Saturday, October 6, 2007

One Plus One Equals 89,000, New Government Math.

Yesterday the government announced that the jobs number that they reported in September of a decline of 4,000 jobs was off just a tad. When the government put a fresh battery in their calculator then pushed the enter button, the new number was plus 89,000. In any other part of our economy should a company not be able to count anything correctly somebody will loose their job, not so in the government.

What was the impact of this lack of ability to count? The Federal Reserve Open Market Committee saw the number and cut interest rates by 50 basis points. The question is would they have made a move at all, or of that magnitude they made, if they had known that the number was off 93,000?

The Fed has indicated that they are “data dependent” so how can the Fed make decisions based on data when the data is as far off as the jobs number was in September? In a period of about 30 days the markets were whipsawed by the data and the actions based on bogus data. We went from the “sky is falling” to “the sky is the limit”.

Investors like you and me make investment decisions based on the actions of the Fed and the perceptions of what is likely to happen to the economy based on what we heard, we are also data dependent. The bond markets were pricing in additional cuts in interest rates based on the August employment data. Now the bond markets are thinking that things will not be as bad as they originally thought, based on the September jobs number.

How do investors who made decisions based on the data and the position of the Fed get back the money they lost because the government got the number wrong? We try and make decisions based on what we believe to be correct information. I wonder if the federal government should start adding disclaimers to their reports much like Wall Street has been forced to add to their data reporting?

Earlier this week I heard the discussion between Larry Kudlow of CNBC and a professor from the University of Pennsylvania, Wharton School. They were discussing the phone calls taken by the Chairman of the Fed from outsiders in the private sector. The question that Larry Kudlow was asking was, “did the phone calls the chairman received from the private sector banks, hedge funds and mortgage bankers change his mind and caused the Fed to cut interest rates by 50 basis points?”

Did the people who made the phone calls have the general good in mind when they called the chairman or were they more interested in protecting their own companies? You might ask the same question to Mr. Rubin from Citibank would he have made the call if he knew that the jobs number would be revised to plus 89,000 new jobs? I would like to think he would still make the call but perhaps he would not have been as concerned about the markets and the economy and his bank.

The markets, based on the revised jobs number set a new high and everything is fine and its up and up from here. The Fed will probably not have to cut interest rates again at the Halloween meeting or in the future they are truly one and done. I don’t think so!

The jobs number hasn’t solved the housing problem and as I have said before we are not half way through the housing problem. It is true that the yield curve has returned to traditional steep position but interest rates above the short-term sector are rising. Enjoy the euphoria while it lasts at least till the next revised data point.

Dan Perkins

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