the pie, but not much about how the pie is distributed.

M2 and inflation

I was looking at different measures of money supply vs. inflation and M2 appeared to have the best correlation (compared to M1 and MZM), with about a 2 year lag. M2 Money Stock is roughly equal to cash and checking plus savings and CDs. The correlation looks less useful after the year 2000, perhaps due to more aggressive monetary policies. It is still growing at about a 7.5% YoY rate, but is below its own exponential trend. To stay on trend, it needs to grow to $20 trillion by the year 2020.

Obama's Better Jargon, Boat of Gloat v.4

The White House has published some details on what the President calls the Better Bargain, trying to evoke something akin to the FDR's New Deal. From Wikipedia:

The New Deal was a series of domestic economic programs enacted in the United States between 1933 and 1936. They involved presidential executive orders or laws passed by Congress during the first term of President Franklin D. Roosevelt. The programs were in response to the Great Depression, and focused on what historians call the "3 Rs": Relief, Recovery, and Reform. That is Relief for the unemployed and poor; Recovery of the economy to normal levels; and Reform of the financial system to prevent a repeat depression.

The "Second New Deal" in 1935–38 included the Wagner Act to promote labor unions, the Works Progress Administration (WPA) relief program (which made the federal government by far the largest single employer in the nation),[4] the Social Security Act, and new programs to aid tenant farmers and migrant workers. The final major items of New Deal legislation were the creation of the United States Housing Authority and Farm Security Administration, both in 1937, and the Fair Labor Standards Act of 1938, which set maximum hours and minimum wages for most categories of workers.

IMO, the keys to economic recovery from the Great Depression were reform of the financial system (SEC, the investment act, Glass–Steagall, FDIC, etc.), reform of labor laws that increased the power of labor (Wagner act, FLSA, etc.), plus Social Security, WPA, and the TVA. In contrast, Obama's Better Bargain consists (so far) of a few minor tax tweaks for business, a recognition that college tuition increases are out of control but a failure to understand that easy federal student loans have caused tuition to skyrocket, and empty talk about avoiding the bubble-bust housing cycle while in the midst of the second housing bubble.

There are no bold initiatives to take power away from financial institutions and give it to workers as FDR did. The weak attempt at financial reform, the Dodd-Frank act, has been only partially implemented, while most of it has been delayed, watered down, or ignored. Glass-Steagall remains repealed and financial profits as a percentage of the economy are spiking near all time highs while real median wages continue their long decline. He wants a bigger role for private mortgage financing but has no plan, while the Fed is buying $45 billion a month in mortgage backed securities.

I guess the President has been too busy trying to convince the rest of the skeptical world to attack Syria. A strange sense of priorities!

Obama's Bargain is mostly Jargon and for that he earns the Boat of Gloat.

The drive to non-manufacturing payrolls (NMP)

It used to take a large percentage of the population working on farms to produce food. Technology and processes kept improving until the only a small percentage was needed. Today, agriculture employment accounts for roughly 1.5% of total employment. Agriculture employment is so insignificant to the general economy that the most important employment related economic release doesn't even count farm employment, the non-farm payroll report (NFP).

The US is now producing the same real value of manufactured goods as a few years ago with a lot fewer employees. Manufacturing employment is down about 33% from the peak around 1980. The same technology improvements that eliminated farm jobs appear to be hard at work on manufacturing jobs. Some day in the future, we may be getting the non-manufacturing payroll (NMP) report instead of the non-farm payroll report.

I gotta wear a welding mask

The retail news over the last week has been so bright that "shades" aren't strong enough to protect my eyes from the blinding light. I gotta wear a welding mask.

Target profit down 13%

Staples's net drops 15%; company cuts year view

American Eagle Outfitters issues downbeat outlook

Wal-Mart drop in sales reveals a tale of two consumers

Those are the retailers that are doing well. Sick retailers like JC Penney are bleeding cash from every orifice and may not survive the next year.

J.C. Penney reports Q2 loss of $586 million

There is always some creative destruction going on, but when the strong, healthy businesses start to turn down, well, it smells like a business cycle even through the Fed has not approved any future business cycles in their minutes. note: this post is laced with sarcasm

Monetary Base vs M1

In 2008, something strange happened with US money. The monetary base (M0) was inflated above the circulating cash and checking account money (M1). As far as I know, this had never happened before since the Federal Reserve was created in 1913. While M1 has grown since 2008, the velocity of M1, how fast it circulates, has dramatically slowed down. It appears people like having extra cash on hand, but those that have it, don't spend it.

Most of the monetary base money has been created in Federal Reserve computers to purchase bonds, mortgage backed securities, and to run the various Fed bailout programs. Large banks tend to get most of that money, which they promptly deposit back into the Fed as excess reserves, so all that money isn't creating inflation. Theoretically, all those reserves could be turned into roughly $25 trillion in new checking account money (through loans), and could create inflation greater than anything seen in the 1970s. That is all theory. In practice, the reserves are sitting idle collecting 25bps in risk free interest.

I have no idea when or if that huge monetary base will impact the real economy, but it, along with a $4-5 trillion balance sheet will be among the problems inherited by the next Fed Chair in 2014. Next year, get ready for a surprise!

Federal Deficit vs. Fed Assets

It's too bad the St. Louis Fed system doesn't offer data on Federal Reserve assets prior to 2002, but looking at the data from other sources, the red line (Federal Reserve assets) were always lower. As the recession in 2008 approached, the Federal Reserve had about $800 billion in mostly short term treasuries and $0 in mortgage backed securities (MBS).

When the gigantic fraud of the housing bubble crashed the real economy, it left a gaping hole in GDP and federal tax receipts. It turns out that millions of fired workers don't pay much income tax, but do collect lots of benefits. Annual trillion dollar money holes are hard to fill. That's where the Fed rides to the rescue, purchasing treasuries of all maturities and MBS in 12 and 13-digit quantities every year since then.

While the deficit has bottomed and is improving, it is still a giant hole that, current course and speed, may get back to zero around 2018. That would leave the Fed with an estimated $5 trillion in marketable treasuries and MBS. That sounds like a lot for a bank with $5 billion in capital. Luckily, accounting rules and being insolvent don't matter for the Fed since they pass losses (and gains) back to the US Treasury.

Maybe my vision is blurry, but that chart looks unstable to me. It doesn't look self correcting or like it will get back in balance any time soon. It looks like something where errors are being magnified, instead of damped, causing the errors to grow exponentially. But everyone can rest easy, because these top market strategists shared their top stock picks on CNBC today.

Blackpalm or Palmberry?

News from Blackberry this morning that they may try to take the company private.

CEO Thorsten Heins might think that running BlackBerry's turnaround as a private company would be easier. After all, upset shareholders would be a thing of the past. The company could also get away with not having to disclose total smartphone unit sales and have to publicly disclose its revenue and earnings (or losses) as often.

Well, that sounds like a winning strategy. I suggest they sell themselves to HP, which is where many technology companies go to die. Palm was acquired by HP in 2007 and after one new product release, was euthanized.

If HP acquires Blackberry, they could fuse the two technologies and release a Blackpalm device! I already have the catchphrase: "Cooler than frostbite" since frostbite also turns your extremities black. Or they could go with the friendlier "Palmberry", but I am not sure they want to evoke that kind of visual. Either way, I would expect one product release before it dies.

Subjective Invective v.9

From the WSJ:

ATHENS—Greece's fiscal discipline efforts appear to be paying off, according to budget data released Monday, with a primary surplus that may help make the country's case for further debt relief from international creditors.

But the steep spending cuts brought about by the fiscal discipline have come at a huge price for the country. The economy contracted by 4.6% in the second quarter, albeit at a slower pace than previous quarters, raising doubts as to whether it will be able to return to growth in 2014 and start lowering record high unemployment rates.

I am not sure why economists invented the term "primary surplus", except to make government budget appear better than they are. The idea of a primary surplus or primary deficit is that it excludes interest payments on debt, and usually other real expenses such as social security payments.

The reality is that debt payments must be made, and pretending government finances are fine by excluding them is a strange exercise in fantasy. Economists nurture a similar fantasy that sovereign debt never has to be repaid, and can be rolled over forever, when there are numerous examples to the contrary throughout history.

In my opinion, Japan is still in the pole position for the Keynesian end game winner. Developed western nations are quickly following the Japanese fiscal leadership of infinite debt and economic stagnation. Don't change that dial, the finish is likely to be spectacular!

Gold vs US Debt since 1971

The correlation of the gold price to the rapid debt increase since 2001 failed early this year. However, the long term correlation since 1971 appears to be back in play. The adjusted R-squared is 0.84 and the price is back within one sigma to the down side. Official US debt has not grown since May 31, 2013 and in fact dropped through May. The Treasury is using emergency procedures to manage payments until Congress passes another debt ceiling increase. Then, it will continue the inexorable climb toward infinity (see Japan). Economists generally acknowledge that sovereign debt is never meant to be paid back, only rolled forever. That works until a country runs out of credit. I am not predicting the US will run out of credit soon, but I do think there is some limit. Camels, straws, you know the story.

Here are the linear regression predictions:
Best Fit Price: $1467.56
One sigma up: $1672.72
One sigma down: $1262.39
Two sigma up: $1887.02
Two sigma down: $1048.09

Battle of the [Interest] Bulge

US Treasury interest rates, especially the 5,7, and 10 year flavors, continue to flail upward. Since my last post in mid-June, the net change has been:

5-year 1.36 +12bps
7-year 2.01 +25bps
10-year 2.63 +30bps

My guess is that the psychology of a rising stock market, bleating from the financial press about the danger of rising rates (and they have been rising), and the Fed's taper talk, has convinced some people to move their money out of bonds and into stocks. This move has gained momentum despite ongoing weak economic data. Housing has had a good year, but with rising rates and higher prices, it has been slowing down.

I think this psychology is temporary, but I don't know when it will be played out. A real spike in rates may happen when the world figures out that the large US trade deficit is permanent and that the US oil production increase is brief and temporary. Before that, I expect Japan to blow up in a huge financial fireball. They have been leading the world for a couple of decades and I believe their fate is the fate of all countries that follow, including the US.

Middle of the curve explodes

US Treasury notes and bonds sold off hard on the FOMC meeting news today, especially the 5-year, 7-year, and 10-year maturities.

5-year 1.24 +17bps
7-year 1.76 +18bps
10-year 2.33 +13bps

The numbers look much worse compared to be beginning of the month. If this trend continues much longer, it is very bad news for mortgage rates, house prices, mortgage backed securities, and bonds in general. The Fed remains firmly in control of short rates, but things are starting to wobble in the rest of the curve.

Damage was not limited to bonds today. The DOW was down over 200 points, precious metals, and commodities also sold off. It is very unusual for everything to be this correlated, unless everything was pumped up with cheap credit that got margin called home.

Gold reversion time

With the incredible one day 5.68% drop in the gold price today, the correlation that has existed since 2001 with the growth of US debt came to an abrupt end.

The only gold related news over the last few days was the closing of a Barrick mine in Chile, and the forced sale from the Cyprus central bank. In my opinion, neither of those explained the crash today. There are many theories floating around, and I don't know what the explanation is, but I know the 2001-present correlation is over. Knowing that, I sold a significant fraction of my holdings today to extract some profits.

Even though the most recent correlation and bull market appears to be dead, let's see what the longer term correlation looks like back to 1971. Using the most recent data points through today, the R-squared of the correlation to 1971 is 0.8463, pretty good.

What does the longer term linear regression predict?
Best Fit Price: $1515.51
One sigma up: $1718.88
One sigma down: $1312.15
Two sigma up: $1931.45
Two sigma down: $1099.58




The gold price is now below the long term linear regression going back to 1971. I've heard of this weird thing called reversion to the mean. Maybe there is something to it. Taking the long view, a closing price of $1477 looks perfectly reasonable. On the other hand, there is no particular reason to view the longer term correlation with any veracity. Time will tell. For now, nothing really looks like a great investment.

Bitcoin Insanity

I've been following Bitcoin passively for more than a year since it came into my awareness. It is an interesting experiment with some good goals and good technology behind it. At least, the cryptography part of it is good.

I considered buying one BTC just to get familiar with the tools last year, but never bothered for two big reasons. One, there is still very little you can buy with bitcoins and two, I was always concerned about the implementation of supporting sites and services.

Giant commercial banks with large and well paid IT departments have a hard time keeping electronic theft under control. A lot of bank hacks and losses are never reported because of black eye it would give the industry. Think of the ongoing rampant identity theft problem and credit/debit card issues. It is not really getting better.

Now, compare that to a start up like Instawallet with a small staff who has to deal with an unknown number of attack vectors. None of the online wallet services or bitcoin banks seem remotely safe. It just seems like a giant disaster waiting to happen. Sure enough, Instawallet was robbed today and the service suspended indefinitely. This is not the first bitcoin wallet site to be hacked and it won't be the last.

Bitcoin is a small market and hot money can sweep in and destroy it. That also appears to be in progress as the price of a bitcoin in dollars has gone from $13.51 on January 1, 2013 to a high of $147.00 on April 3, 2013. That is a 988% increase in a little over 3 months and nothing other than out of control speculation can explain it, not even the forced Cyprus bail-in. Bitcoin price stability makes gold, oil, and almost everything else look tepid. Spikes like this usually result in a waterfall drop on the other side once the mania stalls.

It has been fun watching it play out, but I think a lot of people are going learn some hard lessons about currencies, market size, and bubbles when this ends. Protect yourself.

ECB calls Cyprus deposit theft "solidarity levy"

From the Washington Post:

“If the government wants to change the structure of the solidarity levy for the banking sector, the government can decide as such,” European Central Bank Executive Board member Joerg Asmussen said today in Berlin. “What’s important is that the planned revenue of 5.8 billion euros remain.”

The Orwellian theme from government leaders has gone global. Let's raise our victory gin to the solidarity tax, which will help us defeat Eurasia! We've always been at war with Eurasia, or was it Oceania?

In case you were wondering, what is supposed to happen when a bank fails is that the value of the stock goes to zero, bond holders are impaired to the extent needed up to a 100% loss or conversion to equity, then the state takes over the bank and depositors with balances above the insurance limit take losses. In this case, they are hitting all depositors first, including those below the insurance limit, and apparently leaving the bond holders and management untouched. In fact, it is blatant theft of lunch money by the EU and ECB bullies.

The global game now is to make sure when the next government backed bank theft comes, the next MF Global, the next TARP, etc. your money isn't there.

Gold vs U.S. debt linear regression -- correlation over?

The chart below is based on data since 2001. The adjusted R-squared is 0.97.


Best fit price is $1,789.
One sigma below is $1,706.
Two sigma below is $1,624.
Three sigma below is $1,536.

The correlation between the gold price and rising US debt has been very strong since 2001. The extremes in deviation have been slightly more than 2 sigma plus (September, 2011) or minus (September, 2008) the best fit linear regression line. The gold price as of March 1, 2013 is testing the bottom end of the range at about 2.5 sigma below the best fit price.

This price either signals an incredible buying opportunity or the end of the twelve year correlation. If gold closes below $1,536 in March, I would suggest it means the end of the correlation. The odds of the correlation remaining intact with a three sigma variation is 99.7% against.

Whether this is the end of the gold vs. debt correlation or not, I am convinced that U.S. debt will continue to accumulate at a faster than average pace. Apologists for the administration like to point to the second derivative of the deficit, saying the rate of the improvement, or reduction, in the deficit as a percentage of GDP is better than ever. However, the actual deficit for 2012 was a very high 8.5% compared to the average from 1970-2008 of less than 3%. If the sequester remains in effect through 2013, the estimated deficit would still be a higher than average 5.5%. Total credit market debt remains near all time highs.

Obama's Orwellian radio address on "irresponsible behavior"

From the Weekly Standard:

"Here in America, we know the free market is the greatest force for economic progress the world has ever known. But we also know the free market works best for everyone when we have smart, commonsense rules in place to prevent irresponsible behavior," Obama began.

"That’s why we passed tough reforms to protect consumers and our financial system from the kind of abuse that nearly brought our economy to its knees. And that’s why we’ve taken steps to end taxpayer-funded bailouts, and make sure businesses and individuals who do the right thing aren’t undermined by those who don’t.

"But it’s not enough to change the law – we also need cops on the beat to enforce the law. And that’s why, on Thursday, I nominated Mary Jo White to lead the Securities and Exchange Commission, and Richard Cordray to continue leading the Consumer Financial Protection Bureau.

"Mary Jo White has decades of experience cracking down on white-collar criminals and bringing mobsters and terrorists to justice. At the SEC, she will help complete the task of reforming Wall Street and keep going after irresponsible behavior in the financial industry so that taxpayers don’t pay the price."

It is so perfectly and completely the opposite of reality that I find it difficult to find the words.

I can't think of one major financial industry executive that was prosecuted for irresponsible behavior. I haven't seen any tough reforms to protect consumers. I haven't seen any cops enforcing financial laws, just coddling of banks and wrist slaps. There were monstrous bailouts by Bush, approved and extended by Obama. The federal government still owns a large piece of Citibank and General Motors. Taxpayers are still paying for the bailouts of Fannie, Freddie, Bear Stearns, Bank of America, Goldman Sachs, Merrill Lynch, Morgan Stanley, and more. The statements in the radio address seem to go much farther than just spin. It is calling white, black and vice versa. I can only shake my head in disbelief.

CFNAI back to Yellow Alert

The Chicago Fed National Activity Index is a composite index built from 85 monthly indicators. A reading of zero is historical trend growth, a reading above zero is faster and below zero is slower growth.

source: http://www.chicagofed.org/webpages/research/data/cfnai/current_data.cfm

The composite for December was 0.02 and the three month moving average was -0.11. The last two months have shown some improvement back toward long term trend growth, but the three month moving average posted a 10th consecutive negative reading. It has moved out of the red alert zone back into yellow alert.

California LAO analysis of insolvent UI fund

For years, I've charting the decline into insolvency of the California Unemployment Insurance Fund. The fund balance now rests near all time lows of negative ten billion dollars (-$10,000,000,000). A negative balance is possible and California can continue to pay unemployment insurance claims only because of loans from the federal government for which it is now paying interest.

Even if California runs a $1 billion surplus in 2013, it would need to do so for more than 10 years in a row and put every penny of that surplus toward repaying the federal government for the unemployment loans plus interest. It is possible that the federal government will forgive these gigantic loans some day, but for now, my expectation is that California will have to repay the loans.

The Legislative Analyst's Office (LAO) recently released an Overview of the Governor's Budget in California. On page 37 of the report, the insolvent unemployment fund was addressed:

Federal Loans Total About $10 Billion. The UI Fund has been insolvent since 2009, primarily reflecting recession-related growth in unemployment benefit payments that exceeded the available fund balance. The state has borrowed from the federal government since 2009 to continue paying unemployment benefits, and the outstanding loan from the federal government is projected to be $10.2 billion at the end of 2013. The Governor’s budget does not propose a solution to the ongoing UI Fund deficit, but instead specifies that the Secretary for Labor and Workforce Development will initiate a series of meetings by February 1, 2013 to discuss solutions to repay the federal loan and stabilize the financial condition of the UI Fund. The budget also assumes a $291 million General Fund interest payment on the federal loan for 2013-14.

Effects of the Continuing Insolvency. For each year that the state carries a federal loan balance, UI taxes paid by employers are incrementally increased. The proceeds from these increased tax revenues are used to pay down the principal on the state’s federal loan. Absent corrective action, the administration projects that the federal loan will not be fully repaid until sometime after 2020. Until then, state interest payments on the federal loan remain a significant annual liability.

Recommend Various Actions to Address Program’s Financial Health. We have previously found that California’s UI program has a structural mismatch between its revenues and benefit costs that predates the recent recession and cannot be sustained for the long term. In our October 2010 report, California’s Other Budget Deficit: The Unemployment Insurance Fund Insolvency, we recommended a balanced approach of tax increases, benefit reductions, and eligibility changes to address the long-term financial health of the UI program. These policy options are still viable, and could be phased in over several years if the goal were to minimize the potential adverse economic effects of such proposals on UI beneficiaries and employers.

The LAO analysis highlights the continued, long term insolvency of the fund, the ongoing interest expense to the state, and the increasing cost to employers to try to rebuild a positive fund reserve. This is another legacy from the Financial Crisis in 2008.

Gold vs. US debt linear regression update

The chart below is based on data since 2001. The R-squared is 0.93.

Best fit price is 1,764.62.
One sigma below is 1,682.91.
One sigma above is 1,846.32.
Two sigma below is 1,602.69.
Two sigma above is 1,926.54.

The next chart is based on data since 1971. The R-squared is 0.76.

Best fit price is 1,429.76.
One sigma below is 1,208.74.
One sigma above is 1,650.77.
Two sigma below is 986.36.
Two sigma above is 1,873.16.

Usual and customary disclaimers. Correlation is not causation. This is not investment advice.

Happy New Year (cliff edition)

We have a deal, but it hasn't been voted on yet. We are in living in The Space in Between.

Update 1/2/2013: We have a deal approved by Congress that will be signed by the President. The CBO estimates the deal to add $3.9 trillion to the deficit over 10 years. Wow. I always believed the debt/deficit were out of control, but I expected some kind of token resistance to it from Congress. Apparently, it is pedal to the metal from all branches of the federal government.