A Curveball On The Hiring Debate

The New York Fed (Empire) Index came in either dismal or disastrous depending on which sector you looked at. Away from the general data, we found the section on hiring plans to be quite eye-opening. Look at this: In a series of supplementary questions, respondents were queried about difficulties in finding workers proficient in certain types of skills; they were also asked to estimate training costs to bring new hires up to speed. Manufacturers’ responses to the August survey were not substantially different from those recorded in March 2007, when these questions were last asked. The workers seen as most difficult to find were those with advanced computer skills, followed by those who were punctual and reliable. Training costs to bring a typical new hire up to speed were estimated at 6½ percent of annual compensation, on average. Firms also reported that the wage or salary of a typical worker was expected to rise by about 2½ percent, on average, over the next twelve months. Firms report that they are having difficulty finding people “who were punctual and reliable”. In the worst job market since the Great Depression, people don’t show up for work on time? That really is depressing. Has the nation become that spoiled?

Art Cashin, Cashin’s Comments 8.16.11

Historical Analog Update

Despite the markets (in our opinion) being oversold enough to launch a rally soon, we really have to break from past cycles- because the next 12 months or so do not look too promising based on the historical data:

Market Cycles- We lined up the panic bottoms from the last three secular bear market cycles- these being achieved after a multi-year bear market in stocks had already been in place (the bottom is formed at the midpoint of the cycle). From there, the markets will launch a post-crisis recovery period with strong gains in the first 2+ years. After that, prices trail off and undergo significant retracements based on the prior cyclical bull (either 38.2% or 50%)- and due to macro overhang (not necessarily earnings / valuations).
That’s really the window we appear to be in today- such that despite any oversold / trading rallies ahead, we expect the S&P to move lower over the next 16 months unless something is done to break this cycle (our sense is that it would have to be more significant than a QEIII this time around…).
(Research courtesy of Dan Wantrobski, Director, Technical Research, Janney Montgomery Scott, LLC)

Have We Seen This Movie Before?

Earlier this year The Financial Review presented a paper by Professors Terry Zivney and Richard Marcus entitled “The Day The United States Defaulted on Treasury Bills”.  It happened under Jimmy Carter.

Here’s how my old friend, Don Marron, summed up the key points of the paper back in May: Investors in T-bills maturing April 26, 1979 were told that the U.S. Treasury could not make its payments on maturing securities to individual investors. The Treasury was also late in redeeming T-bills which become due on May 3 and May 10, 1979. The Treasury blamed this delay on an unprecedented volume of participation by small investors, on failure of Congress to act in a timely fashion on the debt ceiling legislation in April, and on an unanticipated failure of word processing equipment used to prepare check schedules.

The United States thus defaulted because Treasury’s back office was on the fritz.

This default was, of course, temporary. Treasury did pay these T-bills after a short delay.  But it balked at paying additional interest to cover the period of delay. According to Zivney and Marcus, it required both legal arm twisting and new legislation before Treasury made all investors whole for that additional interest.

The paper went on to note that even that very small, very brief default forced Treasury rates higher by 60 basis points – not on the $120 million defaulted on, but on the entire $800 billion treasury debt then outstanding. That premium stayed on treasuries long after the crisis ended. Those 60 basis points would be very expensive on today’s trillions of dollars. Pass the popcorn as the show in Washington continues.

Cashin’s Comments 7.26.11, Art Cashin UBS Financial Service

Debt Ceiling: A Picture is Worth a Trillion Words

Though the U.S. defaulted only once in modern history (1979 due to a technical error) and twice in ‘ancient’ history (1933 on its gold commitments to holders and 1790 as a newly formed nation), the amount of times the debt ceiling was actually raised is staggering, in our opinion. In fact so much so, it seems to do little to impact the ‘long cycle’ of the markets (which we feel is driven by valuations, demographics, and private sector / individual credit cycle trends).


Our data indicates the ceiling was raised basically 70 times in 70 years:


The debt ceiling was established in 1909 at $43 billion. The first time it was raised was announced in 1939, taking effect in spring of 1940. Over the next five years, the ceiling was raised from $43 billion to $300 billion by 1945.


The longest stretch where the debt ceiling went untouched lasted from the mid-1940s up until the mid-1950s- from there, it pretty much became a regular event.


Thus- although a default would be the ‘outlier’ event in which several unknowns still exist, history shows 1. the likelihood for the ceiling to be raised; and 2. there is likely to be minimal impact to our current deflationary bear cycle once it is.


(Research courtesy of Dan Wantrobski, Director, Technical Research, Janney Montgomery Scott, LLC)

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