Those needing a laugh today need only listen to another rant from UKIP leader Nigel Farage who says "Listen! The Whole Thing's a Giant Ponzi Scheme!"



Select Quotes

• "EC president Jose Barroso is a delusional idiot and was a supporter of Chairman Mao"
• "America, you are not to blame"
• "The only buyers of Spanish bonds are Spanish banks" 
• "Listen. The Whole Thing's a Giant Ponzi Scheme!" 
• "At the end of the day, this whole thing is going bust" 
• "We have been led by a group of ex-communists to a total disaster" 
• "What we're doing in Brussels with Barroso, and the other joker Van Rumpoy, is we are actually rebuilding a model of centralized undemocratic government run by bureaucrats"

UKIP Creed



That is one of the most amusing interviews Farage has given. Moreover, Farage is correct on every point.

The Republican party would do well to adopt the UKIP Party Creed as shown.

We believe in the minimum necessary government which defends individual freedom, supports those in real need, takes as little of our money as possible, and doesn't interfere in our lives.

That interview was published on June 19. I posted a take on Barroso on the 18th in G-20 Summit in Flames Already as EC President Blames US For Financial Crisis in Europe

Let's be honest here. Yes the US caused lots of problems. So did the ECB, and so did the nannycrats. China played a part as well. Thus, those comments by Barroso are strictly from Fantasyland if not Idiotland. Europe created the euro, not the US. Europe foolishly pledged more and more money to Greece, not the US. And eurozone rules are at the heart of Europe's mess, not anything the US did.

Mike "Mish" Shedlock

I have a great deal of sympathy for Michelle Apperson, the Sacramento "Teacher of the Year" who was laid off. Assuming she deserved the award, she should not have been laid off.

Sixth-grade teacher Michelle Apperson passed down a simple message to her students.

"My favorite teachers growing up were the ones who challenged me to go out of my comfort level a little bit, strive for the stars, and work hard," the veteran California educator wrote on her school's bio page.

Despite just being named Sacramento's "Teacher of the Year," Apperson was laid off as part of a massive budget cut.

"It hurts on a personal level because I really love what I do," Apperson, who taught all subjects, told KXTV-News 10. "But professionally and politically or economically, I get why it happens."

Her pink slip comes just days after President Barack Obama prodded Washington lawmakers to help cash-strapped states with education funding.

The Sacramento City Unified School District has suffered approximately $143 million in budget cuts in recent years. School spokesperson Gabe Ross told News 10 that who gets laid off is mandated by state law and is based on seniority, not performance.

"It's an awful situation," Ross said. "It's another sign of how education's funding really needs an overhaul."

According to her bio, Apperson's goal was to teach her students "how to solve problems with peers, other adults, and the world around them."

Now they know firsthand how difficult that can sometimes be.

Does Apperson Really "Get Why it Happens"?

I like Apperson's Bio, her experience, and her message to her 6th grade class.

However my sympathies end there.

She says she "gets why it happens". Does she? If so why doesn't she explicitly say so?

Who is to Blame?

Teachers' unions are 100% to blame for this mess. Unions protect the under-performers at the expense of those like Apperson. Unions even protect repeated sexual predator teachers.

From the New York Times article Give Schools the Power to Punish

In one case, a male teacher in Manhattan was accused of inappropriately touching a female student in 2010, but the arbitrator imposed only a suspension without pay. And now — after more disturbing episodes — we’ve filed charges against this individual for a third time.

As it stands, public school teachers accused of sexual misconduct enjoy protections that no other city employee has. That puts children in danger, and we cannot allow it to continue.

Rest assured there are thousands of cases like that nationwide. Want some articles?

The Huffington Post reports New York Teachers Paid To Do Nothing: 700 Of Them

Hundreds of New York City public school teachers accused of offenses ranging from insubordination to sexual misconduct are being paid their full salaries to sit around all day playing Scrabble, surfing the Internet or just staring at the wall, if that's what they want to do.

Because their union contract makes it extremely difficult to fire them, the teachers have been banished by the school system to its "rubber rooms" _ off-campus office space where they wait months, even years, for their disciplinary hearings.

The 700 or so teachers can practice yoga, work on their novels, paint portraits of their colleagues _ pretty much anything but school work. They have summer vacation just like their classroom colleagues and enjoy weekends and holidays through the school year.

Because the teachers collect their full salaries of $70,000 or more, the city Department of Education estimates the practice costs the taxpayers $65 million a year. The department blames union rules.

Here is a Google search of Teachers Paid to Sit if you want more examples.

Now factor in incompetent teachers and poor teachers. The union protects them too.

Overhaul Needed

Yes, indeed. An overhaul is truly needed. Teachers should be hired, fired and receive pay raises based on merit, not seniority.

School spokesperson Gabe Ross told News 10 that who gets laid off is mandated by state law and is based on seniority, not performance.

Ross then whines "It's another sign of how education's funding really needs an overhaul."

An overhaul is indeed needed. It's time to get rid of collective bargaining of public unions, and it's time for merit pay for teachers.

Enormous Sense of Entitlement

With very few exceptions, public union members have an enormous sense of entitlement.

Public union members need to put themselves in the average taxpayer's shoes. Public union members also need to realize promised benefits cannot possibly materialize.

Teachers' Unions Do Not Give a Damn About Kids

Here is the deal, straight up. Teachers' unions do not give a damn about the kids.

Please read that carefully. I said "Teachers' unions" NOT teachers.

Most teachers do care about the kids. However, those teachers are sucked into believing garbage fed by union organizers. That garbage inevitably leads to cannibalization of the lowest on the seniority totem pole, regardless of skills or talent.

Union mentality is also to blame for inability of school districts to get rid of sexual predators and grossly incompetent teachers.

Time For Reflection

This is a time for serious reflection. We all need to think about what government owes us (or doesn't), what taxpayers owe public union workers (or don't), and what promises have been made by politicians at taxpayer expense that cannot possibly be met.

The problem is not a lack of education funding.

The problem is absurd expectations as to what benefits public union workers receive, coupled with inability to get rid of union workers, except on the basis of seniority, even in the face of repeated sexual predator behavior.

Mike "Mish" Shedlock

In an interview with GoldMoney, institutional advisor Bob Hoye explains Why Gold Miners are Winners During Deflation

Market historian, geologist and Pivotal Events author Bob Hoye, talks to the GoldMoney Foundation’s Dominic Frisby about the real price of gold in times of post-bubble deleveraging, and the opportunities in gold mining shares – which he thinks could be on the verge of a great new bull market.

Click on Link For Video

To see a video with Bob Hoye, please click on the above link.

I point out in advance that I do have a relationship with GoldMoney, and that I also own shares of miners as well as physical gold and silver at GoldMoney.

If anyone wants information about GoldMoney or investing in physical gold and silver in general, please Email Mish.

I have been in the same boat with Bob Hoye for as long as I can remember.

Mish Thoughts on Gold in Deflation

It is important to point out upfront what "deflation" means to me.

Deflation is not about rising prices, so please do not send me emails telling me about the price of gasoline or food (or anything else), especially if you are going to ignore trillions of dollars of debt and equity wiped off the books in the housing bust.

My definition of inflation is a net increase of money supply and credit, with credit marked to market. Deflation is a net decrease of money supply and credit, with credit marked to market.

We have been in generally deflationary times since 2007 along with the housing bust. Bernanke and central bankers in general have poured on the liquidity spigots fighting the collapse in credit, and as I expected (but other deflationists like Robert Prechter did not), gold advanced.

Here are some specific references to things I have written:

Dear Nouriel Roubini: The Fundamental Case for Gold Has Not Changed; To Understand, All Roubini Need Do is Look in a Mirror
Dec 14, 2011 ... Reasons to Own Gold Have Not Changed The fact of the matter is gold does well in deflation. It also does well in times of credit stress.

How does one invest for inflation and deflation?
Dec 27, 2007 ... Money is hoarded in deflation so gold should act well in deflation. Do not make the mistake of thinking that gold always does well. It does not.

So What's Behind Moves In Gold?
Sep 2, 2009 ... One final point: Gold does well in "real" terms during deflations. It can do better in nominal terms at other times. "Real" means purchasing power

How Will China Handle The Yuan?
Sep 1, 2009 ... And please don't think that gold does well in times of inflation and deflation because it doesn't. Proof is simple ...

Rear View Mirror Hyperinflation Dec 16, 2007 ... Money does well in deflation. Perhaps there is another big pullback first, perhaps not, but the hyperinflation argument for owning gold does not ...

Bizarro World Inflation; About that 2011 Hyperinflation Call ...
Sep 22, 2011 ... It's not that I am in love with the dollar. Indeed I am not. I like gold. Historically, gold does well in periods of deflation and periods of credit stress.

Is The Inflation Scare Over Yet?
Jun 26, 2008 ... Historically, there are times gold does well: Hyperinflationary times and Deflationary times. Gold does poorly under more normal conditions, ...

Myths About "What's Economically Important"
Sep 17, 2010 ... Gold is money and as money it should do well in deflation in the country of the senior currency. It did. In credit-based system, especially where ...

Ten Pages of References about Gold in Deflation

The above links were from the first of 10 pages of articles searching my blog for the phrase gold does well in deflation.

The Google search mechanism on the upper right of my blog performs fabulously for things you are looking for. I use it all the time myself.

Mike "Mish" Shedlock

Congratulations to Wisconsin governor Scott Walker who became the first governor in US history to win a recall vote.

The New York Times reports Walker Survives Wisconsin Recall Vote

Gov. Scott Walker, whose decision to cut collective bargaining rights for most public workers set off a firestorm in a state usually known for its political civility, easily held on to his job on Tuesday, becoming the first governor in the country to survive a recall election and dealing a painful blow to Democrats and labor unions.

Mr. Walker soundly defeated Mayor Tom Barrett of Milwaukee, the Democrats’ nominee in the recall attempt, with most precincts across the state reporting results. The victory by Mr. Walker, a Republican who was forced into an election to save his job less than two years into his first term, ensures that Republicans largely retain control of this state’s capital, and his fast-rising political profile is likely to soar still higher among conservatives.

The result raised broader questions about the strength of labor groups, who had called hundreds of thousands of voters and knocked on thousands of doors. The outcome also seemed likely to embolden leaders in other states who have considered limits to unions as a way to solve budget problems, but had watched the backlash against Mr. Walker with worry.

Voters went to the polls in droves, and some polling places needed extra ballots brought in as long lines of people waited. One polling location was so swamped, state officials said, that it found itself using photocopied ballots, which later had to be hand-counted. The final flurry of television advertising — with Mr. Walker outspending Mr. Barrett seven to one — seemed to have little impact on the outcome. Nearly 9 in 10 people said they had made up their minds before May, according to exit poll interviews.

Liberal fools and union sympathizers in Madison, Milwaukee, and the extreme Northwestern part of the state voted for the recall, but overall the county vote was 60-12 in favor of Walker.



For an interactive map of percentages, please see Wisconsin Recall Election Results

Public unions survive by coercion, threats, bribes, and vote buying. Cities and states are broke as a result. Even FDR agrees.

Message From FDR

Inquiring minds are reading snips from a Letter from FDR Regarding Collective Bargaining of Public Unions written August 16, 1937.

All Government employees should realize that the process of collective bargaining, as usually understood, cannot be transplanted into the public service. It has its distinct and insurmountable limitations when applied to public personnel management.

The very nature and purposes of Government make it impossible for administrative officials to represent fully or to bind the employer in mutual discussions with Government employee organizations.

Particularly, I want to emphasize my conviction that militant tactics have no place in the functions of any organization of Government employees.

A strike of public employees manifests nothing less than an intent on their part to prevent or obstruct the operations of Government until their demands are satisfied. Such action, looking toward the paralysis of Government by those who have sworn to support it, is unthinkable and intolerable.

For more on public union slavery, coercion, bribery, and scapegoating please see ...

• Paul Krugman, Stephen Colbert, Bill Maher, others, Ignore Extortion, Bribery, Coercion, and Slavery; No One Should Own You!
 
• President Obama's Slave Trade; Senator DeMint Says Team Obama Acts Like Thugs; Death of Right-to-Work?
 
• Scapegoating Madness

Finally, actual Wisconsin results prove Union-Busting is a "Godsend"; Elimination of Collective Bargaining is the Single Best Thing one Can do for School Kids

It's time to implement national right-to-work laws and put an end to public union collective bargaining nationally.

Mike "Mish" Shedlock

Quick Notes About the Unemployment Rate

• US Unemployment Rate rose .01 to 8.2%
 
• In the last year, the civilian population rose by 3,653,000. Yet the labor force only rose by 1,307,000. Those not in the labor force rose by 2,345,000.
 
• This month the Civilian Labor Force rose by 642,000.
 
• Those "Not in Labor Force" decreased by 461,000. If you are not in the labor force, you are not counted as unemployed.
 
• Those "Not in Labor Force" fell to 87,958,000 from last month's record high of 88,419,000.
 
• By the Household Survey, the number of people employed rose by 422,000.
 
• By the Household Survey, over the course of the last year, the number of people employed rose by 2,479,000.
 
• Participation Rate rose .2 to 63.8%
 
• There are 8,098,000 workers who are working part-time but want full-time work, an increase of 245,000
 
• Thus of the the net of 422,000 people presumably hired by the household survey, 245,000 were for part-time jobs.
 
• Long-Term unemployment (27 weeks and over) rose by 310,000.
 
• Were it not for people dropping out of the labor force, the unemployment rate would be well over 11%.

This month was another disaster. Actual employment fell by 169,000 and the only reason the unemployment rate dropped is the civilian labor force fell by 342,000. These numbers are well past the point of believability and will be revised at some point in my opinion.

Over the past several years people have dropped out of the labor force at an astounding, almost unbelievable rate, holding the unemployment rate artificially low. Some of this was due to major revisions last month on account of the 2010 census finally factored in. However, most of it is simply economic weakness.

Jobs Report at a Glance

Here is an overview of today's release.

• US Payrolls +69,000 - Establishment Survey
• US Unemployment Rate rose .01 to 8.2% - Household Survey
• Average workweek for all employees on private nonfarm payrolls fell .3 hours to 34.4 hours
• The average workweek for production and nonsupervisory employees on private nonfarm payrolls was unchanged at 33.7 hours.
• Average hourly earnings for all employees in the private sector rose by 2 cents.
  

Recall that the unemployment rate varies in accordance with the Household Survey not the reported headline jobs number, and not in accordance with the weekly claims data.

May 2012 Jobs Report

Please consider the Bureau of Labor Statistics (BLS) May 2012 Employment Report.

Nonfarm payroll employment changed little in May (+69,000), and the unemployment rate was essentially unchanged at 8.2 percent, the U.S. Bureau of Labor Statistics reported today. Employment increased in health care, transportation and warehousing, and wholesale trade but declined in construction. Employment was little changed in most other major industries.

Unemployment Rate - Seasonally Adjusted



Nonfarm Employment - Payroll Survey - Annual Look - Seasonally Adjusted



Employment is finally above the total just prior to the 2001 recession.

Nonfarm Employment - Payroll Survey - Monthly Look - Seasonally Adjusted



click on chart for sharper image

Between January 2008 and February 2010, the U.S. economy lost 8.8 million jobs.

Since a recent employment low in February 2010, nonfarm payrolls have expanded by 4.1 million jobs. Of the 8.8 million jobs lost between January 2008 and February 2010, approximately 46.7% percent have been recovered.

Statistically, 125,000+- jobs a month is enough to keep the unemployment rate flat. For a discussion, please see Question on Jobs: How Many Does It Take to Keep Up With Demographics?

The average employment gain over the last 27 months has been 139,000, barely enough (statistically speaking) to make a dent in the unemployment rate.

Yet, the civilian unemployment rate has fell from 9.8% to 8.2%.

Current Report Jobs



Average Weekly Hours



Average weekly hours for all employees on private nonfarm payrolls declined to 34.4 hours in May. Average weekly hours for production and nonsupervisory employees remained unchanged at 33.7 hours.

Average Hourly Earnings vs. CPI



Except in the depths of the recession when the CPI plunged into negative territory, wages have not kept up with the CPI.

"Success" of QE2 and Operation Twist

• Over the past 12 months, average hourly earnings have increased by 1.7 percent. In April, the Consumer Price Index for All Urban Consumers (CPI-U) had an over-the-year increase of 2.3 percent. For about a year beginning in late 2010, price increases outpaced increases in earnings. Since the third quarter of 2011, however, the gap between the two has narrowed.
 
• Not only are wages rising slower than the CPI, there is also a concern as to how those wage gains are distributed.

BLS Birth-Death Model Black Box

The BLS Birth/Death Model is an estimation by the BLS as to how many jobs the economy created that were not picked up in the payroll survey.

The Birth-Death numbers are not seasonally adjusted while the reported headline number is. In the black box the BLS combines the two coming out with a total.

The Birth Death number influences the overall totals, but the math is not as simple as it appears. Moreover, the effect is nowhere near as big as it might logically appear at first glance.

Do not add or subtract the Birth-Death numbers from the reported headline totals. It does not work that way.

Birth/Death assumptions are supposedly made according to estimates of where the BLS thinks we are in the economic cycle. Theory is one thing. Practice is clearly another as noted by numerous recent revisions.

Birth Death Model Adjustments For 2011



Birth Death Model Adjustments For 2012



Birth-Death Note

Once again: Do NOT subtract the Birth-Death number from the reported headline number. That approach is statistically invalid.

Household Survey Data



click on chart for sharper image

In the last year, the civilian population rose by 3,653,000. Yet the labor force only rose by 1,307,000. Those not in the labor force rose by 2,345,000.

That is an amazing "achievement" to say the least, and as noted above most of this is due to economic weakness not census changes.

Decline in Labor Force Factors

1. Discouraged workers stop looking for jobs
2. People retire because they cannot find jobs
3. People go back to school hoping it will improve their chances of getting a job
4. People stay in school longer because they cannot find a job

Were it not for people dropping out of the labor force, the unemployment rate would be well over 11%.

Part Time Status



click on chart for sharper image

There are 8,098,workers who are working part-time but want full-time work.

BLS Alternate Measures of Unemployment



click on chart for sharper image

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

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

The official unemployment rate is 8.2%. However, if you start counting all the people that want a job but gave up, all the people with part-time jobs that want a full-time job, all the people who dropped off the unemployment rolls because their unemployment benefits ran out, etc., you get a closer picture of what the unemployment rate is. That number is in the last row labeled U-6.

U-6 is much higher at 14.8%. Both numbers would be way higher still, were it not for millions dropping out of the labor force over the past few years.

Duration of Unemployment



Note the huge drop in duration of unemployment in the 15-26 week category accompanied by an even larger increase in the long-term unemployed category.

Grossly Distorted Statistics

Given the complete distortions of reality with respect to not counting people who allegedly dropped out of the work force, it is easy to misrepresent the headline numbers.

Digging under the surface, the drop in the unemployment rate over the past two years is nothing but a statistical mirage. Things are much worse than the reported numbers indicate.

Last month the seasonally adjusted Civilian Labor Force fell by 342,000. This month it rose by 642,000.This is beyond statistical noise, to the point of pure statistical bullsheet.

Mike "Mish" Shedlock

In a Housing Showdown on Bloomberg TV, Economist Gary Shilling & Mark Kiesel Go Head-to-Head.

Housing bear Gary Shilling and housing bull Mark Kiesel of PIMCO debated the state of the U.S. housing market on Bloomberg Television’s “Street Smart” with Trish Regan and Adam Johnson.

Shilling said that housing prices will decline 20% this year because “there are 2 million inventories, both visible and shadow inventories, over and above normal working levels”, which is “a tremendous overhang.” He went on to say that “excess inventories are the mortal enemy of prices.”

Kiesel justified his bullish stance on the market, saying that, “all inventories you look at, whether new existing or shadow, they are coming down” and “there is only 144,000 new home sales for sale. That’s at a 49-year low.”

Kiesel on purchasing a home in California and whether he’s having buyer’s remorse:

“No. I will say it is a little chaotic because there are a lot of boxes around. I think after renting for six years, my view is that housing prices have fallen about 35% and the inventories are coming down and banks are starting to lend again gradually. U.S. housing looks very cheap relative to international housing. I feel good about putting some money into housing right now.”

Shilling on why housing prices will decline 20% this year:

“Because of excess inventories. We estimate that there are 2 million inventories, both visible and shadow inventories over and above normal working levels. That is a lot. Back in normal times, we built about a million and a half houses a year, so two and a half million is a tremendous overhang. Excess inventories are the mortal enemy of prices. What may happen here is that now that the robo signing flap is settled and the big banks settled for $25 billion with the various state attorneys general and the federal government, they have been holding off on foreclosures because they had enough bad PR. Now they have settled that, I think they will go back to foreclosures. The National Association of Realtors says that when foreclosed houses are sold, they sell at a discount of 19% to existing houses and that drags everything down when you get a big dumping of these houses on the market. I'm looking for another 20% decline and that is what it would take to bring them back to the long-term averages. They go back to 1890 in terms of median single-family house prices.”

Kiesel on how he factor in those inventory levels:

“Currently, we have 2.5 million homes in existing inventories which is down in the last seven years from 4 million. There is only 144,000 new home sales for sale. That’s at a 49-year low. The existing inventory is at a seven-year low. If you look at the shadow inventory, there were 3.6 million homes that were 90+ days delinquent two years ago. Today, there is only 2.9. All inventories you look at, whether new existing or shadow, they are coming down.”

Shilling’s response:

“They are coming down, but they are still huge…Yeah, they are down, but when you count in the shadow, and particularly this category that the Census Bureau has, which are houses held off the market for other reasons, very descriptive. This includes foreclosed houses that are vacant, but not yet sold. It includes houses that people have listed, but they couldn’t stomach the bids they got so pulled them off the market. You count all of that in and you are still over a working inventory of about 2.5 million. You are still 2 million above that when you count everything in.”

Kiesel on what number he’s tracking:

“What I was quoting was the 90+ day delinquencies. If you add that with the foreclosures, you do get to the 3.9 level. The thing about housing is that it’s very much a regional market. The homes that your viewers and people actually would want to buy, you need to look at the existing inventory that is quality. Go out and look for a house now. There is less quality inventory on the market today than a year ago. That shadow inventory will get absorbed quicker than you think because the implied rental yields is roughly 5%-12% in a lot of markets, so investors will line up. Gary, I respect your work and I read your books and if housing goes down 20%, I will back up the truck and likely PIMCO will, too.”

Shilling’s response:

“That's right. At that point the percentage underwater of mortgages would go from now 23% to our estimate is 40%. The equity of people who have mortgages which has come from almost 50% in the early eighties to 17% would go down to about 7%. Virtually nobody with a mortgage would have any equity. What that would do to consumer spending to say nothing to mortgages and mortgage-backed securities derivatives, that is pretty heavy duty stuff. That is recessionary kinds of things. We think that will happen over the next three-four years, one way or the other.”

Kiesel on whether employment levels are at a stage at which consumers are feeling confident enough to make an investment in buying a home:

“If you look at it, we have added 2 million jobs in the private sector over the last year. Confidence is picking up. The U.S. economy is doing well in numerous states and sectors like energy pipelines, technology, autos, manufacturing. There are many areas in the country where there is a housing shortage. The shadow inventory and the amount of homes underwater, there are 11 million homes but it is concentrated really in three states: Arizona, 61%, Florida, 45%. Yes, there are some weak areas, but the fact is that in certain areas, housing is picking up and prices are going up and so again, it’s very regional.”

Shilling’s response:

“You and I can remember almost a decade ago as this problem was developing and we were on top of it and you were too, that people initially said, the problem was only in subprime mortgages and those are loans that luckily people will never have to meet. Then, they said it is only in Arizona and Florida and Phoenix. Then as it expanded, they said it is bicoastal, don’t worry. Everyone else is safe. Tip O’Neill said that all politics is local and you can say the same thing about real estate. Somehow, the composite, the national numbers are made up of those local pieces. There are a lot of shortages here or the other place. That I think is begging the question, overall, there is still a tremendous excess inventory.”

Kiesel on whether he’ll lower his assumptions about the economy:

“We are looking at basically 1-1.5% real GDP, but you don't necessarily need superfast GDP to get housing to recover. Housing again is down 35%. The inventories are coming down. We are gradually employing more people. Housing relative to other asset classes—equities, bonds—looks attractive.”

Shilling on the New York-area housing market and whether Wall Street money not being what it used to be has affected real estate:

“I think it very much does. If you look at what is happening to the stock markets and related securities in the last month--if this continues, I think we will see a lot of softness in Manhattan and in the Hamptons and other places influenced by that. If you read off the employment verses GDP curve, if you're looking at even 2% real GDP growth, that says that the unemployment rate would chronically rise about 1% point a year.”

Kiesel on the West Coast housing market:

“Housing is very much based on jobs, based on consumer confidence. We were in the subprime capital of the world in parts of Orange County and we can show you houses that are down 50-60%. In my neighborhood, housing prices fell 20-30% from the peak. The economy is not a recession, we are growing, and banks are flush with cash willing to lend gradually and the Fed is set to reflate. The key here is that you want to own a hard asset in a world of very low to negative real interest rates where the Fed is going to print money. You have to own something tangible.”

Kiesel on the opportunity cost of buying a home:

“I think stocks are looking at basically nominal GDP, which is 4% plus dividends of maybe 2, so you are looking at 6. There are rental yields in housing out there above that. Plus, you get the benefit of actually living in the house. From my perspective, I still think that housing beats a lot of asset classes.”

Kiesel on whether PIMCO is looking at housing as an alternative to bonds:

“We own non agency mortgages and those securities benefit from a housing recovery. If Gary is right and we do see housing prices go down 20%, the U.S. will be one of the cheapest housing markets in the world. It is already near one of the cheapest.”

Shilling’s response:

“Actually, it would take a 22% decline in median single-family house prices to bring them back to the long-term trend that Bob Schiller has identified going back to 1890. That has been corrected for CPI, general inflation, and for the tendency for houses to get bigger over time. That would bring them back to the norm. They might seem cheap but there are only where they would have been for over a century.”

End-Transcript

Debate a "Mixed Bag"

1. I do not think the bottom is in. Yet, I doubt another 20% decline is coming nationally. 
2. Some high-priced markets may see huge declines, other areas may have already bottomed.
3. Inventories are down but still high, especially if one counts shadow inventory and pent-up demand for retiring boomers to downsize. 
4. Shadow inventory and changing demographics will suppress prices for a long time. Student debt will suppress housing formation for years to come as well. 
5. Attitudes have changed. Housing is once again considered a place to live, not a retirement savings plan. 
6. Exuberant attitudes reached a multi-decades peak in 2005. Some overshoot to the downside is expected and it will take years for attitudes just to return to normal.
7. I side with Kisel on the idea that "housing beats a lot of asset classes." In relative terms it is certainly possible to envision housing declines of 10% and equity markets declining 33% or more. While not a prediction, that seems like a reasonable possibility so forget about relative terms and concentrate on the absolute. 
8. In absolute terms, housing is only a very good buy in areas at or near bottom, and then only of one has a stable job. 
9.  Looking ahead, where are home prices going even after they bottom? My answer is nowhere fast. Yet nowhere fast, is likely to beat equities. 
10. Gold is a very nice hedge here against many possibilities.

One thing is for sure, when attitudes change to "it's better to rent" (and they have), a bottom is reasonably close.

This is how I currently see things.




For further discussion, please see New American Dream is Renting; Reflections on Renting Houses, Cars, Books, Clothes; Will Rentership Fuel the Next Boom? What About Home Prices?

Mike "Mish" Shedlock

California, like Greece is perpetually in fiscal trouble. Overoptimistic revenue forecasts coupled with spending $2 billion more than expected has California in a deep hole. Governor Jerry Brown has the same non-solution as ever, hike taxes.

Brown wants a "temporary" (as in seven years) tax hike. Given we all know there are no such things as temporary tax hikes in California (seven years is permanent enough in the first place), and also given the California school budget needs an axe, the I say let him.

Please consider California deficit has soared to $16 billion, Gov. Jerry Brown says

Gov. Jerry Brown announced on Saturday that the state's deficit has ballooned to $16 billion, a huge increase over his $9.2-billion estimate in January.

Lawmakers and others were hoping that a rebounding economy would help the state avoid steep cuts to social services. But revenue in April, the most important month of the year for income taxes, fell far short of expectations, leading to a shortfall of at least $3 billion in the current fiscal year.

The state has also spent $2.1 billion more than expected, according to the controller, further worsening California's financial health.

Advocates involved in budget discussions say they expect deeper cuts to social services than Brown originally proposed in January. Union officials are also in negotiations with administration officials about ways to reduce state payroll costs, an issue that wasn't on the table earlier this year.

Brown has said there will be even deeper cuts, mostly to public education, if voters do not improve tax hikes in November. He is seeking a quarter-cent increase in the state sales tax for four years and a seven-year hike on incomes of $250,000 or more that will range from 1 to 3 percentage points. He says the measure would raise $9 billion in the upcoming budget year.

Tax Hikes, Public Unions, and Union Sympathizers Hand-in-Hand

Whenever tax hikes are on the table, union supporters are at the front of the line demanding them.

Yahoo!News has additional details in California facing higher $16 billion shortfall

Under Brown's tax plan, California would temporarily raise the state's sales tax by a quarter-cent and increase the income tax on people who make $250,000 or more. Brown is projecting his tax initiative would raise as much as $9 billion, but a review by the nonpartisan analyst's office estimates revenue of $6.8 billion in fiscal year 2012-13.

Supporters of the "Schools and Local Public Safety Protection Act of 2012" say the additional revenue would help maintain current funding levels for public schools and colleges and pay for programs that benefit seniors and low-income families. It also would provide local governments with a constitutional guarantee of funding to comply with a new state law that shifts lower-level offenders from state prisons to county jails.

A second tax hike headed for the November ballot is being promoted by Los Angeles civil rights attorney Molly Munger, whose initiative would raise income taxes on a sliding scale for nearly all wage-earners to help fund schools.

Anti-tax groups and Republican lawmakers say both tax increases will hurt California's economic recovery. State GOP Chairman Tom Del Beccaro has embarked on a statewide campaign to discuss alternatives to Brown's tax hikes.

The governor is expected to propose a contingency plan with a list of unpopular cuts that would kick in automatically if voters reject tax hikes this fall. In January, he said they would result in a K-12 school year shortened by up to three weeks, higher college tuition fees and reduced funding for courts.

Expect to hear Armageddon chants from public unions immediately if not sooner.

How Brown Ruined California in His First Term

Bear in mind that Governor Brown helped ruin California with public union collective bargaining rights in his first stint as governor, in the 70's.
 

• The Educational Employment Relations Act of 1976, established collective bargaining in California's public schools and community colleges
• The Ralph C. Dills Act of 1978 established collective bargaining for state government employees
• The Higher Education Employer-Employee Relations Act of 1979, extended collective bargaining to the state university system.

California schools and taxpayers are perpetually in the hole because of Brown's idiocy decades ago.

Four Point Solution

Fixing the problem is easy to describe, but hard to implement given all the union sympathizers who want to further wreck the state.
 

1. California needs to end collective bargaining of public unions
2. California needs to claw back promised pension benefits
3. California needs to end all defined benefit plans for public employees
4. California needs to scrap prevailing wage laws that have crucified cities

Raising taxes will just cause the exodus of more corporations and highly salaried workers as noted in California Tax Revenues Plunge; Businesses Exit "Taxifornia" in Droves; Piecing Together the Jobs-Picture Puzzle

Taxed to Death

If Brown continues to suck up to the public unions responsible for the mess California is in, expect still more businesses to leave, expect the unemployment rate to rise, and expect a continued plunge in revenue.

Mike "Mish" Shedlock
 

On Tuesday, six-term Republican senator Richard Lugar was ousted  in shocking defeat in the Indiana primary to Tea Party activist Richard Mourdock, Indiana state’s treasurer.

Mourdock sent Lugar down in flames as he questioned Lugar's policies on immigration, Supreme Court nominees, the "Dream Act", and bank bailouts. Mourdock said Lugar was "not conservative enough".

As proof of how extreme things have gotten, the Indiana Democratic Party released a statement Tuesday evening thanking Mr. Lugar for his service and criticizing Mr. Mourdock as an “extremist” who is “out of touch with Hoosiers.”

The New York Times has details in Mourdock Defeats Lugar in Indiana Senate Primary

Clearly, there is increasingly little chance for moderates anywhere.

In Europe, 11 governments have collapsed over austerity measures. German chancellor Angela Merkel may be the next to go.

Chaos in Greece

Extreme polarization in Greece is such that no political party could gather as much as 20% of the vote. Indeed the top two parties combined could not even muster 33% of the vote.

For details and further discussion, please see

• Greeks Political Parties Prefer Chaos Over Compromise; June 17 Elections on the Way; Next Bailout Tranche at Risk

 

• SYRIZA's Tsipras Lists Bailout Rejection as Key Demand; Don't Rule Out a SYRIZA Coalition; Eventually May Be At Hand; Why SYRIZA Will Win the Next Election

Polarization in US

For polarization in the US, look no further than the surprising showing of Rick Santorum vs. so-called moderate Mitt Romney midway through the the Republican presidential primary.

Santorum finally stepped aside, but the damage has been done.

Please note that Romney is hardly a moderate in any sense of the word. Romney is a war-monger promoting war in Iran, trade wars with China, and still more military spending in spite of massive budget deficits.

Moreover, anyone who thinks president Obama and his union supportive stance is a moderate has mush for brains.

Greece Is Ungovernable Pariah State

My friend "HB" writes ...

Today the markets realized that it may become entirely impossible to form a government in Greece, even after another election.

In that case there will also not be the votes to continue with the bailout package. I think it is slowly sinking in what that could mean: the troika will no longer have anyone to negotiate with.

The IMF, EU,and ECB would see tens of billions each evaporate. Greece would become a pariah state and likely drop out of the euro, followed by either a radical leftist government taking power or a military coup.

Greece has become near ungovernable. Its infrastructure is crumbling, its jobless rate is over 20%, youth unemployment is 50%, and Greek administrative institutions are paralyzed and corrupt.

The empire is fraying at the edges - literally.

Greece may by itself not mean much, but it is the first modern industrialized post WW 2 welfare state to go completely bust. The signal alone should scare the bejeezuz out of market participants.

Tweedledee vs. Tweedledum

In the US, the presidential choice is between Tweedledee and Tweedledum. Take your pick as to who is who. In case you disagree, please consider ...

• Obama Seeks to Prove He is More Like Romney; Obama vs. Romney - What's the Difference?

 

• Not your grandfather’s Republican Party; President Obama and Mitt Romney are Nearly One and the Same! 

Frankly it does not matter except for four year's down the road, and except for near-term Supreme Court appointees. Romney wants to overturn Roe vs. Wade, believes corporations are people, and strip searches are fine on the the flimsiest of excuses, three extreme positions.

Are those reflective of extreme positions or core US values?

Ignoring the Supreme Court effect, both candidates are war mongers and ObamaCare is the same RomneyCare (even though Romney campaigns against himself).

Inane Election Choices

The only real choice in this election is whether 4 years from now you want to face the inane possibility of Romney winning 4 more years vs. the inane choice of Obama winning 4 more years now (knowing in advance he is gone 4 years from now).

As we sit back and watch Greece and France disintegrate into a morass of extreme politics, the shocking defeat of Richard Lugar in the Indiana primary to a Tea Party activist suggests the US is on the same path.

Mike "Mish" Shedlock

http://globaleconomicanalysis.blogspot.com

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Housing has now gone full circle. President Bush's "Ownership Society" has morphed into the "Rentership Society". The attitude applies to more than houses as noted in the Wall Street Journal article Renting Prosperity by Daniel Gross.

Americans are getting used to the idea of renting the good life, from cars to couture to homes. Daniel Gross explores our shift from a nation of owners to an economy permanently on the move—and how it will lead to the next boom.

In the American mind, renting has long symbolized striving—striving, that is, well short of achieving. But as we climb our way out of the Great Recession, it seems something has changed. Americans are getting over the idea of owning the American dream; increasingly, they're OK with renting it. Homeownership is on the decline, and home rentership is on the rise. But the trend isn't limited to the housing market. Across the board—for goods ranging from cars to books to clothes—Americans are increasingly acclimating to the idea of giving up the stability of being an owner for the flexibility of being a renter. This may sound like a decline in living standards. But the new realities of our increasingly mobile economy make it more likely that this transition from an Ownership Society to what might be called a Rentership Society, far from being a drag, will unleash a wave of economic efficiency that could fuel the next boom.

The reaction to extended leverage and foolish borrowing isn't to stop consuming and buying; it is to consume and buy more intelligently. That's what the Rentership Society is all about. And it starts at home. Literally. Housing is the biggest single component of consumption in the U.S. economy and the source of much of our present misery. According to the Bureau of Labor Statistics, the typical consumer spends about 32% of his or her budget on shelter. In the last decade, that generally meant borrowing a lot of money to take "ownership" of a home.

For an increasing number of Americans, though, it simply makes more sense to rent these days. According to Moody's, by late 2011 it was cheaper to rent than to own in 72% of American metropolitan areas, up from 54% a decade ago. And the more people who do it, the more socially acceptable and desirable it becomes. The decline in the ownership rate means that about three million more households rent today than did at the height of the bubble.

Zipcars and College Textbooks

Gross points out that students are increasing renting books as opposed to buying them. Of course there are also Kindle and other electronic ways of purchasing or renting books as well.

The same holds true for cars, and not just long-term leases either.

Gross writes ...

The Bureau of Labor Statistics says that private transportation—owning and running a car—is the second largest cost for a typical American household, accounting for 16% of expenditures. Factoring in finance costs, depreciation, repairs, insurance, taxes and gas, AAA calculates that an owner of a midsize sedan who drives 15,000 miles a year spends $8,588 a year on his car.

Enter auto-sharing firm Zipcar. Founded in 2000, it grew by focusing on cities and college campuses. It uses information technology to manage its fleet, and control access—people get cards that let them into garages where cars are kept and into the cars themselves. Users in New York pay a $60 annual fee and then $8.75 per hour on weekdays and $13.75 per hour on weekends—no extra charge for gas or insurance or miles. As the U.S. economy contracted, Zipcar went into hyper-growth: from 225,000 members in 2008 to 650,000 members and 9,500 cars in November 2011. Zipcar, which went public in 2011, has had success in the predictable big cities like Boston, New York and San Francisco, but its vehicles can also be found on 350 college campuses and in smaller cities like Providence, R.I., and Portland, Ore. Large rental agencies like Enterprise and Avis have responded by rolling out similar services.

Will Rentership Fuel the Next Boom? When? Why?

Gross put together a nice article explaining what is happening but the article falls far short of the opening premise "how it will lead to the next boom".

I see no reason renting Zipcars, textbooks, or houses will lead to a boom in anything. Every dime Zipcars makes is a dime lost by GM, Ford, and Toyota.

Kindle is going to put numerous bookstores out of business.

Younger Americans are not buying cars and houses because they cannot afford them. Collectively saddled with a trillion dollars in student loans, many cannot afford to buy much of anything, especially poor job prospects and falling wages.

I see no boom from this. Rather, I see pressures on profits in multiple places for multiple reasons.

What About Housing?

Renting cars and textbooks is the start of a trend that makes perfect economic sense. However, Zipcars, textbooks, clothes, and electronics are one thing, and housing is another.

When sentiment on houses reaches the widespread belief  "It's Better to Rent", prices are bottoming. I expressed that thought on numerous occasions since 2005.

This is how I currently see things.

This is how I have called the housing bubble and bust in real time over the years.

• March 26, 2005: It's a Totally New Paradigm
• June 07, 2005: It's time to shift the arrow
• April 10, 2006: US vs. Japan Land Prices Pictorial Update
• February 15, 2008: Housing Bottom Nowhere in Sight
• December 01, 2008: Housing Update - How Far To The Bottom?
• July 13, 2009: Housing Update - How Far To The Bottom?
• June 20, 2011: When was the Housing Peak and How Far to the Bottom?
• March 13, 2012: How Far Have Home Prices "Really" Fallen? HPI Upcoming Changes; HPI and the CPI 

The first four links above are quite humorous. The denial from Bernanke and others is stunningly funny.

Bottoming Process

Some cities are further from the bottom than others, but it is likely some cities have now finally bottomed.

That said, I do not think home prices are going much of anywhere "in general" because there is still years of shadow inventory and years of foreclosures to work through.

Moreover boomer demographics suggest much downsizing is ahead (and who will boomers sell their mansions to?)

Finally, generation Y has far different attitudes than boomers regarding wealth, debt, and possessions and will carry those attitudes for a long time having seen firsthand the trouble their parents and grandparents got into with too much debt, and how they are in the same boat with student debt.

Mike "Mish" Shedlock

Since mid-2010, precisely the time millions of US citizens used up all of their 99 week of unemployment insurance, disability claims have risen by 2.2 million. Those on disability are not counted in the workforce and are not considered unemployed.

Please consider Disabled Americans Shrink Size of U.S. Labor Force

The number of workers receiving Social Security Disability Insurance (SSDI) jumped 22 percent to 8.7 million in April from 7.1 million in December 2007, Social Security data show. That helps explain as much as one quarter of the decline in the U.S. labor-force participation rate during the period, according to economists at JPMorgan Chase & Co. and Morgan Stanley.

The participation rate -- the share of working-age people holding a job or seeking one -- was 63.8 percent in March after falling to a three-decade low of 63.7 percent in January. Disability recipients may account for as much as 0.5 percentage point of the more than 2 point drop since the end of 2007, the economists calculate, and that contribution could grow when some extended unemployment benefits expire at the end of this year.

“How we measure and understand what’s going on in the economy can be influenced by the degree to which various public- support programs are available and being used,” said Michael Feroli, chief U.S. economist at JPMorgan in New York. “With a rising number of disability beneficiaries, there are both lower unemployment rates and lower participation rates.”

More than 99 percent of all SSDI beneficiaries remain in the program until retirement age, David Greenlaw, a managing director in New York at Morgan Stanley, wrote in a March research note, citing government data. The program provides an average of $1,111 in monthly income to eligible workers with a physical or mental impairment that will last at least 12 months or result in death, according to Social Security.

Unemployment insurance requires that applicants search for job opportunities, while disability insurance requires they be unable to work.

Lax Screening Procedures

Less-stringent screening procedures, more attractive benefits and a waning need for less-skilled workers have bolstered SSDI rolls.

In addition, “difficult-to-verify disorders,” including muscle pain and mental illness, more easily qualify for SSDI under program reforms, [David] Autor [economist at Massachusetts Institute of Technology] wrote in a 2011 paper.

Based on current trends, 7 percent of the nonelderly adult population could be receiving disability benefits by 2018, Richard Burkhauser and Mary Daly wrote in the spring issue of the Journal of Policy Analysis and Management. That’s two years after the SSDI program will run through its trust fund, according to an April report by the Social Security trustees.

Costs Increase

Costs Increase

Costs have increased with the rolls: The program spent $132 billion last year, more than twice as much as in 2000.

Non-Solutions

Richard Burkhauser, a policy professor at Cornell University, and Mary Daly, associate research director at the Federal Reserve Bank of San Francisco, think the solution is to raise taxes on businesses with larger shares of people on disability.

So does David H. Autor in a white paper The Unsustainable Rise of the Disability Rolls in the United States: Causes, Consequences, and Policy Options.

While the paper provides a clear understanding of the problem, their proposed solutions, centering around more taxes, would make it more likely that businesses fire workers before they go on disability, make it more likely businesses will seek younger, not obese workers in excellent health in the first place.

While I am sure that happens today, nothing like incentives from the Fed to increase that pressure on businesses.

How About Stopping the Fraud?

Autor's proposals dot not go far enough to stop what is clear fraud.

Indeed, Autor explicitly states "A second lesson, evident from the drug and alcohol addiction experience, is that highly motivated applicants in many cases will eventually succeed in obtaining benefits, particularly because of the 1984 liberalization of the criteria for pain and mental illness. While this latter observation highlights that the SSDI disability determination system is badly in need of modernization, my main conclusion is that better gatekeeping cannot be the centerpiece of effective SSDI reform."

I do not buy that, nor do I buy  the excuse "Revoking benefits en masse from needy beneficiaries is not politically viable, whether or not this would be desirable from an efficiency standpoint."

What about the "not-needy, fraudulent beneficiaries"?

Moreover, this country better come to grips about what is "politically viable" before government percent of GDP soars to 56% like it is in France, or worse yet, the extremely unstable mess in Greece or Spain.

From an "efficiency" standpoint one has to be nuts to not to want to stop the fraud. And throwing money at alcoholics, drug addicts, and those claiming mental stress does nothing but increase those number of claims.

Mental Illness

I talked about mental illness and fraud on February 20, 2012 in Disability Fraud Holds Down Unemployment Rate; Jobless Disability Claims Hit Record $200B in January

Pre-crisis, mental illness constituted about 33% of claims. Now it's 43%. The cost is staggering, over $200 billion a year.

I did some calculations in the above link and this is what it looks like with a mere 10% rate of fraudulent claims. 

Unemployment Rate with 10% Fraud

• 10% of 27.5 million is 2,750,000.
• The civilian labor force would rise to 157,145,000 from 154,395,000
• The number of unemployed would rise to 15,508,000 from 12,758,000
• The resultant unemployment rate would be 15508/157145 = 9.9%

Is there anyone who thinks disability fraud is less than 10%? If not, then the unemployment rate would be at least 9.9% assuming those in fraudulent claims started looking for work.

Those numbers are as of the February BLS jobs release and would undoubtedly be worse now given Friday's Payroll Disaster: Nonfarm Payroll +115,000 Establishment Survey But -169,000 Household Survey, Labor Force Drops by 342,000

 

Amazing Achievement is Fraud

In the last year, the civilian population rose by 3,638,000. Yet the labor force only rose by 945,000. Those not in the labor force rose by 2,693,000.

In the last month, actual employment fell by 169,000, but the unemployment rate dropped by .1%.

That is an amazing "achievement" to say the least.

Since Mid-2010 2.2 Million Went on Disability

Notice the jump in claims after the recession was allegedly long-over.

The timing coincides with unemployment benefits expiring at 99 weeks. Supposedly higher taxes will fix the problem. I say "nonsense".

Mike "Mish" Shedlock

Quick Notes About the Unemployment Rate

• US Unemployment Rate fell .01 to 8.1%

 

• In the last year, the civilian population rose by 3,638,000. Yet the labor force only rose by 945,000. Those not in the labor force rose by 2,693,000.

 

• The Civilian Labor Force fell by 342,000.

 

• Those "Not in Labor Force" increased by 522,000. If you are not in the labor force, you are not counted as unemployed.

 

• Those "Not in Labor Force" is at a new record high of 87,419,000.

 

• By the Household Survey, the number of people employed fell by 169,000.

 

• By the Household Survey, over the course of the last year, the number of people employed rose by 2,237,000.

 

• Participation Rate fell .2 to 63.6%

 

• There are 7,853,000 workers who are working part-time but want full-time work

 

• Were it not for people dropping out of the labor force, the unemployment rate would be well over 11%.

This month was another disaster. Actual employment fell by 169,000 and the only reason the unemployment rate dropped is the civilian labor force fell by 342,000. These numbers are well past the point of believability and will be revised at some point in my opinion.

Over the past several years people have dropped out of the labor force at an astounding, almost unbelievable rate, holding the unemployment rate artificially low. Some of this was due to major revisions last month on account of the 2010 census finally factored in. However, most of it is simply economic weakness.

Jobs Report at a Glance

Here is an overview of today's release.

• US Payrolls +115,000 - Establishment Survey
• US Unemployment Rate dropped .01 to 8.1% - Household Survey
• Average workweek for all employees on private nonfarm payrolls was unchanged at 34.5 hours
• The average workweek for production and nonsupervisory employees on private nonfarm payrolls was unchanged at 33.8 hours.
• Average hourly earnings for all employees in the private sector rose by 1 cent.
  

Recall that the unemployment rate varies in accordance with the Household Survey not the reported headline jobs number, and not in accordance with the weekly claims data.

April 2012 Jobs Report

Please consider the Bureau of Labor Statistics (BLS) April 2012 Employment Report.

Nonfarm payroll employment rose by 115,000 in April, and the unemployment rate was little changed at 8.1 percent, the U.S. Bureau of Labor Statistics reported today. Employment increased in professional and business services, retail trade, and health care, but declined in transportation and warehousing.

Unemployment Rate - Seasonally Adjusted

Nonfarm Employment - Payroll Survey - Annual Look - Seasonally Adjusted

Employment is about where it was just prior to the 2001 recession.

Nonfarm Employment - Payroll Survey - Monthly Look - Seasonally Adjusted

click on chart for sharper image

Between January 2008 and February 2010, the U.S. economy lost 8.8 million jobs.

Since a recent employment low in February 2010, nonfarm payrolls have expanded by 3.7 million jobs. Of the 8.8 million jobs lost between January 2008 and February 2010, 42 percent have been recovered.

Statistically, 125,000+- jobs a month is enough to keep the unemployment rate flat. For a discussion, please see Question on Jobs: How Many Does It Take to Keep Up With Demographics?

The average employment gain over the last 26 months has been 142,000, barely enough (statistically speaking) to make a dent in the unemployment rate.

Yet, the civilian unemployment rate has fell from 9.8% to 8.1%.

Current Report Jobs

Average Weekly Hours

Index of Aggregate Weekly Hours

Average Hourly Earnings vs. CPI

"Success" of QE2 and Operation Twist

• Over the past 12 months, average hourly earnings have increased by 1.8 percent. In March, the Consumer Price Index for All Urban Consumers (CPI-U) had an

  over-the-year increase of 2.6 percent; growth in prices has recently been outpacing growth in earnings.

 

• Not only are wages rising slower than the CPI, there is also a concern as to how those wage gains are distributed.

BLS Birth-Death Model Black Box

The BLS Birth/Death Model is an estimation by the BLS as to how many jobs the economy created that were not picked up in the payroll survey.

The Birth-Death numbers are not seasonally adjusted while the reported headline number is. In the black box the BLS combines the two coming out with a total.

The Birth Death number influences the overall totals, but the math is not as simple as it appears. Moreover, the effect is nowhere near as big as it might logically appear at first glance.

Do not add or subtract the Birth-Death numbers from the reported headline totals. It does not work that way.

Birth/Death assumptions are supposedly made according to estimates of where the BLS thinks we are in the economic cycle. Theory is one thing. Practice is clearly another as noted by numerous recent revisions.

Birth Death Model Adjustments For 2011

Birth Death Model Adjustments For 2012

Birth-Death Note

Once again: Do NOT subtract the Birth-Death number from the reported headline number. That approach is statistically invalid.

Household Survey Data

click on chart for sharper image

In the last year, the civilian population rose by 3,638,000. Yet the labor force only rose by 945,000. Those not in the labor force rose by 2,693,000.

That is an amazing "achievement" to say the least, and as noted above most of this is due to economic weakness not census changes.

Decline in Labor Force Factors

1. Discouraged workers stop looking for jobs
2. People retire because they cannot find jobs
3. People go back to school hoping it will improve their chances of getting a job
4. People stay in school longer because they cannot find a job

Were it not for people dropping out of the labor force, the unemployment rate would be well over 11%.

Part Time Status

click on chart for sharper image

There are 7,853,000 workers who are working part-time but want full-time work.

Table A-15

click on chart for sharper image

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

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

The official unemployment rate is 8.1%. However, if you start counting all the people that want a job but gave up, all the people with part-time jobs that want a full-time job, all the people who dropped off the unemployment rolls because their unemployment benefits ran out, etc., you get a closer picture of what the unemployment rate is. That number is in the last row labeled U-6.

U-6 is much higher at 14.5%. Both numbers would be way higher still, were it not for millions dropping out of the labor force over the past few years.

Grossly Distorted Statistics

Given the complete distortions of reality with respect to not counting people who allegedly dropped out of the work force, it is easy to misrepresent the headline numbers.

Digging under the surface, the drop in the unemployment rate over the past two years is nothing but a statistical mirage. Things are much worse than the reported numbers indicate.

Note the drop in U-6 unemployment this month as the Civilian Labor Force fell by 342,000. This is beyond statistical noise, to the point of pure statistical bullsheet.

Mike "Mish" Shedlock

Once again it was a pleasure to be on Capital Account with Lauren Lyster Tuesday afternoon. We discussed Europe, austerity measures, Paul Krugman, whether or not the Fed could create jobs, and the Greenspan Contrarian Indicator.

Link if video below does not play: Mish Tackles Paul Krugman and the Greenspan Contrarian Indicator (GCI) .

For more on the GCI, Please see Contrary Indicator Alert: Greenspan Says U.S. Stocks ‘Very Cheap,’ Likely to Rise

I have a lot of fun doing these. I do not come in until after the 6 minute mark but Lauren had some excellent comments before I came on.

Mike "Mish" Shedlock

The Pentagon is about to waste $1.5 trillion, 38% of entire defense budget for a "virtual flying piano". That may sound preposterous, and it is. Unfortunately, it is also true.

Foreign Policy Magazine discusses the sad saga of The Jet That Ate the Pentagon.

This month, we learned that the Pentagon has increased the price tag for the F-35 by another $289 million -- just the latest in a long string of cost increases -- and that the program is expected to account for a whopping 38 percent of Pentagon procurement for defense programs, assuming its cost will grow no more.

How bad is it? A review of the F-35's cost, schedule, and performance -- three essential measures of any Pentagon program -- shows the problems are fundamental and still growing.

Although the plane was originally billed as a low-cost solution, major cost increases have plagued the program throughout the last decade. Last year, Pentagon leadership told Congress the acquisition price had increased another 16 percent, from $328.3 billion to $379.4 billion for the 2,457 aircraft to be bought. Not to worry, however -- they pledged to finally reverse the growth.

The result? This February, the price increased another 4 percent to $395.7 billion and then even further in April. Don't expect the cost overruns to end there: The test program is only 20 percent complete, the Government Accountability Office has reported, and the toughest tests are yet to come. Overall, the program's cost has grown 75 percent from its original 2001 estimate of $226.5 billion -- and that was for a larger buy of 2,866 aircraft.

The total program unit cost for each individual F-35, now at $161 million, is only a temporary plateau. Expect yet another increase in early 2013, when a new round of budget restrictions is sure to hit the Pentagon, and the F-35 will take more hits in the form of reducing the numbers to be bought, thereby increasing the unit cost of each plane.

A final note on expense: The F-35 will actually cost multiples of the $395.7 billion cited above. That is the current estimate only to acquire it, not the full life-cycle cost to operate it. The current appraisal for operations and support is $1.1 trillion -- making for a grand total of $1.5 trillion, or more than the annual GDP of Spain. And that estimate is wildly optimistic: It assumes the F-35 will only be 42 percent more expensive to operate than an F-16, but the F-35 is much more complex.

The F-35 isn't only expensive -- it's way behind schedule. The first plan was to have an initial batch of F-35s available for combat in 2010. Then first deployment was to be 2012. More recently, the military services have said the deployment date is "to be determined." A new target date of 2019 has been informally suggested in testimony -- almost 10 years late.

What Happened?

You can actually blame president Clinton for this debacle. You can also blame every president since Clinton for stupid decisions upon stupid decisions and for not scrapping the program. The sad saga continues ...

The design was born in the late 1980s in the Defense Advanced Research Projects Agency (DARPA), the Pentagon agency that has earned an undeserved reputation for astute innovation. It emerged as a proposal for a very short takeoff and vertical-landing aircraft (known as "STOVL") that would also be supersonic. This required an airframe design that -- simultaneously -- wanted to be short, even stumpy, and single-engine (STOVL), and also sleek, long, and with lots of excess power, usually with twin engines.

President Bill Clinton's Pentagon bogged down the already compromised design concept further by adding the requirement that it should be a multirole aircraft -- both an air-to-air fighter and a bomber. This required more difficult tradeoffs between agility and low weight, and the characteristics of an airframe optimized to carry heavy loads. Clinton-era officials also layered on "stealth," imposing additional aerodynamic shape requirements and maintenance-intensive skin coatings to reduce radar reflections. They also added two separate weapons bays, which increase permanent weight and drag, to hide onboard missiles and bombs from radars. On top of all that, they made it multiservice, requiring still more tradeoffs to accommodate more differing, but exacting, needs of the Air Force, Marine Corps, and Navy.

Finally, again during the Clinton administration, the advocates composed a highly "concurrent" acquisition strategy. That meant hundreds of copies of the F-35 would be produced, and the financial and political commitments would be made, before the test results showed just what was being bought.

This grotesquely unpromising plan has already resulted in multitudes of problems -- and 80 percent of the flight testing remains. A virtual flying piano, the F-35 lacks the F-16's agility in the air-to-air mode and the F-15E's range and payload in the bombing mode, and it can't even begin to compare to the A-10 at low-altitude close air support for troops engaged in combat. Worse yet, it won't be able to get into the air as often to perform any mission -- or just as importantly, to train pilots -- because its complexity prolongs maintenance and limits availability.

The Dustbin Awaits

Foreign Policy Magazine arrives at a rational conclusion: "There is only one thing to do with the F-35: Junk it. America's air forces deserve a much better aircraft, and the taxpayers deserve a much cheaper one. The dustbin awaits."

Who supports the program?

Defense Contractors

Defense contractors are at the top of the list. For example, Lockheed Martin, Northrop Grumman, BAE Systems, and Pratt & Whitney support the F-35.

Please consider this Lockheed Martin Propaganda.

Establishing air superiority in today’s complex global security climate requires the unprecedented capabilities and versatility that only the F-35 Lightning II can offer.

And the F-35’s strong global partnership and broad industrial base ensures affordability through economies of scale while delivering thousands of technology sector jobs around the world.

Visit our partners

Northrop Grumman

BAE Systems

Pratt & Whitney

To show you what incredible liars the defense industry has, Lockheed Martin has the gall to claim "economies of scale".

 Senator John McCain Supports the Boondoggle

Senator John McCain wants F-35 training in Arizona at Luke Air Force Base.

McCain was presented with the Wing Coin and Chairman’s Award by Brig. Gen. Kurt Neubauer, 56th Fighter Wing Commander, and Charley Freericks, Chairman of Fighter Country Partnership’s board of directors. The award was given in recognition of McCain being a champion of Luke during his years of public service.

Neubauer thanked McCain for speaking at the gathering of more than 250 Fighter Country Partnership members and guests at the annual meeting. He noted the 27,000 sorties, 35,000 hours of flight, the training of 350 new pilots and 400 crew chiefs that took place at Luke in 2009. He told the crowd that Luke trains 95 percent of all the fighter pilots for the Air Force, and has deployed 600 down range to 17 different countries.

Spirit of Idaho

The Spirit of Idaho organization hopes for training mission in Idaho.

Idaho citizens are second to none in their enthusiastic support for the men and women of our Armed Forces and for their military missions. Hosting the F-35 Lightning II Joint Strike Fighter would be a great way to continue that tradition while helping to secure the future of Mountain Home Air Force Base and Gowen Field. That’s to say nothing of the thousands of great jobs and economic opportunities that having the F-35s here would create. C.L. "BUTCH" OTTER, GOVERNOR

Greed, Graft, Public Unions

In general, states where defense contractors are located, states that will house or train the pilots want the jobs support the F-35. Those states, and politicians in those states do not give a rat's ass about how inept or costly the program is.

The greed, graft, and waste are bad enough as it is. However, no amount of greed, gall, and waste is so great that unions will be satisfied with it.

Please consider Lockheed F-35 workers ready for long strike, union says

Unionized workers on strike against Lockheed Martin Corp (LMT.N) over healthcare benefits and pensions are prepared for a long work stoppage, a top union official said on Tuesday as the company said it would be able to keep operations running.

Nearly 3,650 union workers walked off the job on Monday at the Fort Worth, Texas, plant where Lockheed builds the new F-35 fighter plane and at two military bases where it is tested.

Paul Black, president of the local chapter of the International Association of Machinists and Aerospace Workers (IAM), said three earlier strikes in 1984, 2000 and 2003 lasted from two to three weeks, and union leaders have warned workers the current dispute could take longer to settle.

Workers in the union voted overwhelmingly on Sunday to hit the picket line rather than accept the company's "best and final offer," which called for an end to the defined benefits pension that current workers receive and a switch to a retirement account similar to a 401(k).

The F-35 program deserves to be scrapped because of cost overruns, inept design specs, and poor test results. Yet 3,650 union ingrates were arrogant enough to walk off the job demanding still more money to build this boondoggle.

Every last one of them deserves to lose their job permanently. Let's hope this is the final straw that kills the program.

Mike "Mish" Shedlock

Paul Krugman is now so far into outer space with ridiculous economic proposals that even Helicopter Ben Bernanke recognizes Krugman's proposals as "reckless".

Bloomberg reports Bernanke Takes On Krugman’s Criticism Ignoring Own Advice

Federal Reserve Chairman Ben S. Bernanke took on Nobel prize-winning economist Paul Krugman yesterday and called his advice to reduce unemployment by boosting inflation “reckless.”

“The question is, does it make sense to actively seek a higher inflation rate in order to achieve” a slightly faster reduction in the unemployment rate, Bernanke said yesterday to reporters after a Federal Open Market Committee meeting. “The view of the committee is that that would be very reckless.”

Krugman, whom Bernanke hired at Princeton University in 2000 when he was chairman of the economics department, said in a New York Times Magazine article that the Fed should raise its 2 percent inflation target to cut unemployment. Such a policy shift would align with Bernanke’s comment in 2000 that the Bank of Japan (8301) should pursue faster inflation to escape deflation, he said. Japan’s consumer prices fell 0.2 percent that year.

“While the Fed went to great lengths to rescue the financial system, it has done far less to rescue workers,” Krugman wrote. “Higher expected inflation would aid an economy” because it would persuade investors and businesses “that sitting on cash is a bad idea,” Krugman said.

The chairman spoke in response to a reporter’s question referring to Krugman’s story, titled “Earth to Ben Bernanke,” published April 24. The article cited “the divergence between what Professor Bernanke advocated and what Chairman Bernanke has actually done.”

Bernanke said pushing the increase in prices above the Fed’s 2 percent goal would risk undermining inflation expectations and erode the central bank’s credibility as a force for stable prices.”

“We, the Federal Reserve, have spent 30 years building up credibility for low and stable inflation, which has proved extremely valuable in that we’ve been able to take strong accommodative actions in the last four, five years,” Bernanke told reporters. “To risk that asset for what I think would be quite tentative and perhaps doubtful gains on the real side would be, I think, an unwise thing to do.”

Krugman and Bernanke Both in Outer Space

The irony in this bickering is that both Krugman and Bernanke are economic failures. The idea that more inflation will help those mired in debt is preposterous. Japan attempted to halt deflation for 20 years and has nothing to show for it but a mountain of debt.

On the other hand, Bernanke brags about "30 years building up credibility" that the Fed simply does not have. The US has seen bubble after bubble, each with increasing amplitude and troughs, so Bernanke has to be on some sort of mind-altering drugs to talk of either credibility or price stability.

Perhaps his mind was altered by gamma rays from being in "deep academic space" for so long.

Price-wise, Bernanke is correct the US is in a state of inflation, and Japan not. I expect Krugman to counter with housing.

If one takes housing into consideration, inflation is well under the Fed's target as I pointed out in How Far Have Home Prices "Really" Fallen? HPI Upcoming Changes; HPI and the CPI

CPI Adjusted for Home Price Index (HPI)

The Fed kept interest rates at historic lows between 2002 and mid-2004.

The last two rate cuts by Alan Greenspan were not justified at all, by

any measure, and downright absurd considering the bubble brewing in

housing prices vs. rent.

Allegedly the Fed held interest rates low to prevent "deflation". Instead it exacerbated "price deflation".

Clearly the Fed had no idea what it was doing, and still doesn't, (unless of course you believe this is a Fed conspiracy to deliberately screw the middle class). The result is bubbles and crashes of ever-increasing amplitude as the Fed chases its own tail. New bubbles have formed in the stock market and commodities right now.

Outer Space Policies

 Bernanke is trying like a madman to get banks to increase lending but Bernanke and Krugman both do not understand economic reality.

1. Banks cannot lend because they are still capital impaired, hiding losses yet to come, and holding assets that are marked-to-fantasy instead of marked-to-market
2. Consumers are busted and holding interest rates at 0% when prices of food and gasoline are soaring exacerbates the problem
3. There are few credit-worthy businesses that want to borrow in this environment 
4. The businesses that do want to borrow are not credit-worthy and banks would be foolish to lend to them
5. Boomers are headed into retirement with too much debt, too little income, too few assets and they need to save not spend. 
6. Real wages (discounting the decline in housing), are hugely negative, and forcing more inflation would be downright idiotic
7. The Fed can inject liquidity but it cannot determine where it goes. 
8. The Fed desperately wants home prices to rise and businesses to borrow, but instead food and energy prices have risen, and there is little hiring. Krugman wants Bernanke to do more of the same even though the same has already proven to be the problem.

Academic Wonderland, Somewhere Beyond Pluto

Quite frankly all eight points above are common sense ideas. However, neither Bernanke nor Krugman have real world experience. Both come from academic wonderland, well beyond the orbit of Pluto.

Clearly neither Krugman nor Bernanke have any solid grasp of the concept of debt-deflation. Neither understands boomer demographics. Neither understands why businesses are not hiring. Neither understands that debt eventually has to be dealt with, and it is the debt itself is the problem. Neither understands that inflation will destroy those without a job. Neither understands (but especially Krugman) that increased inflation will not guarantee more jobs.

That my friends is the sad state of affairs.

Mike "Mish" Shedlock

Governor Pat Quinn rammed through the largest tax hikes in Illinois history last year. On January 13, 2011, Governor Pat Quinn signed off on a 67% hike in personal income taxes and a 46% hike in corporate taxes.

The result is not what the governor thought. Businesses have fled, more have threatened to leave and Quinn responded with sweeteners. Moreover, Illinois pension plans are still the worst funded in the nation, and the state is still struggling to pay bills.

Bloomberg reports Illinois ‘Treads Water’ as Unpaid Bills Top $9 Billion

Illinois’s backlog of unpaid bills has risen to more than $9 billion because of pension costs and falling federal aid, leaving the state “essentially treading water,” Comptroller Judy Baar Topinka said.

While revenue grew from higher personal and corporate taxes, “Illinois’ financial position has not improved,” Topinka said in a report today. The combination of unpaid bills to vendors and Medicaid obligations, estimated at $8.5 billion in January, means payment delays will persist, according to the report.

While tax increases boosted revenue by about $7 billion, or 3.9 percent in the first three quarters of the fiscal year that began in June, the gains were undercut by the loss of federal funding and financing of pension contributions directly, rather than through bonds as in the past two years, Baar Topinka said.

Democratic Governor Pat Quinn has proposed a voluntary 3 percent increase in pension contributions from current employees and a cut in cost-of-living increases for retirees.

“Bold action” is required to save the retirement systems, the governor told reporters in Chicago April 20. In fiscal 2010, Illinois had the lowest-funded state pension in the U.S., with assets equal to 45.4 percent of projected obligations, according to data compiled by Bloomberg.

Public Unions Bankrupt Illinois

Just where was this "bold plan" when Quinn was running for Governor?

Nowhere in sight. And now he wants "voluntary" contributions. Give me a break.

Illinois is bankrupt and corrupt politicians like governor Quinn, Speaker of the Illinois House, Mike Madigan, and all the union panderers in Chicago ruined the state by giving into "collective bargaining" demands from public unions.

Voluntary 3% contributions by unions is not a "bold plan" and will not do a damn thing. Illinois needs to scrap its defined benefit plans immediately and claw back on promised benefits under threat of default.

Moreover, Illinois needs to scrap prevailing wage laws and end collective bargaining of public unions immediately if not sooner.

Illinois desperately needs a "Bold Plan" before the entire stat looks like Central Falls or Providence Rhode Island, or Detroit Michigan.

• Central Falls Rhode Island Files Chapter 9 Bankruptcy; Court Asked to Negate Collective bargaining Agreements; Vallejo Precedent

 

• Providence Rhode Island Faces "Bankruptcy by June" says Mayor; Pension Plan 32% Funded (and About to Get Worse)

 

• Deal Reached to Prevent Michigan Takeover of Detroit; Really? No, Not Really; What's Best for Bankrupt Detroit?

Mish's Eight-Point "Bold" Plan to Save Illinois

1. Immediately kill public defined benefit plans going forward
2. End collective bargaining of public unions
3. Scrap prevailing wage laws
4. Tax at an 85% rate all defined benefits above $80,000
5. Claw back all pension-spiking
6. Lower corporate tax rates to previous levels to attract businesses. 
7. Set long-term pension plan assumptions at 5% or the 30-year Treasury rate, whichever is lower (currently 3%).
8. Default, if necessary on pension benefits above a certain level, whatever it takes to make the state solvent within 10 years, using conservative pension plan assumptions.

The $80,000 cap is s suggested starting point for discussion. It may be higher or lower based on point number eight.

Now that's a bold plan, and a badly needed one at that.

New border controls are another sign of increasing protectionism in European states. It was not supposed to be this way, yet these controls represent a Vote of No Confidence in Europe

Germany and France are serious this time. During next week's meeting of European Union interior ministers, the two countries plan to start a discussion about reintroducing national border controls within the Schengen zone. According to the German daily Süddeutsche Zeitung, German Interior Minister Hans-Peter Friedrich and his French counterpart, Claude Guéant, have formulated a letter to their colleagues in which they call for governments to once again be allowed to control their borders as "an ultima ratio" -- that is, measure of last resort -- "and for a limited period of time." They reportedly go on to recommend 30-days for the period.

Of course, using catchphrases like "ultima ratio" and "limited period of time" is supposed to make such policies sound reasonable and proportionate. After all, the reasoning goes, it's just a few occasional border controls for up to 30 days. What's the big deal, right?

But the proposal is far from harmless and would throw Europe back decades. Since 1995, the citizens of Schengen-zone countries have gotten used to freely traveling within Continental Europe. Next to the euro common currency, free movement is probably the strongest symbol of European unity. Indeed, for many people, it's what makes this abstract idea tangible in the first place.

To throw this achievement into doubt now is a vote of no confidence in Europe. The fact that this proposal is coming in the middle of the French election campaign makes it even more suspicious. With his back to the wall, French President Nicolas Sarkozy is pretending to take a tough-guy stance toward immigrants. And the fact that Germany's interior minister is allowing himself to get caught up in this charade is regrettable. Still, if you take a look at his party affiliations -- as a member of the center-right Christian Social Union (CSU), the Bavarian sister party to Chancellor Angela Merkel's Christian Democratic Union (CDU) -- it's hardly surprising. 

But this symbolic act could have drastic consequences. It is a relapse into the type of nationalist thinking that many viewed as part of the past. And it brings to mind a country that continental Europeans like to make fun of for its obsession with its own borders: Great Britain.

Border controls are not the only form of protectionism rearing its ugly head. The New York Times reports In France, Old Protectionist Idea Reawakened

An old French idea is blossoming again in the Paris springtime.

The Socialist Party has embraced a form of European trade protectionism in its manifesto, a shift from its previous endorsement of globalization as a win-win proposition for French workers.

The shift matters both because the Socialists and their Green allies have a good chance of unseating the center-right president, Nicolas Sarkozy, in the election next year, and because France has a way of setting the political agenda in Europe.

“Europe is the only continent that imposes free trade on itself in a world that is constantly making exceptions,” according to the Socialists’ program, adopted April 9.

Declaring that Europe should be neither a fortress nor a sieve, the Socialists want international labor, environmental and health and safety standards built into world trade rules.

Failing that, “we will propose putting in place tariff locks at Europe’s borders” until exporting countries adopt norms applied in Europe to issues like trade union rights, child labor and carbon emissions.

Furthermore, the Socialists want the European Union to insert tougher “fair trade” safeguard clauses in agreements with third countries, enabling the Union to reimpose tariffs to halt any import surge threatening European industry.

And they demand that the European Commission publish a study assessing the effects of each new trade agreement on European industry and employment before it is signed.

Free trade has little political constituency in France. While the seafaring British and Dutch have long been free traders, the French have a protectionist tradition reaching back at least to the 17th-century mercantilist Jean-Baptiste Colbert, Louis XIV’s finance minister.

More recently, Maurice Allais, the Nobel economics laureate, published diatribes against free trade with emerging economies until his death last year, warning that it would cause mass unemployment and depression in Europe.

Another contrarian intellectual, the demographer Emmanuel Todd, is campaigning for European protectionism and an exit from the euro, saying the loss of jobs would otherwise tear French society apart.

Disastrous Global Trade Wars Coming Up

The New York Times article stated "the drift toward protectionism has no support in Germany, France’s vital partner in E.U. leadership."

It appears the author needs to read Der Speigel article on border controls at the top of this post. More importantly, once Sarkozy is booted, there is not going to much left of the German-French alliance.

The Times also states "The Socialists’ U-turn on trade is largely driven by domestic politics, and while it resembles positions taken by the Democratic Party in the United States, it has little support so far in other European countries, except perhaps Italy."

"Except perhaps Italy" is quite the exclusion. France and Italy just happen to be the second and third largest eurozone economies.

The last thing Europe can afford is a disastrous round of increased protectionism on top of insane tax hikes, yet insane tax hikes are the norm and signs suggest more protectionism is on the way.

Moreover, Mitt Romney has stated on numerous occasions that if elected he would declare China a currency manipulator. Such an act coupled with increased protectionism in Europe would likely start a disastrous, unwinnable, global trade war.

A close friend of mine since high school frequently writes for Foreign Affairs Magazine, the Small Wars Journal, and places like Janes's Defence Weekly.

His latest article in the Small Wars Journal highlights compelling reasons that bigger, more expensive, weapons systems "borrowed from the end of World War II or the Cold War" are far too costly and are not even what is needed in today's world.

Please consider a few snips from Disruptive Thinkers: More Thoughts on Disruption and National Security by David Wise.

“The Military Needs More Disruptive Thinkers,” by Benjamin Kohlmann reminded me of what is surely fast becoming the quote for our times when Sir Ernest Rutherford, the father of nuclear physics, once said to his staff: “Gentleman, we have run out of money. It is time to start thinking.”

The futility of large, inflexible military bureaucracies, procuring large, complex, over-engineered systems from the few large, inflexible remaining general contractors in a rapidly changing world seems evident.

Something that I wrote critiquing one branch of the military, the Navy, and its fixation on large ships, seems relevant to this discussion. In that article appearing in the May 18, 2011 issue of Jane’s Defence Weekly I said:

What is the most effective way to achieve the missions of the US Navy: sea control, sea denial, power projection or protection of open commerce? In an age of networks, small wars, unmanned systems and diffusion of military technology, the best solutions are unlikely to be found in highly expensive, complex, centralised systems requiring massive manpower. Answers are likely to be found in ways that distribute firepower to lower-cost platforms for more widespread and rapid deployments on more numerous, but less visible, lower-signature vehicles. Solutions are likely to stress reliability over theoretical elegance, quality achieved through quantity and simplicity over complexity while utilizing the emerging capabilities of robotics and unmanned systems.

One real world example that illustrates this point can be found in a small New Hampshire company, Juliet Marine. Interestingly, Juliet describes itself , not as a defense contractor but as “a maritime technology think tank that is developing innovative solutions for naval and commercial applications.”

Juliet claims that it can develop systems in one third the time and at one third the cost than achieved through usual military procurement procedures. Juliet has developed “Ghost” which they claim to be the world’s first supercaptivating ship. Reportedly Ghost achieves very high speed through hull friction that is 1/900th of conventional surface ships.

The vessel was designed to control the littorals and would be applicable to missions from patrolling for pirates, keeping bodies such as the Straits of Hormuz open from swarm attacks to also supplying offshore oil rigs. As yet untested, the Ghost and the organizational system that produced it merit a lot of attention and, if verified, emulation. Most interesting of all, Juliet developed the Ghost on its own nickel, without any government funding.

As promising as all of this may be, disruptive thinking at operational and doctrinal levels has to be preceded by disruptive thinking at the level of grand strategy. Warmed over or updated versions of worldviews borrowed from the end of World War II or the Cold War will not suffice.

The last attempt, “the Long War,” was a tepid stew not worthy of being served. We face a period of human history that will be unprecedented. How do we intend to use all of our strengths – economic, technological, social as well as military – to lead the world?

The brayings from Washington are not promising. The supposed deficit hawks who are keen on revolutionizing the safety net and social contract want to give a free pass to the military complex not merely wanting more of the same, but rather increased amounts of the same.

Wasting money on outmoded concepts in the name of defense actually saps the national strength on which our power ultimately rests.

"The Ghost"

More Images of "The Ghost" on Gizmag.

On March 9, 2011Juliet Marine Systems, Inc. Announces Anti-piracy Sea-based Security Platform, GHOST.

International piracy has been consistently growing. In Somalia alone, pirates today hold 33 hijacked ships and 711 hostages, according to ICC IMB figures. Piracy is growing at about 10% per year and the heaviest activity is centered in Somalia.

Juliet Marine Systems is discussing with the shipping industry the use of GHOST boats to provide private security patrols for their ships and insurance customers. Smaller boat owners wishing to navigate close to areas of concern would also be able to contract for security for their transit. Sancoff says, "This service, made possible by GHOST technology, could prevent tragedies such as the recent Quest hijacking, that resulted in the killing of four Americans, and the hijacking of the Maersk Alabama, which also could have ended with American fatalities."

Free Market Solution

Please note that "The Ghost" was not designed with taxpayer dollars. Also note that the free market itself may provide a solution to Somalia pirates.

Contrast the design approach by Juliet Marine with the military procurement process we have today, complete with costs overruns at taxpayer expense for grandiose ideas that cannot possibly work in the first place.

Recall that the 911 attack was made by a group of "air pirates" using not much more than razor blades and surprise. Yet, Romney wants to build a strategic missile defense system. Why?

Apparently Romney is still reliving World War II and the Cold War, both of which were won decades ago.

Is there any risk of a nuclear missile attack on the US. The answer is no. Moreover, even if there was risk, such an attack might be impossible to stop anyway, especially if launched from a submarine or small boat just offshore.

Note there is a far greater risk of a suitcase nuke attack for which there is no defense other than stopping it via intelligence gathering.

We could easily slash our defense budget in half if we stopped fighting stupid wars, pulled our troops back home from the 140 countries they are stationed, and focused on smaller, lighter tactical weapons and weapons with general defense capability rather than bigger war-mongering machines.

We have indeed run out of money, and it's long overdue that we start thinking about real strategic "defense" needs as opposed to preparing to do simultaneous battle with Iran, China and the rest of the world.

We do not need battleships to defeat Somalian pirates. Indeed the above press release suggests we do not even need US military at all for that purpose. So what do we need battleships for? What do we need more nuclear weapons for? Don't we have enough nukes to blow up the entire world already?

Why do we need troops in 140 countries? If troops are needed to defend other countries, shouldn't those other countries pay us to have us there?

These are the kinds of adult questions we should be asking. So why isn't Congress tackling those questions?

Four Reasons

1. Defense contractors bribe Senators and Representatives with campaign contributions. Those who are "soft on defense" do not get bribe money and have a hard time getting elected.
2. Congress likes jobs in their districts and absurd levels of completely useless defense contracts provides high-paying jobs.
3. Neanderthals like Mitt Romney are still fighting the Cold War.
4. The Supreme Court absurdly ruled that corporations are people, thereby enabling the warmongers and defense contractors to outspend any candidate who is not committed to more wars.

Unfortunately, both president Obama and Mitt Romney are committed to the industrial military complex hell-bent on starting more wars.

Thus, even if we solved entitlement issues (that both parties refuse to touch and/or cannot compromise on), constant wars and ever-increasing military budgets will eventually bankrupt the nation.

History shows reckless military spending has been the downfall of every great nation. Sadly, the US is on a collision course with exactly that reality.

The US and European embargo of Iranian oil is one of the factors behind the stubbornly high price of crude, trumping the huge slump in petroleum demand in the US. Although Iranian oil exports are down 33%, Iran is on a course for its third largest oil-related earnings ever. Thus, the primary beneficiary of high oil prices is Iran.

Rather than blame himself for the absurdity of the situation, president Obama blames oil speculators.

High Oil Prices Shield Iran From Sanctions

The Financial Times reports High Oil Prices Shield Iran From Sanctions.

The Centre for Global Energy Studies (CGES), a London-based think-tank, estimates that Iran will earn $56bn selling its crude this year – its third-highest earnings ever – even after factoring in the loss of roughly a third of its export volume due to sanctions.

Washington has imposed sanctions to penalise foreign financial institutions dealing with Iran’s central bank, while Brussels has approved a full embargo on Iranian crude oil starting formally from July 1.

The western allies are trying to achieve a difficult balance: hurt Iran enough to force it to negotiate over its nuclear programme, but keep enough oil flowing to avoid a price spike that damages the fragile economic recovery.

“The sanctions are not working,” said Olivier Jakob, head of the Swiss-based oil consultancy Petromatrix, in a note to clients. “They are definitely hurting Iran as it limits its [crude oil] exports, but they are also hurting the rest of the world, given that the western powers have not managed to control prices.”

Iran has had a hard time repatriating those earnings but Iran’s president, says Tehran has enough savings to survive until 2015. “We have as much hard currency as we need, and the country will manage well, even if we don’t sell a single barrel of oil for two or three years.”

It's difficult to know if that is a bluff or reality. However, artificially high oil prices are certainly not helping the global economy.

Obama Blames Oil Manipulators

Please consider Obama proposes steps to curb oil market manipulation

Facing heat for high gasoline prices, President Obama tried to shift the focus to Congress, Republicans and energy traders, calling for legislation that he said would "put more cops on the beat" to crack down on potential manipulation of the oil market.

Obama called on Congress to provide more money for regulators and increase penalties for market manipulators. The president, flanked by Treasury Secretary Timothy F. Geithnerand Atty. Gen. Eric H. Holder Jr., suggested that traders and speculators are affecting the price of oil and digging into Americans' pocketbooks.

"We can't afford a situation where some speculators can reap millions while millions of American families get the short end of the stick," Obama said in brief remarks in the Rose Garden on Tuesday. "That's not the way the market should work."

Who is the Real Manipulator?

Multiple ironies abound in Obama's lecture about "market" forces.

Besides Obama's own influence on the price of oil, the Fed artificially holding interest rates low is "not the way the market should work" either.

The very idea that 10 alleged wizards can sit in a room eight times a year and divine the proper interest rate to steer the economy is preposterous. Indeed that is precisely "not the way the market should work" and in fact cannot possibly work.

Proof is easy to find. We have had bubble after bubble after bubble, each with increasing amplitude, each with bank bailouts, each causing greater and greater income disparity, and ultimately culminating in the biggest housing bust in history.

History proves there have are no wizards on the FOMC, only economic and academic jackasses. Yet eight times a year, those jackasses sit in a room and set policy. Worse yet, they are arrogant enough to believe they, not the market, know what is best for the economy.

Then to top it off, we have to listen to an Obama lecture on the market when it is his own policies coupled with inane Fed policies that are the real cause of high oil prices.

Yesterday the US Census Bureau reported retail sales rose 0.8% in March. Is that what happened?

Charles Biderman, President & CEO TrimTabs Investment Research, has no faith in the number. Here is a video explaining why.

Biderman says Ignorance is Bliss Regarding Economic Data

Ignorance is bliss, particularly when it comes to US government economic data. The latest bad joke occurred this morning when the US Census Bureau said retail sales rose 0.8% in March.

And the financial press reported that 0.8% sales increase as gospel showing once again how totally ignorant the media is when it comes to reporting economic numbers put out by the US government. The AP headline was that US retail sales in March rose 0.8%, helped by job gains. The Wall Street Journal online site reported not only that U.S. retail sales rose 0.8% in March, but also that Americans spent more on autos.

Really? This is garbage reporting of the worst sort. Why? Well first let us look at the actual Census Bureau press release, which is entitled Advanced Monthly Sales for Retail and Food Services March 2012. Lower down the press release explains that the advance estimates are based on a subsample of the Census Bureau’s full retail and food services sample.

What is a subsample? Would you believe in this broadband world that what is reported as a hard fact by the financial media morons, is based upon a mailed, snail mail, survey to 5,000 retailers and the mailed back response?

Let’s see, the US Census Bureau mails surveys to a mere 5,000 retailers and from the responses mailed back guesses at the fraction of a percent change in month to month retail activity. Wow! One would think that the Census people never heard of credit, debit and cash cards. Actual cash is much less than 10% of sales these days and I would rather have all the credit and debit card data than a survey of 5,000 outfits, wouldn’t you? Believe it or not, Master Card and Visa sell their data to the public and I am sure all would give summary data to the government, if asked.

But no, the US government agencies, which also include the Bureau of Labor Statistics and the Bureau of Economic Analysis, in their infinite wisdom ignore available real time data.

My solution is very simple. Fire all the government economists and disband the BLS, BEA and Census Bureau. Instead hire me and give me enough clout to get real time data from master card, visa and all the plastic folk and I tell you what the consumer is doing in real time. Also if I was allowed to mine the withheld income and employment taxes sent daily to the US Treasury I could tell you how many people are working and how much they are making in real time.

But no, the government reports garbage and the morons in the financial media report that garbage as hard facts! The fault is not really with the reporters. Rather it is their editors who are to blame.

The globe is in a real time mess. Global trading is in real time. Yet, the financial markets trade in real time data on the US economy that is based upon surveys and guesses. Am I missing something, or is this just plain nuts?

It's Just Plain Nuts

To answer the question, it's just plain nuts. Moreover, I consider Biderman's proposal a mere down payment on what needs to happen.

In addition to getting rid of the BLS, the BEA, and the census bureau, we also need to get rid of the Fed, the department of energy, student loans, crop subsidies, the small business association, Davis-Bacon, prevailing wage laws, collective bargaining, and all sorts of other programs that at best accomplish nothing at tremendous cost, and in most cases do further economic damage because of graft, inefficiencies, and bad reporting.

The proverbial can only be kicked so far before the can rusts away to nothing. That is what Police in Stockton, California have found out and that is what the pensioners in the entire Illinois retirement system will soon find out.

Stockton Can Suspend Police Accrued Vacation Payouts

A California Superior Court Judge says Stockton Can Suspend Police Accrued Vacation Payouts.

Stockton, the central California city trying to avert bankruptcy, can continue suspending accrued vacation and sick time payouts for its retiring and departing police officers, a state judge ruled.

San Joaquin County Superior Court Judge Lesley D. Holland yesterday rejected the Stockton Police Officers’ Association’s request for an order reinstating the pay. David E. Mastagni, a lawyer representing the association, said some officers have spent 30 years accruing the compensation.

“I’m proceeding on the assumption that bankruptcy, if not a certainty, is a highly probable outcome,” Holland said. The city is trying to remain solvent and win concessions from creditors through negotiations under a state law designed to discourage municipal bankruptcies, the judge said.

City Default

The City Council on Feb. 28 agreed to extend its fiscal emergency declaration, default on $2 million in bond payments and suspend sick leave and vacation payouts to retiring workers. Officials decided to suspend the payouts to discourage workers who fear the mediation would lead to a cut in their benefits from retiring early and draining city coffers.

On April 12, San Francisco-based Wells Fargo & Co. (WFC), the fourth-largest U.S. bank by assets, was awarded possession of three Stockton parking garages in a separate lawsuit it filed as a bond trustee against the city. San Joaquin County Superior Court Judge Roger Ross made the decision about who controls the garages after Stockton missed a $779,935 payment on lease revenue bonds issued in 2004.

The City Council on Feb. 28 agreed to extend its fiscal emergency declaration, default on $2 million in bond payments and suspend sick leave and vacation payouts to retiring workers. Officials decided to suspend the payouts to discourage workers who fear the mediation would lead to a cut in their benefits from retiring early and draining city coffers.

Stockton has already made a mistake. It lost nice parking assets because it has not yet filed for bankruptcy. It should have filed first, then missed the bond payment. Two groups should lose in this mess: city employees with untenable pension benefits and bondholders.

Illinois Retirement Systems Only 36% Funded

Please consider Illinois Is Pension Basket Case You Forgot About

This month, the Teachers’ Retirement System of the State of Illinois made a dire announcement to its members. TRS, which covers most public-school teachers in Illinois outside Chicago and has more than 360,000 members, said the following:

“If the General Assembly does not continue to provide all of the funding called for in state law, calculations done by TRS actuaries show that the System could become insolvent as soon as 2030. Preventing insolvency may include significant changes for TRS -- new revenues must be generated and if they are not benefits may have to be reduced.”

The teachers’ fund is one of the country’s worst-financed statewide pension systems, reporting that it is only 47 percent funded. And that’s if you buy the system’s rosy accounting assumptions, including that it will achieve 8.5 percent annual returns on its assets. This level is tied for the most aggressive investment assumption among state pension funds in the country, and the fund has had to get creative in an effort to meet it. Pensions & Investments magazine says it has the fourth-riskiest pension investment portfolio in the U.S., with less than 17 percent of its investments in fixed income and cash.

The system’s funding status is so poor that it achieved a 23.6 percent return on investments in 2011 and still managed to shave only $2 billion off its $46 billion unfunded liability. And it’s not as though the fund can make such gangbuster returns consistently -- in 2009, it returned negative 22.7 percent.

Closing the TRS funding gap -- and the gap at the State Retirement Systems of Illinois, which is only 36 percent funded -- will depend on taxpayers’ willingness to start paying far more than they ever did for pensions. And as the TRS statement makes clear, that is far from a sure bet, meaning that pensioners may see their benefits cut.

Chris Christie Willing to Sacrifice Career to Take on Teachers' Unions

Link if video does not play Christie: I will Sacrifice my Career to Take on Teachers' Unions