Gauging The Gauges (Part Three)

As in any new year there comes a time when one must decide where, or why, one is going to proceed in any direction. Which was the underlying premise for writing this series. (links to: Part One or Part Two)

It’s one thing to set off on a course. It’s quite fool-headed to assume any gauge never needs to be adjusted or reset as to provide true readings. Assuming anything heralded across the media landscape is accurate without your own due diligence may cost you more than you bargained for.

There is probably no better example for this than the recent scientific expedition that were convinced they would find and record evidence of dwindling ice in the Antarctic.  All based on their beliefs, reasoning, and thinking, fortified by their models and gauges.

So sure and trusting of those gauges, they charted a vessel and set course for the Pole to record the devastation. Problem? So much ice – so thick, not only did their ship become ice-bound, the ice breaker sent to rescue them became stranded!

All appearances suggests someone never checked to verify if their gauge for ice being present was accurate or not. Even in this day of satellite technology – no one bothered to verify? If scientists can be so foolish, you think economists can’t fall into the same group think? (Please spare me the climate hate mail)

Just look at probably one of the foremost indicators or gauges used by everyone across the media as well as the so-called “smart crowd.” The unemployment number. (UE#)

All of the sudden I noticed media outlets changing their interpretation of the UE# in unison. Seemingly it has morphed overnight from one of the most accurate barometers for economic activity to suddenly a “questionable gauge.” Why?

Well of course, or as usual, pure politics. And this is where all the earlier playing, or spinning as its know to be can now actually work against the very people who need clarity more than ever. The unemployed themselves.

The UE# has always been gamed no matter who has been in office. However, since the financial crisis of 2008 that game has never been “played” as it seems of late. The evidence for that is how long UE emergency insurance payments have been going on. We are now approaching 5 years of benefit extensions. (I’m not stating for, or against. I’m just arguing perspective and possible impact, nothing more.)

The reason this number is far more important today in 2014 than previously is two-fold. First: The Federal Reserve policy of tapering their quantitative easing policy  has been tested. They actually began tapering. One must remember one of the foremost criteria for that decision was the UE#’s which recently printed 7%. The lowest since the crisis.

The dreaded idea of tapering was seen by nearly all of the financial media as well as Wall Street itself as “highly unlikely.” In my opinion, “unlikely” can no longer be viewed in the same paradigm. Which changes everything the markets have relied upon as an “accurate gauge” for what will happen next policy wise.

On the political side a new budget was signed into law the other day. What was noticeably absent? Further emergency unemployment payments effecting nearly 1.5 Million people immediately. i.e., No further benefits or payments.

What affect this will have on the psyche of the public at large is anyone’s guess for this 1.5 million persons are the first to lose immediate help. I remind you there are millions upon millions coming along that have been receiving benefits that will face this same dilemma.

Is a 7% UE# today the equivalent of a 7% job market say only 6 years ago? What happens to the businesses where these people live? Their landlords, grocers, city government, et al – when suddenly millions of people are suddenly found with ZERO income? And the issue doesn’t stop there.

Both sides of the political aisle have and still are using the current UE# as a gauge on whether or not emergency benefits should go on. Problem for both including everyone else is most haven’t a clue of how, or what that number truly represents any longer.

If people are now dropped abruptly from the roles of counted UE, the rate can actually fall even lower showing a seemingly better number. (e.g. 6.9% or lower)  And what does that do for policy calculations not only in Congress, but at the Federal Reserve? For if the Fed. changes anything in policy direction either way, Wall Street or the financial market as a whole can react in ways no gauge may have predicted.

I’ve been stressing the following example for years now. It seems both the political as well as the media are finally coming around to understanding what they’ve been willfully ignoring, along with its implications.

  • “Let’s say there are 1000 jobs with 1 person in each. If you lay off 100 people you would have an unemployment rate of 10%. If at the next report the companies that laid off those 100 workers now state those workers are not going to be rehired because – those jobs will no longer be available; (i.e.,Whether by attrition or a shuttering) You will now have a base line of 900 jobs for the next report. So by the Government’s calculation and reporting criteria the next unemployment report would show a 0% rate meaning 100% or full employment because the pool of available jobs is now smaller (meaning 900 instead of 1000) and they are all currently filled.”

For the 100 people who lost their job this type of math is what infuriates them, and with good reason.

Over the last 5 years this earlier gauge of economic health has been adulterated with years of chronically unemployed falling from the roles never before seen since the depression years. Yet, the number itself still holds monetary decision-making hostage as to implementing or discontinuing policies as if it were infallible or incorruptible.

Gauging what numbers, or what to do with those numbers, is a requisite for clear thinking. However, knowing if your gauges are reading correctly?
That’s a paramount requisite for an entrepreneur.

© 2014 Mark St.Cyr

Gauging The Gauges (Part Two)

As I stated in “Part One” of this series, the issue I believe that will determine whether or not bumps in the road will remain just that. Or, will a now complacent financial market realize not only are the gauges faulty but rather; will not be able to give any advance warnings other than an “idiot light.” For as anyone familiar with cars, once the light goes on – the damage has already happened.

Another one of the so-called market gauges that has been at the forefront of both the good, as well as the bad, is housing. Currently the financial media is once again all abuzz quoting anything related to housing. However, just as when you look at a gauge for tell-tale signs good or bad. You have to have the intellectual honesty as to compare one report, or one year vs another – truthfully.

Let me make my argument this way: A house for what ever the reason is always assumed to be purchased by a family and lived in. Regardless of earnings, loan terms, what ever. The next economic assumption is once they purchase, they’ll move into and live in it with their family. Immediately integrating into the community via schools, shopping, etc. The economic impact is to be felt throughout the micro-market surrounding them.

Multiply this for simple math by 10 homes in a surrounding area, and one can clearly see the multiplier effect. Anyone with some true business acumen can see (and try to gauge) what, where, why, or how things might progress further and both invest, or make plans in other businesses to support this market.

You would, as had been done for years, use previous data points, models, etc. as to try in computing risk or rewards. However, is this latest set of data points that everyone is now using as a “See..See! Sales are booming! Just look at the numbers.” even relevant to calculate the above’s example for economic impact? For my take: Absolutely not.

Currently the housing market is once again gaining steam. But – for quite possibly the worst of all reasons. Where once the money to purchase these homes (whether one likes who, how, or why) was ultimately for a great many families to live in. The most recent rash of purchases are being made by “all cash buyers.” At first blush this sounds wonderful. However, all cash buyers turns out to be a two-fold problem.

First, many of these buyers are not interested in anything else except some form of vehicle where they can place their money other than in a bank. Second: They more often than not don’t care who rents or stays in the home. While sometimes – being left vacant is all the better. They’ll just pay a management company to maintain it. The economic impact of such a purchase in a community? It can be argued the impact is negative rather than positive.

Next, it seems Wall Street has found a better way to slice and dice the housing market once again. This time? Screw slicing and dicing mortgages. Buy the homes outright at forced foreclosure sales and screw the existing owner out into the street. Or: Offer to rent it back to them at a figure above the mortgage price they couldn’t afford that put it into foreclosure in the first place.

Can’t afford it? No problem, here’s the Sheriff with your eviction papers. Many might say, “Well, they probably couldn’t afford it in the first place. Or, that’s the way of the world.” Yes, that may or may not be true however, there was one story on Bloomberg TV® about a couple being evicted under this scenario that just didn’t sit well with me.

The real issue that caught my ear was this: They had been trying to work through the mortgage modification process when all of a sudden during that process, they were notified that their mortgage holder sold their foreclosure where an “all cash buyer” bought it sight unseen then, abruptly foreclosed.

Yes, all legal, yet it just reeks of Mr. Potter in the classic, “It’s a wonderful life.” (Dec. 1946 RKO Radio Pictures) Could the timing actually be any more coincidental? But I digress.

Many of these “all cash buyers” are investment firms buying up real estate, then packaging the assets under an umbrella as to form some type of “investment vehicle.” Then they sell (or dump) those shares into a market fueled with a Federal Reserve funded printing frenzy of free money which is desperately (and usually quite foolishly) seeking anything with even the remotest of a promise of future yield. This is a recipe for disaster in my view.

Buying and slicing up the these assets that supposedly in the future will generate rental and price appreciation values based on the metrics that were used previously; is just the same as trying to say you have enough fuel in the tank to make it home because your old car went another 25 miles when the gauge read empty.

Problem is – this new car hasn’t been put to that test yet. And saying this gauge will work and read the same as the old one because, “They’re both fuel gauges and work the same way.” will get you in a lot of trouble. (Especially if her father is 6’5″ and works for the Sanitation Bureau.)

So my point here is this – today’s latest housing boon is not what we would have used to gauge further or more importantly greater economic impact to the overall economy as we did just a few years ago.

No, the impact of 10 homes in the latter scenario as compared to the earlier have two very different impacts. Not only monetarily but an even greater, more important social or psychological impact in the affected area.

For it’s not the robust sales that mean much to any given area as much as what those homes and families that dwell in them do to the area. For anyone with experience knows…
You don’t buy the house – You buy the neighborhood!

Seeing friends or family members lose their homes, or move out leaving a vacant, (or worse) rented property to people who could care less about the neighbors – is a recipe for failure. And that’s not going to do anyone any good now or in the future. For what it’s surely not – is some recipe for growth. You can have great neighborhood home sales – and still kill the neighborhood.

Quite possibly this is going to resolve itself as the latest gauge for an impending disaster.
That any idiot should have noticed was lit.

© 2014 Mark St.Cyr

Gauging The Gauges (Part 1)

As we put 2013 into the rear view mirror and focus our attention towards the horizon in front of us. I believe this coming year will be full of far more surprises than the preceding. And, quite possibly, even rival the past five. Why?

As of today there has been many mantras that have held firm. i.e., “Don’t fight the Fed.,” “Just buy the dip,” The trend is your friend,” etc. Anyone going against this school of thought in both intellectual argument as well as monetary positioning has found themselves on the wrong side. Even though the argument for holding such a view or position can be intellectually made. The results so far have shown in dramatic fashion; there are times intelligence – means nothing.

An example of this is described elegantly in Nassim Nicholas Taleb’s tour de force, Antifragile: Things that gain from disorder. (Nov. 2012 Random House) In it, he once again gives his example of the black swan. (I’m paraphrasing)
“Centuries of arguments that were based on the reasoning and so-called proof by the intellectuals that black swans didn’t exist, were laid to waste with just one sighting.” This example shows quite vividly that dogma – is not proof. Which is precisely what I believe the mantras posted above will prove to be in the end. Just when is anyone’s guess.

Of course prudence and diligence in trying to be positioned for that guess is all one can do. However, to make that “guess” one has to not only look at the gauges; one must know whether or not those gauges are accurate. Just because one believes their eyes are wide open doesn’t mean they aren’t running blind. This is where I feel 2014 will prove more difficult to many from politicians, to business leaders and financial players. Or, more importantly, the population at large.

Change, real change takes place this year in a myriad of ways. Across all sectors public as well as private that have not been at play since the financial crisis of 2009 was addressed. Today, we have traded in the previous vehicle for a different one, while many are assuming the gauges on this dashboard read exactly as the previous. They don’t and here’s why…

First: The Federal Reserve (Fed.) shocked many with their decision to actually begin tapering their monetary program by $10 Billion dollars a month. Some say this is chump change in the larger picture. Fair point however, that’s $120 Billion dollars that is no longer going to be funneled into the markets. If that figure isn’t large enough how about the 5 to 1, or 10 to 1, or even 15, 20 to 1 leverage that we know takes place in the financial markets. Quick math dictates you quite possibly be looking at $600 Billion on the low side to as much as $2.5 TRILLION or more on the high side no longer sloshing in and around the markets looking for a home (any home!) in a search for yield. Can you say Twitter®?

The issue doesn’t stop there. Every so-called “smart crowd” across the financial media is touting this is a good sign based on blah, blah, blah. Emerging markets are picking up the slack, China this, China that. All I’ll say is, did anyone see what is currently transpiring in China’s money market funding the day the Fed. announced the dreaded taper? All heck is now breaking loose. Why is this something that is quite possibly more important than China’s economic data?

Well if one remembers anything about the financial crisis in 2009, it wasn’t until the “breaking of the buck” in the money markets when all bets were off. Too many forget or disregard that point. What happens if China doesn’t respond to their growing crisis correctly? This is a new issue where there is no gauge – only an “idiot light.” And just like those indicators, once they lit up, the damage was already done. Was the taper the initial factor here? Hard to know but one needs to find a way to correctly gauge what effect corresponds from here on in.

Next is healthcare. Regardless of what I’ve heard or read one thing is clear too me. Less than 1 in 1 million have any idea about what will transpire this year for their healthcare coverage. The debacle that has happened since the roll out is miniscule in both its disruption or cancellations of policies. Employer provided insurance which dwarfs privately purchased plans goes into effect this year. With all the changes, turmoil, and confusion with new compliance regulations and more, businesses will feel either compelled or complacent in dropping employer-provided coverage. Period.

If you want to argue not true, then my guess is you’ve either never owned a business where you were responsible for meeting payroll or, you’ve never held a position high enough in any business where that decision fell at your level.

To help make this point a little more clear, one has to think of what’s transpiring from the position of both a small business owners perspective, as well as the larger corporate entity with a boardroom level decision-making structure.

They may make their decisions based on differing criteria yet the outcome will be the same regardless of criteria or process. (I can make this assessment because I’ve been at the helm of both the small and larger corporate entity with sales nearing $100 million annually)

When an owner is faced with the prospect of an expense – any expense – that not only can rise by double-digit percentages but rather double, triple, or more at any time. There’s only one thing that can be done to help ensure survival of that business. Find a way to remove it – immediately.

Some will say this won’t happen. I’ll contend the ones that say that haven’t an understanding of what it takes to truly run, and be in charge of a business.

When your accountant tells you your profit margin can’t absorb a 10% raise in any given expense let alone an exponential one, followed by your attorney advising you that; he can’t give you any advise because the law is changing day to day, and at will, so your only knowable protection against fines or suit is to discontinue the practice and possibly give a stipend letting the employees shop for their own. That’s exactly what will be done by the vast majority.

The once held premise that employees will leave no longer can or will be gauged as once before. Why? Because the companies they would have applied to will be doing, or contemplating the same.

Add onto this the previously under reported “49” rule also becomes forefront in any business decisions. (Under 50 employees the mandate to provide insurance is negated.)
Along with the same for 35 hour workers. Again, the under reporting of this phenom will be brought front and center this year. It was treated or regarded as some inconsequential news story during the past two years. Today – it’s law. Businesses regard anything and everything with a whole lot more diligence, and act accordingly, once anything is now deemed law. The effect this has on the economy is entirely unknown.

If a persons premium can rise from as little as $10.00 per month to as much as monthly premiums doubling or tripling where one is talking $100’s of dollars. Once again if you use simple math based on the number of possible people effected you again talking about $100’s of Billions of dollars annually coming right out of the economy – this year alone.

Some will disregard the significance of such increase. But lest I remind you – there are many, very hard working, financially prudent families where an extra $20.00 throws their household budget into chaos. For many it doesn’t take much to put them over the edge or into a crisis. Every dollar is accounted for and needed. Keep that in mind.

What does all this do to the prices or pricing of anything else in the economy? Does Walmart® sales go down? Does 401K contributions go down? Or, worse – redeemed? Do car sales continue higher if a health insurance payment rises this year at the equivalent of a car payment? Will 2013’s gauges even work in the new 2014 model? Hard to tell, we’re going to have to wait and see.

© 2014 Mark St. Cyr