Another Break

Surgery went off without a hitch yesterday - everything went well, but the recovery will take a few days, during which time it is difficult to think clearly or sit comfortably.

Look for the next post early next week - maybe sooner.

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Blinder and Kudlow on Gold

Yesterday, the Federal Reserve took another baby step toward safe and sane monetary policy by raising the overnight bank lending rate from 3.5 percent to 3.75 percent. The policy statement acknowledged the devastation caused by Hurricane Katrina, but indicated that accommodation would continue to be removed at a "measured" pace.

While noting that core inflation has been low, that underlying inflation is expected to be contained, and that longer-term inflation expectations remain contained, they acknowledged that higher energy prices have inflationary potential.

Whew!

That's a lot of talk about inflation - for a moment there it looked like they were going to tell us that we actually had some.

Gold as Kryptonite

It is not often that we tune into CNBC - it is best taken in small doses, abstinence is ideal. Yesterday, we did happen to catch a portion of Ron Insana's panel discussion after the Fed policy announcement. Former Fed vice chairman and devoted Greenspan worshipper Alan Blinder was one of the guests.

A chart of the historical relationship between real oil and real gold prices was shown. The chart clearly showed the decades long correlation between these two commodities and indicated in a not-so-subtle way that gold would be closer to $1000 than $500 if this relationship had not broken down over the last few years. Barry Ritholtz over at The Big Picture had this chart up the other day - apparently Ron showed this chart last Friday as well.

Hmmm... Perhaps Ron owns some of the yellow metal. Or, maybe he's just curious.

After a few words about commodities and inflation, Insana asked Blinder a long and tortured question about the Federal Reserve and gold. Here is the discussion that followed:

Blinder: So, I'm not sure what the question was. Are you asking should the Fed be talking about the price of gold?

Insana: Should it be looking at the price of gold as an inflation indicator. Yeah.

Blinder: No. I think it's time we outgrew gold. The numbers that you just cited show that gold's been a lousy investment, but that's kind of beside the point. It's also not a good indicator of the stance of monetary policy, the state of bank credit, a predictor of inflation, or anything like that.

Judging from this brief discussion, we conclude that gold must be like kryptonite to central bankers - we couldn't help but notice that at just the mention of gold, Blinder's multiple facial ticks, already apparent prior to the gold question, quickly intensified and stayed elevated during this exchange.

It was quite odd to listen to a Fed economist, with little control over any muscle on his face, dismiss gold. We wonder if any Chinese or Japanese central bankers were watching.

While we tend to agree that gold has been a lousy investment since 1980, we also acknowledge that it may not be relevant to monetary policy or bank credit. Moreover, we question how good a predictor of inflation it has been or will be - it seems so much depends on how inflation is measured.

However, there is one thing that we are sure that gold is useful in predicting. That one thing also happens to be the title of a catchy REM song from five or ten years ago ... the one thing that the gold price surely excels at predicting is - the end of the world as we know it.

Maybe the prognostication has already begun.

"Core" Commodity Prices

Meanwhile, over at the National Review Online, we find that Larry Kudlow has penned another interesting article. Normally, we get right at the business of mocking Larry's statistical sleight of hand, but we find ourselves caught off guard at the first line in his current offering:

"With gold knocking at the door of $470 an ounce, a degree of uncertainty has crept into the inflation outlook ..."

Respect for gold? Like CNBC, Kudlow dosage should be severely restricted, so we don't know if Larry has a long-standing respect or fascination with gold, but obviously it does not have the same Kryptonite-like effect on Wall Street economists as it has on central bankers.

After waving his magic wand to come up with a few benign statistics - surplus money creation of 1.5 percent and inflation measures of 1.8 and 2.1 percent - he starts making sense again:

"But gold remains a core indicator of future inflation, and the recent spike near $470 an ounce demands attention. Prior to this, gold had traded in a generally narrow range in the past nine months, with a high last Friday of $457.20 and a low of $411.10. The London afternoon fixing price had ranged from 6.3 percent above the nine-month average ($430.06) to 4.4 percent below it. That’s a fairly stable record."

So, gold is an indicator of future inflation? A "core" indicator? (Thankfully, not a "core" indicator of "core" inflation.) Larry seems to be quite interested and perplexed with the gold price action lately, as are many others in the financial media. Maybe "concerned" would be a better word.

He continues:

"Other real-time indicators also have reflected a non-inflationary monetary environment. Bond yields around 4.25 percent remain at four-decade lows. Spot commodity prices (that exclude energy and gold) have flattened out and stabilized over the past twenty months. The exchange value of the dollar has been gradually rising this year. Even the oil spike is abating. Sweet West Texas intermediate crude is trading around $65 a barrel, 7 percent off its August 30 peak. Unleaded gasoline has plummeted 25 percent."

We still don't know how long term yields, the "conundrum", having confused and confounded legions of analysts and commentators, can still be relied upon to predict future inflation. It seems that while there may be confusion about just about every other aspect of long term bond yields, the predictive value relative to inflation expectations is intact. Is this sound logic or wishful thinking?

And, finally, we get our first glimpse of the future of commodity price reporting. It's not stated here, but we see where it's going - if you take energy and gold out of commodity price reporting, you get the "core" rate of commodity price increases, which, not surprisingly are more apt to be ... benign.

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California Jobs

Last week, the California Employment Development Department released the August jobs data, which showed an unchanged unemployment rate of 5.2 percent and a total of 17,200 new jobs for the month. Press reports noted that job growth was steady and in some areas the unemployment rate had dipped below 5 percent.

Some press reports also included a cautionary paragraph or two about the potentially problematic relationship between a peaking real estate market and job creation in recent years - job creation that has been heavily dependent on home construction and the "wealth effect" of rising home prices. In a weekend article, the Los Angeles Times noted the following:

Analysts, however, are concerned that the state is vulnerable to another potential economic storm: an expected slowdown in the state's sizzling housing market.

Much of the state's recent job growth has stemmed from the real estate boom, in such fields as construction, mortgage lending, insurance and home sales. Strong consumer spending has been fueled by the so-called wealth effect of higher home prices, as homeowners have tapped refinancings and home equity loans to pay for new luxury automobiles and Caribbean cruises.

We often wonder what kind of jobs are being created in this state to support the kind of real estate prices that are being fetched. It is clear that low interest rates and "innovative" financing are a large factor in today's astronomical home prices, but just what kind of jobs are being created to provide the future stream of income that will enable homeowners to continue making mortgage payments in the years to come?

Last month, these sectors accounted for all of the net new jobs (i.e., gains and losses in other sectors offset each other - these sectors accounted for 17,600 new jobs while the total number of new jobs was 17,200, on a seasonally adjusted basis):

1. Trade, transportation, and utilities
2. Leisure and hospitality
3. Construction

Last month, as well as for the last few years, the dominant category within each of these sectors has been:

1. Retail trade
2. Food service
3. Home building

Which roughly translates to the creation of a whole lot of jobs for:

1. Wealth effect-enabled purchases of imported goods
2. Wealth effect-enabled dining out
3. Construction of new homes to create more wealth

But we already knew that ...

Today we take a look at job creation by sector for the state of California for the four years following the end of the last two recessions - that would be from February 1991 to February 2005 and from August 2001 to August 2005. All charts are year-over-year changes, so seasonal adjustments are not a factor.


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First, note that these are private non-farm payrolls only - no government or farm employment is included and it excludes the tiny, and mostly inconsequential sectors of Natural Resources and Mining, and Other Services.

The scale is the same for both charts to make absolute comparisons easy. There was greater job loss in the early nineties, and greater job gain in the last two years - cumulatively, for the two periods, there was a total net loss of 119,000 jobs from 1991 to 1995 and a total net gain of 211,000 from 2001 to 2005. While the magnitudes are different, the timing is similar for the losses and gains in the two charts - both show two years of net job loss, bottoming out roughly two years after the last quarter with negative GDP growth, followed by two years of net job gains.

The question we seek to answer is, "Compared to a decade ago, how has recent job growth positioned the California economy for the future?" We all know what happened to job growth between 1995 and 2000 - it is well off of these charts. What can we expect for the second half of the current decade?

A crucial difference between the two periods is that in the early nineties, the California real estate market had just peaked. This explains the loss of Construction jobs during this period. However, in the 2001-2005 period, Construction is the leading source of job growth after technology had peaked. Manufacturing job growth is abysmal for both periods, but at least in the early nineties, there was some improvement which then led to a brief resurgence in the late nineties.

In the 2001-2005 chart, the impact of the wealth effect can be clearly seen in the Trade, Transportation, and Utilities sector as well as in Leisure and Hospitality. Remember these two sectors are for the most part Retail Trade and Food Service - shopping and dining. It is clear from this chart how job growth in these sectors followed growth in Financial Activities and Construction a few years prior.

The Professional and Business Services jobs were largely employment agency jobs (temporary jobs) in 2001-2005, so there is not a lot to get excited about there. In stark contrast however, the period of 1991-1995 showed excellent growth in both Professional and Business Services jobs as well as in Information. This set the stage for tremendous growth in these areas in the latter half of the nineties. This is what most consider to be high-quality service jobs - the kind of jobs that these days are being outsourced to India.

When looking at job creation in 1991-1995 versus 2001-2005, it is hard not to notice how much healthier the job growth was a decade ago. The nascent technology boom is evident in the 1991-1995 chart and both housing and finance were bit players in job creation. When looking at the 2001-2005, it appears almost like a desperate attempt to keep things from really falling apart - first Financial Activities, then Construction, then wealth effect-enabled consumer spending.

The light blue bars on the 1991-1995 chart look promising, the light blue bars on the 2001-2005 chart do not.

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Snow's Reconstruction Plan

Through a highly placed Treasury Department source, we have obtained a confidential memo from Treasury Secretary John W. Snow to President George W. Bush in which Secretary Snow proposes a bold, yet somewhat unusual plan to finance the Gulf Coast reconstruction.


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Thank You Bryco!

Well, it looks like all the home equity lending risk management guidelines are working wonders. As you'll recall, five federal agencies issued these guidelines back in May. At the time we likened this guidance to fitting a patient suffering from back pains with a back brace, while a cancerous tumor was growing inside, impinging upon his spinal cord.

It looks like the patient isn't even wearing the back brace.

Here's the transcript from a TV commercial that we stumbled across this morning. Fortunately, thanks to DVR (Digital Video Recorder) technology, the only time we watch commercials is by accident - this was just such an accident, however we did learn something.

We don't know if what Bryco Funding is offering the public is typical of others in the industry - our sample size of one is probably too small, but here it is:

If you are backed up against the wall financially, and you own a home and have a mortgage, there is a simple easy way to get fast cash.

Even if you've been in your home for six months, one month, or a day, Bryco Funding can use a new appraised value to get you cash instantly.

Credit scores as low as 500, bankruptcies, or foreclosures are not a problem. You don't even need proof of income or past tax records.

Call Bryco Funding now to pre-qualify, there's no obligation and there are no charges or fees for pre-approval. And since Bryco Funding lends their own money, they can make instant decisions and approvals.And, they can wrap up your loan in as little as ten to 14 days.

Stop worrying and screening phone calls from nagging creditors. Help Bryco help you today with a quick-cash loan. Just call the toll-free number on the screen. Our number one goal is to say yes.

At Bryco Funding we believe in loans, not limitations.

Yes, things are much better now that five federal agencies have weighed in on home equity lending, and Bryco must have some very cooperative appraisers to work with. While not stated in their advertisement, we can reasonably conclude that the minimum requirements for a home equity loan from Bryco are a home with equity and a pulse.

You have to wonder if the grand plan is to forestall as long as possible the inevitable outcome of the housing bubble. At least in California, as long as home prices remain elevated, with all the equity in California homes, we could probably go on for at least another five years borrowing against our homes even if everyone lost their jobs.

With a median income of around $50,000 and say, $250,000 equity in your home, that's an easy five years living off your house with no other source of income.

Maybe someone does have a plan.

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