On this day in 1937 President Franklin Roosevelt introduced his notorious plan to pack the U.S. Supreme Court. According to FDR, the greying Court had become out of touch with “changed conditions” and “the needs of another generation.” His plan was to completely reorganize the federal judiciary by granting himself (and all future presidents) the power to appoint one new federal judge to match every sitting judge that had served at least 10 years and had not retired or resigned within six months of turning 70. Specifically, FDR would get to add as many as 44 new federal judges and, most important to him, up to six new Supreme Court justices.
In my recent book Overruled: The Long War for Control of the U.S. Supreme Court, I discussed how FDR’s scheme came to meet its well-deserved end. Notably, Roosevelt’s biggest opponents in the Court fight turned out to be progressive leaders such as Justice Louis Brandeis and Democratic Sen. Burton K. Wheeler of Montana. Here’s an except from Overruled on the court-packing plan:
It was no secret to anybody what Roosevelt’s true motives were. He wanted to appoint a fresh slate of liberal justices who were ready, willing, and able to practice judicial deference and uphold future New Deal legislation.
Unfortunately for the president, the plan backfired spectacularly. Brandeis, offended at both the personal insult and the frank attack on the independence of the judiciary, maneuvered behind the scenes to bring about the bill’s defeat. Most significantly, he put the bill’s chief congressional opponent, Democratic Senator Burton K. Wheeler of Montana, in touch with Chief Justice Charles Evans Hughes, who had prepared a memo, signed by himself, Brandeis, and Justice Willis Van Devanter, testifying that the Supreme Court was completely on top of its workload and was in no need of any young blood to pick up the non-existent slack. During testimony on the court-packing proposal before the Senate Judiciary Committee, Senator Wheeler unveiled that memo to great effect. Thwarted by such legislative maneuverings, not to mention by the broad public opposition to his apparent tinkering with a co-equal branch of government, Roosevelt failed to garner the necessary votes and the court-packing plan went down to defeat in the Senate.
It’s often forgotten today that a number of influential liberals of the 1930s came out against FDR’s executive overreach. In addition to Brandeis and Wheeler, there was also Al Smith, the legendary New York Progressive who accused the New Dealers of betraying the Democratic Party in favor of socialistic government. “It is all right with me if they want to disguise themselves as Norman Thomas or Karl Marx, or Lenin, or any of the rest of that bunch,” Smith famously declared of FDR and his brain trusters, “but what I won’t stand for is to let them march under the banner of Jefferson, Jackson, or Cleveland.”
Smith’s main objection to the New Deal was not its progressivism; Smith objected to the massive centralization of power in Washington. A committed foe of alcohol prohibition—a “wet” in the political parlance of the day—Smith had been outraged by the damage done under the 18th Amendment. Prohibition, Smith wrote in 1933, “gave functions to the Federal government which that government could not possibly discharge, and the evils which came from the attempts at enforcement were infinitely worse than those which honest reformers attempted to abolish.” As biographer Christopher Finan later observed, Smith “began to believe that the danger of giving new power to the federal government outweighed any good it might do.”
For more on the New Deal and its discontents, check out the following articles from Reason’s archives:
Reason TV was on the campus of the University of New Hampshire for last night’s Democratic presidential debate. Before and during the televised dust-up between Bernie Sanders and Hillary Clinton, we caught up with supporters of both would-be nominees, who held dueling rallies outside the debate hall.
About 2.50 minutes.
Watch above, or for downloadable versions, full text, and associated links, click the link below. Subscribe to ReasonTV’s YouTube Channel to receive notification when new material goes live.
Donald Trump won more votes in the Iowa caucuses than any Republican candidate in history.
Impressive, except Ted Cruz set the new all-time record.
And Marco Rubio exceeded all expectations by taking 23 percent.
Cruz won Tea Party types, Evangelicals, and the hard right.
Trump won the populists and nationalists who want the borders secure, no amnesty, and no more trade deals that enable rival powers like China to disembowel American industries.
And Rubio? He is what columnist Mark Shields called Jimmy Carter, 35 years ago, “the remainderman of national politics. He gets what’s left over after his opponents have taken theirs by being the least unacceptable alternative to the greatest number of voters.”
Marco is the fallback position of a reeling establishment that is appalled by Trump, loathes Cruz, and believes Rubio — charismatic, young, personable — can beat Hillary Clinton.
But there is a problem here for the establishment.
While Rubio has his catechism down cold — “I’ll tear up that Iran deal my first day in office!” — his victory would mean a rejection of the populist revolt that arose with Trump’s entry and has grown to be embraced by a majority of Republicans.
Cruz, Trump, Carson — the outsiders — won over 60 percent of all caucus votes. Their anti-Washington messages, Trump and Cruz’s especially, grew the GOP turnout to its largest in history, 186,000, half again as many as participated in the record turnout of 2012.
Most significant, 15,000 more Iowans voted in GOP caucuses than the Democratic caucuses, where participation plummeted 30 percent from 2008.
What does this portend?
While Iowa has gone Democratic in 6 of the last 7 presidential elections, it is now winnable by Republicans — on two conditions.
The party must be united. And it cannot lose the fire and energy that produced this turnout and brought out those astonishing crowds of tens of thousands.
The remainderman, however, cannot reproduce that energy or those crowds. For Rubio is not a barn burner; he is a malleable man of maneuver.
Arriving in Washington to the cheers of populists reveling in his rout of Charlie Crist, Rubio went native and signed on to the Schumer-McCain amnesty.
He voted for “fast track,” the GOP’s pre-emptive surrender of Congress’s constitutional power to amend trade treaties. He hailed the Trans-Pacific Partnership trade treaty President Obama brought home.
Now he is moving crabwise away from TPP. Shiftiness, however, does not bother the establishment, it reassures the establishment.
Rubio is “The Hustler,” the “Fast Eddie” Felson of 2016. And the Beltway is all in behind him.
He is now the candidate of the Washington crowd that a majority of Republicans voted to reject in Iowa, the darling of the donor class, and the last hope of a Beltway punditocracy that recoils whenever the pitchforks appear.
Which brings us to the antithesis of Rubio — Bernie Sanders.
Given where he started a year ago, a sparring partner for the heavyweight Clinton, and where he ended, a split decision and a coin toss, the Brooklyn-born Socialist was the big winner of Iowa.
In the Democratic race, it is Sanders who has been getting the Trump-sized crowds, while Hillary and Bill Clinton have been playing to what look like audiences at art films in the 1950s.
Sanders will likely have the best night of his campaign Tuesday — if Hillary Clinton’s surge does not overtake him — when he wins New Hampshire.
After that, however, absent celestial intervention, such as a federal prosecutor being inspired to indict Clinton, he begins a long series of painful defeats until his shining moment at the convention.
But just as a stifling of the Trump-Cruz-Carson rebellion, with another establishment favorite like Rubio, would bank all the fires of enthusiasm in the GOP, Clinton’s rout of Sanders would cause millions of progressives and young people who rallied to Bernie to give up on 2016.
And if both the Sanders’ revolution that captured half his party in Iowa, and the Trump-Cruz revolt that captured half of their party are squelched, and we get an establishment Republican vs. an establishment Democrat in the fall, America will be sundered.
For there is not one America today, nor two. Politically, there are at least four.
Were this Britain or France, the GOP would have long ago split between its open-borders, globalist, war party wing, and its populist, patriotic, social conservative wing.
The latter would be demanding a timeout on immigration, secure borders, no amnesty, no more needless wars, and a trade policy dictated by what was best for America, not Davos or Dubai.
Democrats would break apart along the lines of the Clinton-Sanders divide, with the neo-socialists becoming a raucous and robust anti-big bank, anti-Wall Street, soak-the-rich and share-the-wealth party.
These splits may be postponed again in 2016, but these rebellions are going to reappear until they succeed in overthrowing our failed establishments.
For the causes that produced such revolutions— Third World invasions, income inequality, economic torpor, culture wars, the real and relative decline of the West —have become permanent conditions.
Yesterday, on the way to documenting the malaise China’s hard landing has inflicted on Minnesota’s mining country, we discussed the dramatic impact falling crude prices have had on the American and Canadian oil patches.
Take Texas, for instance, where a year of crude carnage has wreaked havoc upon what, until last year anyway, was the engine driving the “robust” US labor market. As we showed in November, layoffs in Lone Star land far outrun job losses in any other state. In Houston (which was already staring down a worsening pension crisis), vacant office space is “piling up.” As WSJ wrote last week, “the amount of sublease space on the market in the Houston area hit 7.6 million square feet, or the size of more than two Empire State Buildings.”
“The unemployment rate in Texas rose sharply to 9.2% in 1986, an all-time high for the state,” Goldman wrote recently, recalling a previous period of low oil prices in a note entitled “How Bad Can Texas Get?”
“Real house prices fell 30% peak to trough, and the number of bankruptcy filings (including both business and non-business filings) more than doubled from 1984 to 1986,” the bank added.
North of the border, things are even worse. As regular readers are no doubt aware, Alberta is a veritable nightmare as suicide rates rise, the number of jobless multiplies, food bank usage soars, and property crime in Calgary spikes.
“Lower for longer” has been a disaster for many state and local governments in the US, as revenue projections devised before oil’s historic plunge prove increasingly optimistic.
Take Louisiana for example, where Lt. Gov. Jay Dardenne recently announced that the state is facing a $750 million deficit. “Many people are probably wondering how this is possible, given legislators met just six weeks ago to approve a plan to close a nearly $500 million gap that was projected by state analysts,” The Times-Picayune wrote in late December. “Dardenne said he found the number ‘shocking,’ but said it was the state’s best guess at how short on cash the state will be by the end of the fiscal year given several projections that showed things are worse than previously thought.”
Louisiana officials had assumed oil prices around $62 a barrel when calculating projected tax revenue. Needless to say, their projections were slightly off the mark.
Meanwhile, in Alaska, Governor Bill Walker is looking at a $3.5 billion deficit, prompting the state to consider implementing an income tax for the first time in three decades. The new tax would generate about $200 million, based on estimates provided by Walker’s office. “Another of Walker’s proposals, unveiled in November, would divert some of the money from the state’s oil wealth investment fund, or Permanent Fund, which generates the annual payout based on earnings, toward financing state government,” Reuters reported in December. “This year, about 645,000 Alaskans received a Permanent Fund Dividend check for $2,072. A new calculation formula would cut that to about $1,000.”
“If we do nothing, we will empty our savings in the constitutional budget reserve, then we will have to tap into the earnings reserve – which means that in five years, Alaskans would no longer get dividends,” Office of Management and Budget Director Pat Pitney said.
And then there’s North Dakota which, as Bloomberg recalls, “has been the economic envy of every state in America for most of the past decade.”
“It posted the lowest jobless rate, the highest increase in personal income, and the fastest-growing population—all thanks to an historic oil boom that vaulted it past Alaska to become the country’s second-largest producer after Texas,” Bloomberg continues. “Now, amid the worst bust in a generation, North Dakota’s economy is shrinking, employment is falling fast, and the state is imposing the deepest spending cuts in its history to help plug a $1 billion budget deficit.” Here’s more:
With crude prices at 13-year lows, Republican Governor Jack Dalrymple on Feb. 1 ordered 73 state agencies to make 4 percent across-the-board cuts. Patching the deficit, which comes after years of surpluses, will require officials to take $500 million out of a rainy-day fund, leaving it with only $75 million for emergencies. Dalrymple is only the third governor in the state’s 127-year history to dip into the fund.
When state officials were drafting their budget a year ago, they assumed oil prices would range from $47 to $53 a barrel, which they thought was sufficiently pessimistic to cover them against further drops. They were not pessimistic enough. “We never would have guessed it would get down to $28 a barrel,” says Pam Sharp, the state’s budget director.
Taxes on oil production account for only about 5 percent of total state revenue, says David Flynn, chair of the economics and finance department at the University of North Dakota. The real money comes from sales tax revenue, the bulk of which is derived from the sale of equipment and services related to fracking, says Sharp. With prices down, roughly 1,000 wells that have been drilled but not fracked are sitting idle, awaiting the market’s recovery. As a result, the state’s sales tax revenue fell by a fourth during the third quarter of 2015 from the same period in 2014. “Sales tax revenue alone is down $700 million from the original forecast,” says Sharp.
According to data from the Bureau of Economic Analysis, North Dakota’s economy shrank 10.4 percent in the first quarter of 2015 and 1.2 percent during the second quarter.
And there’s no respite in the cards.
Storage is overflowing, OPEC is splintered as Saudi Arabia remains generally belligerent on the idea of production cuts and Iran is reluctant to start talking about curtailing supply just as the country is attempting to ramp production back up after years spent languishing under international sanctions.
On the bright side for North Dakota, whose economy has “quite simply been devastated by the dramatic drop in oil prices” (to quote IHS economist Karl Kuykendall), at least no one can take away their new and improved roads.
“So much oil money went to road improvements,” one resident told Bloomberg. “That’s definitely a quality-of-life improvement that will last beyond the boom.”
And with cheap gas, North Dakotans can drive on them all day long.
The Nuclear Energy Revolution was at hand, proclaimed Alvin Weinberg and Gale Young of the Oak Ridge National Laboratory way back in 1966. And why not? The cost of building nuclear power plants was, after all, declining sharply. “Nuclear reactors now appear to be the cheapest of all sources of energy,” they declared. “We believe, and this belief is shared by many others working in nuclear energy, that we are only at the beginning, and that nuclear energy will become cheap enough to influence drastically the many industrial processes that use energy.” But instead of falling, construction costs for nuclear power plants skyrocketed. A new study in Energy Policy argues that excessive regulatory precaution, not factors intrinsic to nuclear technology, was responsible for wildly escalating the costs in the U.S. Speeding up the approval of new advanced nuclear power plant designs would now go a long way toward finding out which energy sources are ultimately cheaper and safer for people and the planet.
Two supporters of Vermont Sen. Bernie Sanders have been blocked from Tinder after stumping for the Democratic presidential candidate through the dating app. The women—Robyn Gerdrich, 23, and 22-year-old Haley Lent—confirmed to Reuters that Tinder had locked their accounts after too many reports that they had been messaging men with questions like “Do you feel the bern? Please text WORK to 82623 for me. Thanks.”
Sending that text would sign someone up to receive text updates about the Sanders campaign and volunteering opportunities.
Neither Lent nor Gerdrich are employed by the Sanders campaign.
Gerdich toldTech Insider: “I started it about two weeks ago when we got that snow storm in New Jersey. There’s so many lazy millennials that would never read about Bernie unless someone sent it right to them [on Tinder].”
Lent told Reuters that she had purchased a premium Tinder membership, which allows users to choose a location other than the one they’re physically in, so she could get in touch with men in New Hampshire.
“I would ask them if they were going to vote in their upcoming primaries,” she said. “If they said no or were on the fence, I would try to talk to them and persuade them to vote.”
On Tumblr, “Tinder Campaigning” shares other efforts from Sanders fans to campaign for their candidate on the app. And even more right-swiping for Sanders can be found via the Facebook group Bernie Sanders’ Dank Tinder Convos. (Some fun examples below.) The majority of the Sanders outreach shared in these groups comes from women. Could the Bernie Babes of Tinder finally put an end to the media-manufactured “Bernie Bros” narrative?
The best way it was put came from a German newspaper, the Leipziger Volkszeitung, on Tuesday, in an article that describes 5 separate incidents in two days in which buildings occupied by asylum seekers are targeted with rocks and home-made explosives. The headline quotes Leipzig’s head of police as saying: A pogrom mood prevails (Es herrscht Pogromstimmung). The full line further down in the article says: “Across the whole country, a pogrom mood prevails that is gathering an explosive intensity.”
It is early February in Europe. 62,000 more refugees reached Greece in January. Over 360 drowned trying, or 12 every single day. At least a quarter of them were children. About 90% of these people came from Syria, Iraq and Afghanistan, and are therefore considered ‘real’ refugees, no matter how often you read the word ‘migrants’ instead. It’s funny that someone wrote on our Facebook page that the word ‘refugee’ is often abused, because so many are really ‘migrants’.
Funny, because it’s the other way around: the word migrant is the one that is used wrongly, and often for political purposes. Dutch uber assclown Frans Timmermans, right hand man to EC President Juncker, claimed in Dutch media recently that 60% of ‘arrivals’ were people from countries “where you can assume they have no reason to apply for refugee status”.
The UNHCR, and even Frontex, say the correct number is 10% are ‘migrants’. 39% Syrian, 24-25% each Iraqi and Afghani. And just like not all migrants are refugees, the group ‘migrants’ does not have a subset called ‘refugees’. Confusing the terms is derogatory. Timmermans is just plain lying.
Staying in that vein, EU border cops Frontex stated the other day that there were “more than 880,000 illegal border crossings detected” in Greece in 2015. That at once raises the question whether refugees are illegals. An interesting question, because according to the Geneva convention they are not: they have the right to seek asylum, and executing one’s rights cannot per definition be illegal. Frontex, like Timmermans, uses insinuations to create an atmosphere, a mood.
And before you know it that turns into a pogrom mood. But Europe’s politicians, overwhelmed as they are with the combination of the refugee influx and their own incompetence, have apparently decided that it may play into their hands to steer their people’s moods against refugees. At that point, the entire issue becomes a cattle trade, something we’ll see more of.
Back to Timmermans and his lie about 60% being ‘migrants’: that’s more than a little mistake. That’s false insinuation. Timmermans became very popular in Holland because of his handling of the MH-17 aftermath (he was -the Dutch equivalent of- secretary of state at the time). Which is also funny, because what he did was accuse Russia of shooting down the plane mere minutes after is was shot, and way before any evidence could possibly have been gathered.
And he never stopped. He held a tearjerker of a speech at the UN and kept on hammering on the guilt of the Russians, carried on the waves of the ‘objective’ western media.
Of course, the US did the same, and never substantiated a single word either. It has taken the Dutch a year and a half to question their government’s account of the event, but the anti-Russia sentiment is now firmly in place. Since most victims were Dutch, Holland leads the investigation into the disaster. It has not brought one shed of proof to light, only innuendo.
Lately, Dutch people and media have started asking (it’s a miracle!) how it’s possible that all of Ukraine’s groundradar systems happened to be switched off when the plane came down, and why it has taken so long to find this out. Switching off groundradar must be reported internationally -to Eurocontrol, in this case- for obvious (safety) reasons. This was not done. When will they begin to wonder if maybe it was Ukraine all along? That would mean letting go of the Putin as bogeyman meme, so it may take a while.
Meanwhile the Dutch government -minus Timmermans, whose Putin bashing gave him almost as good a Brussels job as Donald Tusk got for his as PM of Poland- is chairing the EU until July 1. With youthful fervor, they started out by suggesting a sort of ferry service that would take refugees straight back from Greece to Turkey.
At the same time, the Times in Britain wrote about an EU plan to make it illegal to help refugees at sea. See, now they’re flaunting Geneva, and they’re flaunting international maritime law too. The latter says it’s illegal to NOT help people in distress at sea, and the EU is a signatory -or at least its member states. The former says specifically that ‘push-back’ of refugees is not allowed. The European Commission itself warned Greece about this in 2013.
Back to the drawing board. Or perhaps not quite: at the same time the government in The Hague came with their nonsensical ferry plan, the Dutch parliament -a few doors down- voted to let Holland start bombing Syria. You know, to support one’s partners. So you bomb the crap out of them, and then send them back when they seek to flee your bombs. Holland’s been bombing Iraq for a long time.
And that kind of tomfoolery is why there are international agreements in place, meticulously articulated after earlier disasters and vowing to never make the same mistakes again. But you don’t have to know law to be a politician, or be smart, or have a conscience. The job’s basically open to anyone who can successfully sell a second-hand car.
Being an outright sociopath ticks off a few boxes too, but people will say I shouldn’t say that. Dutch PM Mark Rutte looks like such a decent guy, after all. But the shrewd observer’s already seen that he’s merely another body-double dummy sprouted from the same egg as Cameron and Osborne, Harper in Canada, Renzi, you name them, know the type, early 40’s ideal sons in law but with a bit too much ambition.
Works well in times of plenty, but has no idea what to do in case of a headwind. And then goes berserk without knowing what that is.
* * *
The two things that stood out for me when I was making notes were that German police chief talking about a pogrom, and our dear friend Wolfgang Schäuble, German FinMin, who of all people was the only one who made sense about 10 days ago when he said that what Syria would take was a Marshall Plan, and it would cost the world a whole lot more than anyone realized.
For once, he was right. Apparently, the people he was with when he said it, and Rutte was one, didn’t even react to what he said. “Cost? Is that going to cost me votes back home?” It was hilarious to see, today, that Gordon Brown -yeah, they let him out- was talking about a Marshall Plan for Syria -they let him read papers again, too- in connection with a high-level meeting on the issue that takes place in London -oh, wait, that’s how Gordon managed to sneak in-.
World leaders are going to promise away billions of dollars to ‘help’ the Syrian people. The problem here is obvious. These are the same leaders who have been responsible for bombing the region to smithereens. And now take the lead in doling out other people’s money -yours- to ‘help’ the people who survived, and have often fled thousands of miles from home.
That’s who I would like help from if I had lost half my family, seen a bunch of my kids drown, and get my few remaining possessions taken away from me by the ‘authorities’ of a country that tells me I should be really awfully grateful they’ll accomodate me. Grateful? You guys bombed my home to the ground! Grateful for what, exactly?
Oh, but the accomodation is only temporary. Says ‘poor’ Angela Merkel, she of short-lived Mother Teresa fame. When the war is over, they have to return. Right. Return to what? How about this?:
And when do you think the war will be over, Angela? What? It’s all Assad’s fault? Oh, Putin again. Yeah. Pray tell, what’s the combined take of the US, UK, France and Germany arms industries every day after day that this wholly psychopathic use of a formerly beautiful nation for target practice goes on? Yeah, right, you’re fighting that evil ISIS. Well, so is Assad. While some of ‘our’ friends, Saudi Arabia, Turkey, to name a few, are helping them out. And ‘we’ at least sort of gave birth to them.
It’s not that hard, is it? Syria=Libya=Iraq. 2003 is not the beginning, but it very much IS when this utter destruction really took off. 12 and a half years of target practice and rising defense expenditures, and ‘we’ are nowhere near done yet. But we’ll throw the poor dogs some scraps. We’ll promise $10 billion with wide sociopath smiles at the camera and aim for $3 or $4 max. While knowing it’ll cost a $trillion just to rebuild a few cities in Syria. But then we can pretend we have no such money.
So when will the war stop? Not a soul will address that issue in the London conference this weekend (“Supporting Syria – And The Region”, they have less than zero shame). They all profit from that war, while blaming its existence on others. What they will do is shove a few scraps off their rich tables to the subhumans whose drowned children they have never expressed nor felt any sympathy for.
Well, here come the refugees, Europe. 62,000 in January points to well over a million in 2016. And that’s lowballing it. An estimate in late 2015 said 3 million. A Bulgarian Red Cross leader went for 3 million just this spring.
Get ready. For the pogrom.
PS: Oh, and I haven’t even mentioned Erdogan, who makes money off of ISIS oil, and off EU refugee cattle trade money, and off ‘people smugglers’ taking off from Turkey for Greece. A $4 billion industry last year. Think he doesn’t demand his cut? Ideal son in law. Well, next time, then.
PS 2: Who wrote this?: “Nightsticks and Water Cannons, Tear Gas, Padlocks, Molotov Cocktails And Rocks, Behind Every Curtain.”
PS 3: I wrote a year ago that the only way to approach a crisis like this is to put the people first. How many children have been sacrificed on the Brussels altar since then? Grow a pair, Europe.
PS 4: There’ll be a huge amount of violence against refugees in Europe this year, It will get very ugly, and many people will die. And your ‘leaders’ are the ones who have instigated this. Again, grow a pair. Be someone. Someone real.
After weeks of modest declines, the US Oil Rig Count plunged by 31 to 467 this week – the biggest drop since April 2015 led by a 19 drop in Texas. Total rig count crashed 48 to 571. The reaction, though muted, was a jump in crude prices.
*BAKER HUGHES OIL RIG COUNT FALLS 31 THIS WK TO 467
*U.S. TOTAL RIG COUNT DOWN 48 TO 571
A big plunge – tracking lagged crude perfectly…
Led by Texas in absolute terms – but every region is accelerating in the last 6 months…
For now, as Bloomberg reports, production has not budged.
After a year of low oil prices, only 0.1 percent of global production has been curtailed because it’s unprofitable, according to a report from consultants Wood Mackenzie Ltd. that highlights the industry’s resilience.
The analysis, published ahead of an annual oil-industry gathering in London next week, suggests that oil prices will need to drop even more — or stay low for a lot longer — to meaningfully reduce global production.
“Since the drop in oil prices last year there have been relatively few production shut-ins,” according to the report. The company, which tracks production and costs at more than 2,000 oilfields worldwide, estimates that another 3.4 million barrels a day of production are losing money at current prices, of about $35 a barrel. It cautioned against expecting further closures, because “many producers will continue to take the loss in the hope of a rebound in prices.”
While the primary topic of Albert Edwards’ most recent note is the question how long China can sustain its FX intervention before tapping out and letting the hedge funds win with their short Yuan bets once total reserves drop below the critical redline of $2.7 trillion (the answer incidentally is between 5 months and 10 months assuming monthly reserve burn rates of $130BN to $60BN), we will skip that part as we have discussed it extensively in the past, and instead will fast forward to some chart porn by the SocGenarian.
Here is Albert Edwards showing that the S&P had breached key moving averages normally seen at the start of a bear market.
Back in the mid-1990s I spent three memorable years working at Bank America Investment Management, among some of the industry’s finest. Having previously spent three years as an economist at the Bank of England, I was new to markets and I let my economic enthusiasm often get the better of me when making recommendations to fund managers. I remember the head of fixed income explaining to me it was far better not to try and pick market tops or bottoms but to wait and observe the market turn, making the trade late rather than prematurely trying to pick the bottom or top. So the chart below is notable, showing that key 200d and 320d moving averages for the S&P have just been breached to the downside. If one is looking for key technical indicators to ring the bell on the cyclical bull market- maybe it has just rung loud and clear. A renminbi devaluation will only sever an already badly frayed safety rope.
With the BLS’s release of Q4 productivity figures, we get to check the BLS’s estimates just in time for today’s increasingly irrelevant payroll report. That much has become thoroughly apparent especially since the middle of last year as the Establishment Survey and unemployment rate only diverge with the overall breadth of economic indications. With GDP no longer corroborative, the labor reports have been in a world all their own. Far too many economists still rely upon them as their sole window for economic interpretation and these productivity numbers show further why they should not.
You have to understand what productivity means as both an economic concept and the statistic as it is constructed and presented. No economy will grow with low or even zero productivity; it’s plain common sense. Yet, the BLS’s numbers say that productivity growth has been zero or near it for five years. It has puzzled economists only because they take the calculations at face value. The fact that productivity is and remains so confusing already suggests that further investigation on all those accounts within the figure is warranted, and even demanded.
Any way you want to present the productivity estimates, clearly “something” is amiss starting around the beginning of 2011, flowing into and out of the 2012 slowdown. It has persisted at an alarmingly low state for years now, meaning that this is not simple statistical variation that will converge on its own to the mean. I have chosen to focus on the latter two years because that encompasses the “best jobs market in decades”, which serves really to highlight the major discrepancy here. In terms of economic common sense, why would businesses be hiring so robustly and getting so little out of their employees overall?
In the statistical sense, the BLS tells us that productivity since the start of 2011 is just slightly positive; during the “best jobs market in decades” it is even less so – essentially zero.
The statistical measure of productivity is essentially a check between the BLS’s version of the economy in labor against the BEA’s version of the economy in GDP. We start on the right side (below) where overall nominal GDP is reduced by some calculation of price changes and then further sliced into what the BLS uses as “private output.” On the left side, the BEA inputs its related CES figure for total hours worked, which goes hand in hand with the payroll and employment estimates. Productivity is simply the difference or plug in between output and hours.
While not derived as anything more than a remainder between other terms, it does again give us an opportunity to at least sync up the BEA’s version of the economy and the BLS’s; labor market vs. GDP. With GDP less than 1% in Q4 2015 and the Establishment Survey wholly unbothered by anything, you can guess without much trouble that there would be an issue in this kind of reconciliation through statistical productivity. Sure enough, the BLS reported today that productivity was supposedly -3.0%.
Private output being barely positive, the relatively large increase in BLS’s version of hours worked left productivity to be so highly negative. In other words, the BLS-skewed picture of the economy was nothing like the BEA’s account, with highly negative productivity just that kind of signal. One quarter of difference is not all that rare, though the size of the discrepancy is already suggestive, but this divergence has lasted again for years. Using just the averages of the past eight quarters, we can see the problem clearly.
At essentially zero productivity, that would suggest that output is gained only through increasing labor – which is not the way a truly productive system operates. Past productivity calculations bear that out conclusively. From 2004 through 2007, productivity averaged 1.66% (which is being charitable by comparison of only later in that cycle, since productivity from 2002 through 2007 averaged 2.53%) which means that if productivity in the current period was at least as positive as then there would have been only about a third of the increase in total hours.
The recovery from the dot-com recession during the housing bubble mania was not in any way especially robust. By further comparison, the average productivity rate in the 1990’s (from 1992 through the end of 2000) was 2.23%. Using that in our current status would have meant virtually no labor gains whatsoever, as the “best jobs market in decades” simply disappears almost entirely.
While that may sound unduly harsh, it actually more closely replicates our economic experience outside of these payroll accounts. In other words, as noted earlier today, factory orders have contracted for fourteen consecutive months through December 2015, a direct relationship with consumers and consumer spending. That would appear far more like what we see of a more positive productivity figure rather than a highly positive labor figure. That is also true of retail and wholesale sales, as well as the fact of Chinese production and global trade and economy that was and remains highly dependent on those same US consumers.
The front side of the labor statistics shows nothing but terrific gains, but the rest of them including this multi-agency economic check disagrees – vehemently. The numbers just don’t add up to the “best jobs market in decades”, far from it. Further, the BLS’s own inflation metrics also argue in favor of productivity rather than robust employment. The Employment Cost Index endures at a highly subdued rate where the unemployment rate heading for and reaching “full employment”, as Janet Yellen claims, should be creating highly visible inflation pressures through wages.
That is the whole point of the rate increase exercise, as it indicates that the FOMC believes the mainstream BLS statistics suggest “slack” is gone and that overheating through wage gains is the primary concern. The ECI and its components continue to instead show nothing of the sort; agreeing fully with the productivity check that I describe above.
Economists have been saying for over a year that the unemployment rate is and was meaningful; more meaningful, in fact, than market prices in funding and credit that increasingly doubted the full narrative. Those markets have been proven increasingly correct as the labor statistics fall further and further toward irrelevance. How likely is it that they have been accurate and the economy just falls apart while businesses are hiring and expanding labor utilization at a rate not seen since Bill Clinton’s last term? Occam’s Razor alone would suggest the productivity interpretation, that the BLS has simply been overstating labor gains for years. That would actually fit quite well within both the decrepit recovery picture, the one that has caused Main Street to near political revolt, and the onrushing recession.
The only other statistical possibility is that the BEA has been understating GDP, a question that is increasingly settled by further and broader contraction throughout the economy. If anything has been overstated it is by far the belief in the “best jobs market in decades”; it simply cannot be found in even the BLS’s own more removed numbers. That it will not reconcile with the BEA’s output figures nor the increasingly negative world we see around is leaves so very little doubt in that respect. The jobs market just wasn’t there; how could it have been? It never made sense and a closer inspection easily reveals it never added up, either.
That explains why economists were so wrong about 2015 because they were depending on phantom jobs in order to forestall very real market-driven and market-suggested danger. There is no productivity mystery, only a distinct and illegitimate lack of curiosity on the part of economists to simply take the Establishment Survey as gospel regardless of how little it fit the rest of the world. It also calls into question the legitimacy of the FOMC and monetary policy that was certainly subject to, and predicated upon, the same quackery. No matter how little the payroll reports described the economy as it was, including the relation to GDP, they held on to nothing else to instead deny everything. And some continue to.