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Take Me Out – Going To The Ballgame

The day before Employment is often a quiet day, and today it also happened to be the Yankees’ home opener.[1] Had it not been quarter-end then the markets might as well have been shut. At 3:58ET, only 650mm shares had traded on the NYSE (the final tally, however, was 1.01bln due to rebalancing flows).

Scheduled economic releases were not earth-shattering: Initial Claims was a smidge weaker than expected at 388k (expected: 380k) and the Chicago Purchasing Managers’ Report was slightly stronger-than-expected at 70.6 (expected: 69.9).

Now, all was not quiet everywhere. The Libyans, who are notoriously uninterested in Yankee baseball (rumor has it they’re Phillies fans), insisted on continuing to fight; the ebb and flow of Gaddafi’s forces were on the “flow” side today and there was considerable fighting around one of the oil ports and another oil hub. This pushed oil higher, and today’s $106.68 close for front Crude on the NYMEX was the highest close to date.

The Irish, who probably see baseball as being a sissy sport (have you seen the sport of hurling played?), also showed little respect for Opening Day as banking regulators ordered four domestic banks to raise €24bln in capital after a stress test showed that they were (shocker!) undercapitalized. This may prove difficult. Consider Allied Irish, the biggest of the four. The Irish central bank says they need €13.3bln; meanwhile, its market cap is, um, €0.3bln.

JP Morgan Chase President Jamie Dimon (who is probably more of the horsey set, but these comments were made late Wednesday so we’ll give him a pass) remarked on the future of banking in the U.S., noting that clients will prefer to deal with banks in countries that have lower costs and therefore can offer better prices. “We’re starting to add up a whole bunch of things which are negative for America…if we have higher capital limits than the rest of the world, now you’re just starting to put nails in the coffin.” These comments may be surprising to those of us who have already buried the banks because lower volumes, tighter spreads on vanilla product that is being pushed to exchanges, and lower leverage should combine to lower the return on equity of a banking institution quite considerably. However, I do agree with his remark that the derivatives laws in Dodd-Frank represent some of the most “irrational” legislation he has ever seen. Dimon is not exactly trying to win friends on Capitol Hill right now (which I guess is one sign that he figures the worst is past); he also said that banks would not even consider writing down mortgages for homeowners who are able to make payments. Well, I also agree with him there – borrowing is a moral obligation as well as a financial obligation, fraud aside – but wonder at his reasons for making the comment.

Turning to the story which is increasingly on people’s minds (and high time, I would say; have I mentioned recently that my company consults on inflation-related topics and investments?), a friend sent me a link to a USA Today story entitled “Wal-Mart CEO Bill Simon expects inflation.” It turns out that he sees “serious” inflation ahead. “We’re seeing cost increases starting to come through at a pretty rapid rate.” When someone who is sitting in the crow’s nest hollers “iceberg, dead ahead!” it pays to listen and to take evasive action, even if you can’t yet see the iceberg.

But it’s baseball season, there’s new grass on the field, and hope is everywhere…which is, I suppose, why stocks just registered another 5% quarter.

Many hopes have been dashed, though, on Employment Friday, and it happens that Q2 kicks off tomorrow with just such a day. The consensus estimate for Payrolls is another +190k figure (last month was +192), with the Unemployment Rate holding steady at 8.9%. Given the way the ‘Rate has been plunging, remaining unchanged would almost seem to be bad news, but as I’ve noted before (and which hasn’t gone unnoticed elsewhere) the declining labor force participation rate has been largely responsible for that plunge. I want to see the ‘Rate decline, but almost more important at this point is that I want to see the participation rate rise.

Surveys of labor market conditions over the last month continue to show that if the employment situation is improving, the man on the street isn’t yet feeling it. The “Jobs Hard to Get” index in the Consumer Confidence report is still up around 45. And the JOLTS survey of job openings declined slightly in December and January (see Chart). That survey is volatile, and is released with a big delay so it isn’t very helpful to us in forecasting this release, but do notice on the chart that the number of job openings still hasn’t risen to equal the lowest level reached in the last recession. So it wouldn’t shock me to see the Unemployment Rate rise.

Job openings still aren't as widespread as they were in the depths of the last recession.

Also scheduled for tomorrow is the ISM Manufacturing survey (Consensus: 61.0 from 61.4), which is unlikely to be a market-mover, and monthly car sales for March.

Bonds (the 10y note at 3.47%) remain in a holding pattern, and inflation swaps are still waiting for an excuse to break to new highs or to retreat from their current levels (about 2.46% on the 5y and 2.74% on the 10y). Both are unlikely to find that excuse tomorrow. For what it’s worth, I still expect the next major move in rates to be higher (in rate), rather than lower, even if I am skeptical that the recovery is robust enough to warrant equity prices where they are.

[1] For the record, I follow the Mets.

Categories: Employment
  1. Lew
    March 31, 2011 at 11:08 pm

    I read your articles often and find them extremely educational, thanks. I have one question about this one, you said “borrowing is a moral obligation as well as a financial obligation”……would you also agree that borrowing can be a contractual obligation i.e. I don’t pay my mortgage the house belongs to you. I understand the moral hazard of strategic default but somewhere in the last two years I have started to wonder what the mortgage writers “moral” responsibility is, after all they employ the risk managers.

    • April 1, 2011 at 6:35 am

      The mortgage writers do not have any moral obligation to the people they are lending to. This is I think the biggest flaw in the reasoning of certain elements in Congress who have written all sorts of obligations for lenders into the laws, to make certain sorts of loans under certain conditions. The lenders have a moral obligation but it is to their own shareholders, to make profitable loans and as many of them as they can. Bank employees have failed over the last decade, but the failing was to their own shareholders, by extending too much credit on too easy terms to people who should not have had credit (or as much credit as they did). Now, they did this partly because the Congress ordered them to make some dumb loans, and also because they were securitizing mortgages and did not think they were putting their shareholders at risk, but also at times because of personal greed, trying to increase a personal bonus with no regard for their own shareholders. THAT’S the moral failing of bank employees during the bubble and bust.

      But as for jingle mail and strategic defaults. In my opinion, the borrower who is putting his house up for collateral is first putting up his good name, and it is to preserve his good name that he should make the payments if he can. If the collateral isn’t worth as much any more, that’s too bad, but in my opinion it is immoral to stick it to the lender on that basis. “But the bank shouldn’t have loaned me that much money!” Yes, and the borrower shouldn’t have accepted the loan if he didn’t have the means to repay it. It isn’t like you’re required to take as much money as the bank offers to lend! Those people who don’t understand loans have a moral obligation to seek advice about how and why to borrow money, from good and reputable counsel. Is that how business is usually done these days? I don’t think so, but that doesn’t change my answer about what is the moral way to do business.

      Pujo Commission, 1912 (J.P. Morgan testifying):

      Mr. UNTERMYER. Commercial credits are based upon the possession of moneyor property?
      Mr. MORGAN. What?
      Mr. UNTERMYER. Commercial credits?
      Mr. MORGAN. Money or property or character.
      Mr. UNTERMYER. Is not commercial credit based primarily upon money or property?
      Mr. MORGAN. No, sir; the first thing is character.
      Mr. UNTERMYER. Before money or property?
      Mr. MORGAN. Before money or anything else. Money cannot buy it.
      Mr. UNTERMYER. So that a man with character, without anything at all behind it, can get all the credit he wants, and a man with the property can not get it?
      Mr. MORGAN. That is very often the case.
      Mr. UNTERMYER. But that is the rule of business?
      Mr. MORGAN. That is the rule of business, sir.
      Mr. UNTERMYER. If that is the rule of business, Mr. Morgan, why do the banks demand, the first thing they ask, a statement of what the man has got, before they extend him credit?
      Mr. MORGAN. That is what they go into; but the first thing they say is, “We want to see your record.”
      Mr. UNTERMYER. Yes; and if his record is a blank, the next thing is how much has he got?
      Mr. MORGAN. People do not care, then.
      Mr. UNTERMYER. For instance, if he has got Government bond or railroad bonds, and goes into get credit, he gets it, and on the security of those bonds, does he not?
      Mr. MORGAN. Yes.
      Mr. UNTERMYER. He does not get it on his face or his character, does he?
      Mr. MORGAN. Yes; he gets it on his character.
      Mr. UNTERMYER. I see; then he might as well take the bonds home, had he not?
      Mr. MORGAN. Because a man I do not trust could not get money from me on all the bonds in Christendom.

      • Lew
        April 3, 2011 at 6:44 pm

        I appreciate the response. If I have this right, for the bank the transaction is a business one and for the home owner the transaction is a moral/business one. Let us say that the home owners shareholders are are a family and its financial future, at some point the homeowner may take the legal but as you feel “immoral” step to look out for their shareholders. I guess for me the moral judgement is just not as easy as it once was. I think the bank bailout, TBTF and Fed policy has led me to believe that all the moral and financial consequences should not lay at the feet of the home owner. Regardless of our beliefs I think that Mr. Dimon is going to own a lot more homes of people who are able to pay before this is over.

    • April 3, 2011 at 7:37 pm

      Well, I wouldn’t go so far as to call homeowners IMMORAL if they’re in a pinch and have to choose between their family’s well-being and their obligations to the lender. But the question is about strategic defaults, and defaulting when you CAN make the payments. That’s different. You can think about it another way, too; if the lender needs to account for strategic defaults, if it is no longer enough to analyze credit profiles and ability to pay but now you have to set aside some amount for people who just decide not to pay, then interest rates will go up for everyone (or credit will become less available at any given rate). So consider the dynamic part of the moral equation – your default is my added cost.

      Regardless, the corporation isn’t a being. The owners of the corporations are other people, shareholders and partners. So it doesn’t make much sense in my opinion to even talk about the “moral obligation” of the firm. The firm has no morals and no scruples, because it isn’t a person.

      But maybe I’m just relying on sophistical arguments to support my own view.

  2. Lee
    April 1, 2011 at 7:48 am

    Not to excuse in any way borrower stupidity and greed, but I think the big driver of the housing/financial crisis was the Countrywides who certainly were planning on Too Big To Fail. And let’s let the Irish face major league pitching without batting helmets and then they can get back to us.

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