Hyde Park Blvd

David Rosenberg, he of Gluskin Sheff in Toronto, opines on US unemployment and the likelihood that 12% is not impossible, that structural problems may be around for a while:

Think about it. We haven’t yet hit bottom on employment but that will happen at some point. Employment is not going to zero, of that we can assure you. But when we do start to see the economic clouds part in a more decisive fashion, what are employers likely to do first? Well, naturally they will begin to boost the workweek and just getting back to pre-recession levels would be the same as hiring more than two million people. Then there are the record number of people who got furloughed into part-time work and again, they total over nine million, and these folks are not counted as unemployed even if they are working considerably fewer days than they were before the credit crunch began.

So the business sector has a vast pool of resources to draw from before they start tapping into the ranks of the unemployed or the typical 100,000-125,000 new entrants into the labour force when the economy turns the corner. Hence the unemployment rate is going to very likely be making new highs long after the recession is over — perhaps even years.

For those who remember his dad, Mike, on Boston local news (circa 1970s), Matt Taibbi’s rollicking style is a delight, full of genetic echoes.  His Rolling Stone article on Bear Sterns and Lehman — and the naked short-selling behind their demise — is a good read:

Six months after Bear was eaten by predators, virtually the same scenario repeated itself in the case of Lehman Brothers — another top-five investment bank that in September 2008 was vaporized in an obvious case of market manipulation. From there, the financial crisis was on, and the global economy went into full-blown crater mode.

Via David Rosenberg at Gluskin Sheff in Toronto.  He’s not convinced, he just reports:

A freshly minted report from the Asian Development Bank forecasting faster-than-expected growth for the region — excluding Japan, growth is seen at 3.9% this year versus the March projection of 3.4%. This is having a fairly significant market impact this morning with credit risk declining, the U.S. dollar under renewed downward pressure (the Euro just crossed 1.48 for the first time in a year), commodities rallying right across the board, resource-based currencies, such as the Loonie and Kiwi (the latter also benefiting from a much lower current account deficit for the year ending June) and global equities, in most jurisdictions, in the green. U.S. equity futures are flying as the buy-the-dips psychology has become tremendously well entrenched — see Optimistic View on Rally on page 25 of the FT. A Barclays survey shows that bears are now capitulating en masse and now fewer than 1 in 5 believe this is a bear market rally ripe for correction.

John Cochrane, Yntema Professor of Finance at the University of Chicago Booth School of Business offers an appropriately terse reply to Paul Krugman’s much-discussed gloss on academic economics (an excerpt is reprinted on the NYT Economix blog by Catherine Rampell):

Imagine this weren’t economics for a moment. Imagine this were a respected scientist turned popular writer, who says, most basically, that everything everyone has done in his field since the mid 1960s is a complete waste of time. Everything that fills its academic journals, is taught in its PhD programs, presented at its conferences, summarized in its graduate textbooks, and rewarded with the accolades a profession can bestow, including multiple Nobel prizes, is totally wrong. Instead, he calls for a return to the eternal verities of a rather convoluted book written in the 1930s, as taught to our author in his undergraduate introductory courses. If a scientist, he might be a global-warming skeptic, an AIDS-HIV disbeliever, a stalwart that maybe continents don’t move after all, or that smoking isn’t that bad for you really.

Full text available at Cochrane’s web page.

In case you missed it, Amity Shlaes in the Washington Post uses Obama’s Team and Perfect Mark Buehrle (courtesy of Steve Kaplan) to ’splain why pay caps for CEOs are a non starter:

After all, people hire for the long term, not just for one recession or recovery. And talent is rarer than we tend to think. “In a world where skill is in great demand and markets are large — when a lot of money is at stake, whether it’s baseball or finance — market forces insure that those skilled people get paid a lot,” says Kaplan. Pay caps, or even too much harassment from regulators, will drive the talent to jobs where there aren’t such obstacles. The result will be fewer perfect games in the corporate world: “You pay peanuts, you get monkeys,” says Kaplan.

Despite the recent headlines about housing’s uptick, the backstory is a bit more complicated (compliments of Bianco Research):

While the media was speculating that housing finally hit its bottom and the great decline of 2006 to 2009 was over, S&P then posted the SA data.  This data showed a slight decline between April and May.  It also showed that 12 of the 20 cities surveyed had price declines in May.

The Blog Calculated Risk has done an excellent job of analyzing the housing data.  They note that housing really has two bottoms.  First sales (volume) bottom and then prices bottom.  While possible, history shows that sales and prices do not bottom at the same time.  Additionally, home prices often do not bounce back as quickly as other assets after a prolonged downturn.

Via reader RS

I didn’t see much mention of Nick Paumgarten’s May 18 New Yorker piece The Death of Kings (audio available here).  Overall a useful, if sobering, perspective.  He talks to Columbia University Prof Bruce Greenwald:

He explained that we are, in some respects, the victims of a structural imperative reaching back to the waning days of the Second World War.  The Great Depression in Britain, he said, started in the late 1920s, owing to structural deficits in the nation’s balance of payments, a result of the pound sterling’s traditional role as the world’s reserve currency.  Breton Woods, the global economic conference in New Hampshire in 1944, repalaced the pound with the dollar.

This meant that debts tended to be denominated in dollars, and other nations had to hold dollars in reserve, to pay them off.  Not having dollars would expose your country to the risks of currency fluctuation.  And so other countries coveted dollars.  Toget them, they sold goods.  There was, therefore, in the Bretton Woods arrangement, a structural demand for current-account surpluses, and for someone to eat up all those surpluses.  We had to be the consumer of last resort.  “We’ve been living beyond our means for the sake of the world,” Greenwald told me.  “Where else would all that crap go?”

They make, we take.  And then, we find ways to pay for it all.  Our prime asset, over time, became our financial acumen.  It represented an ever greater part of our economy, our political system, and our interaction with the world.  “What’s our best export?” Leib said (Barclay Leib, derivatives trader and hedge-fund consultant).  “Scrap metal?  No.  Hedge-fund managers.  Financial creativity.  We’re good at it.  We keep the cycle of money going.”

Ultimately, Paumgarten looks at both sides and seems to edge efficient market-ward:

The market scolds saw the positive signs (in stock market prices) as jabberwocky, or else mere accounting tricks.  The skeptics worried that the crisis was mutating into a virulent strain of delusion, a pretext for the preservation of the old status quo.  The presumption was that staving off near-term pain would lead to ever more spectacular collapse.  But who knows?  Maybe it won’t.  Divination is fraught, fact being merely what we make of them.

Our dreams of normalcy are just that.  We will have to create something new; propping up what exists in hopes of reclaiming what was isn’t going to work.  But I think we all know that, or I hope we do.

The Federal Reserve Bank of Atlanta’s macroblog has a post by Federico Mandelman that explores the correlation betweenUS housing starts and remittances to Mexico.  He has interesting things to say about current policy and the value of more — or less — open borders:

In a study published in 1997, Belinda Reyes found that about two-thirds of the undocumented immigrants returned to Mexico within three years upon arrival. Increased border enforcement during the last decade has broken the typical pattern of flows of undocumented workers. Basically, while increased enforcement makes it harder/more expensive to enter the country, it also reduces the incentive for those already in the country to leave. Why? Because of the high cost/risk associated with reentering the United States in the future.

Thanks to Jeff Carter for the heads-up.

Doug Short at dshort.com compares financial downturns:

Lots of good stuff here, including an analysis of the market since 1950:

Thanks to the Daily Dish for the link.

Today’s WSJ Opinion Journal speculates on Cass Sunstein’s role as the Administrator of the Office of Information and Regulatory Affairs.

“Credit regulation raises immense challenges, and there is a serious danger that, in light of the current crisis, government regulators will overreact,” Mr. Sunstein wrote in an op-ed on these pages last August. “The fundamental line of defense should be improving market competition, not eliminating it. And to improve competition, transparency is the place to start.” That piece, co-authored with the University of Chicago’s Richard Thaler, argued that better disclosure, combined with technology, would be more effective than playing “regulatory whack-a-mole” with unpopular industry practices.

The world expects wholesale re-regulation; the smart money is on a more nuanced — and market-savvy — approach.

Fresh-water economics with a Democratic flavor. No wonder Powell called Obama a transformational figure.

Thanks to reader ASR for the heads-up.