Where the 12-13% UR forecasters can be wrong is to the extend that the government can pump more stimulus if that looks likely to happen, so can the Fed through more QE purchases
Bernanke just sent the front end of the yield curve flying. GE calls have now more than doubled, I'm not selling it, there is more to come, much more
I didnt give much credibility to the 13% UR calls because I never saw any reasoning or math behind it. Also that is not the consensus forecast nor the stock market forecast(not even the corporate bond market forecast as far as I'm aware), so jumping in these sorts of huge tailish predictions is usually a receipe for disaster, specially when they look obvious 'no brainers'(If it is obvious then markets and observers will usually see it, quasi-free lunches are hard to find, I know many 'nobrainers' that didnt endup well, the obvious market 'mispricing' turned out to be correct). But now those Mish numbers will have to be scrutinized because it appears that he uses conservative numbers. Still I will stand by my rule of avoiding fading market expectations too drastically(Unless the payoff is massive, usually happens through derivatives). So perhaps I need to raise my working UR forecast from 11% to 12%, but to take bets that will only pay off at 12.2-13%+ I find extremish, I rather have a margin of safety. You never know when you are hallucinating, plus you can make money in the other forecast anyway
Very exciting move today in the GE calls. In a mini-panic, I legged out of many of my Dec 2010 calls some weeks ago, but was fortunate to buy a couple of nice slugs of Mar 2011 calls recently and see them nearly double in the space of 10 or so trading sessions. As for the UR, there are some serious flaws in the Labor dept's gathering and figuring of the employment stats. Trying to pick a top in the rate w/a number to the right of the decimal point is a joke. It does seem farily certain that payrolls are leveling out. Whether the unemployment rate tops at 10% or 13% is up to gov't bureacrats. Don't know if this has been posted, but here is Hugh Hendry's latest. Good stuff as always. http://www.scribd.com/doc/22606253/Hugh-Hendry-Eclectica-Nov09 Hendry thinks he may be onto the latest Paulson trade in his purchase of CDS on some Japanese gov't and corporate debt. For more on what I call the Paulson trade, check out this book - for a macro trader, its certainly one of the more important books in many years. http://www.amazon.com/Greatest-Trad...=sr_1_1?ie=UTF8&s=books&qid=1258426092&sr=8-1
Some people think a declining dollar might prompt the Fed to act. What they seem to be missing is the Fed's dual mandate and what a declining dollar does, it hurts the price stability aspect but it helps the maximum employment part. The Fed has no obligation in targeting a high offshore purchasing power for the dollar, by definition they cant, a central bank needs to choose between targeting certain growth in the money supply, a certain level of overnight interest rates or the fx value of the currency. It would be nice but its not possible to do all of them
Heres a risk to the 13% UR forecasters http://www.nytimes.com/2009/11/13/opinion/13krugman.html If krugman have his way, european style firing restrictions could be coming. If Germany was able to stand the credit crisis with only 0.5% higher unemployment this shows these sorts of manipulations can have an effect. Add in more stimulus(if the UR is headed to 12%, that is virtually a certainty to happen), more QE(helping housing) and the government might be able to save some elections down the road
For one thing the Mish numbers are assuming the labor pool will start to increase from now on, that has not been the case so far. Since Nov 2007 the labor pool has not grown, a lot of people are dropping out because they cant find jobs. This decreases the UR and masks a lot of problems, now maybe these people will flood the market once the job market gets better and the UR will shoot up. But Mish it is making an assumption that is likely to be incorrect, specially in a short-term(12 month)basis
I feel that I need to scrutinize his numbers is because he sometimes struggles with basic economics. He seem to be one of those in the 'deflation no matter what camp', he doesnt seem to understand that the Fed can beat any deflation by mailing $6T in USD checks through the UST-IRS or by buying every UST bond, GSE MBS, muni bond publicly traded, effectively boosting the M2 money supply by very large amounts. If he fails to understand that this would be hyperinflationary what other kinds of mistakes will he make?
The implications of 12% UR for eurodollars could be large. I remember reading that analysis from FBR's Paul Miller that banks would struggle a ton with the rate that high, so perhaps libor could blow out. I'm monitoring libor and will keep in mind that risk even though I believe no fed hikes in 2010 is almost a done deal
Nice summary by Hatzius from GS http://www.zerohedge.com/article/goldman-sachs-v-shaped-recovery-unlikely I"m trying to find more data on the Fed senior loan survery from the 80's and 70's. I was not aware it even existed back then, the Fed site doesnt have that data