"Kee" Points with Jim Kee, Ph.D.

US: Markets rallied late last week as nonfarm unemployment (jobs) increased by 163,000 in July. That was considerably better than last month's dismal 64,000 number and better than the 100,000 or so that was expected. 163,000 new jobs per monthis not enough to bring unemployment down, and I think the last few months' data serve as a great example of the late economist Julian Simon's favorite source of error in science: failing to appreciate the inherent variability of a system. These numbers, though ping-ponging up & down month-to-month, actually paint a very straightforward picture. Namely, that the U.S. continues to expand at a subpar 1%-2% growth rate. That's consistent with last week’s non-manufacturing (services) ISM number, which also improved a bit from last month, allaying recession fears.


Jefferies’ strategist David Zervos calls the 163,000 reported jobs the "perfect number for risk assets," meaning that the Federal Reserve has every reason to be accommodative anytime the number is below an unemployment reducing rate of, say, 200,000. I don't think that the U.S. slow growth rate is a monetary policy problem, so I have little enthusiasm for (or rather, low expectations for the efficacy of) further Fed actions.


Other: Another reason for the market's rally was European Central Bank (ECB) President Mario Draghi's assertion that the ECB would create a plan to buy bonds in order to combat the high risk premiums for some Eurozone countries: "The Euro is irreversible...it stays. It is pointless to bet against the Euro" (Financial Times). In China, the central bank also pledged to ensure expansion of money and credit in order to "guide stable growth" (Financial Times). I suppose that's another "risk on" signal, but frankly, it is perfectly consistent with all of China's statements and actions over the past several months.


Debt and deficit stuff: This morning I attended a speech given by Alan K. Simpson, theformer Republican U.S. Senator and Governor from Wyoming, to public pension fund administrators. Simpsonco-chaired President Obama's National Commission on Fiscal Responsibility and Reform with President Clinton’s former chief of staff Erskine Bowles. I always try to share any insights from "Washington insiders" with Kee Points readers, and here are the key takeaways from Simpson’s speech from my notes. I won't put them in quotes because I don't have an exact transcript:


Deficit denial is dead. We got to where we are because politicians made promises they couldn't possibly keep. We can't solve our budget deficit/debt problems without cutting Medicare, Medicaid, Social Security, and Defense. Taking each in turn: With respect to defense, our $740 billion budget is greater than the world's top 15 countries' defense budgets combined, including Russia and China. On healthcare (Medicare and Medicaid), the current system can't possibly work, and the recent health care bill has nothing to do with cost containment. Some form of means testing (wealthy pay more of the cost of their heart surgery) is a must. On Social Security, it was created when the average life span was 63 and benefits began at 65. Fifteen people paid in for every one receiving benefits...we are heading towards a ratio of 3:1. On the Fall Presidential election: Simpson stated that people don't vote for anybody, they vote against someone, and felt that people were suffering Obama fatigue and so Obama will lose. Any strength in the economy could change that. Funniest line: We have a treaty with Taiwan that says we will support them if China becomes aggressive. Only problem is, we will have to borrow money from China to do it!