'Tis the Season

This morning’s weekly report on claims for unemployment insurance benefits was greeted by the financial media with something like horror, though the stock market seems to have shrugged it off successfully by midday. Once again, however, the reported numbers are highly misleading.

The news tickers and financial correspondents are, as usual, reporting the Labor Department’s headline number: 542,000 initial filings for benefits, up from 516,000 the previous week and the highest level since 1992. Pretty shocking stuff, if it were real. Here’s a chart (click to enlarge, right-click to open in its own window) showing the true situation:



The headline number is of course the “seasonally adjusted” figure for initial claims. What the chart shows, in contrast, is the actual number of filings this year to date compared with last year and the average going back to 1967. And the actual number of filings, 511,941, was down in the latest week, not up.

That’s not to say that the employment situation is rosy. The latest number is in fact the second-highest for the corresponding week since record-keeping began; the highest was in 1982. And the total is 58 percent above the corresponding week last year, which, as the chart shows, was actually a little below the long-term average. But there’s no surprise here; the unadjusted figures this year have been running sharply higher than last year since February (with one week in July marking an exception).

Adding in continued claims, which are reported a week later than initial claims, the situation looks pretty bad:



The latest number for this series is 53 percent above the same week last year and, like the initial claims number, is the second-highest on record for the corresponding week, with 1982 marking the peak. And again, filings this year have steeply outpaced last year for pretty much the whole year, so I’m having a little trouble understanding why this is all such a shock to the talking heads on TV.

In both charts, this year’s filings have been following the long-term seasonal pattern quite closely but at an exceptionally high level. If the numbers continue that pattern, it’s not good news for workers, because the seasonal tendency is for layoffs to increase sharply until mid-January. Given the effect the economic slowdown is already having on retailers, car dealers and just about everyone else, it’s not good news for anyone.

It Could Be Worse

Today’s economic reports, stock market decline and related news stories were all pretty ugly. But they were 1970s ugly rather than 1930s ugly, which is some consolation.

The Dow Jones Industrial Average is down, as of today’s close, 44 percent from its all-time high set a little over a year ago. The decline from the January 1973 high to the December 1974 low was 45 percent. The decline from the September 1929 high to the July 1932 low was almost exactly twice as much, 89 percent. An 89 percent decline from the October 2007 high would put the Dow at about 1558, so today’s much-discussed close slightly below 8000 may not look quite so bad.

Mathematically, stock market movements resemble earthquakes; that is, they’re fractal and scale according to a power law. In oversimplified English, which is the only way I can understand this kind of thing, what that means is that exponentially larger movements occur exponentially less often than small movements. This is why seismologists are unable to tell Californians exactly when “the Big One” will occur but insist that the more time passes without a big one, the more likely it becomes. So same thing with the stock market.

The current bear market is the second since 2000; the decline from the January 2000 high to the October 2002 low amounted to about 38 percent. From the seismological point of view, that might mean that we’re less likely to get a “big one” of near 90 percent, and instead must suffer through a series of less catastrophic but still thoroughly unpleasant medium-sized shocks.

From the standpoint of technical market analysis, 8000 on the Dow isn’t very interesting anyway. The really interesting number is the October 2002 low at about 7286, which we could stretch a bit down to the 7000 level as an idealized 50 percent decline. If that range doesn’t hold, then we’re potentially looking at a decline to 1.) the 5300-5700 area, representing the trading range of a 1996 pause, for a possible 62 percent drop; the 3600-4000 range, which is the level of a somewhat significant sideways move in 1994 and would amount to a roughly 75 percent decline; or the aforementioned near-90 percent decline to the 1500 range. And of course there's always the possibility that the world could come to an end and the Dow would fall to zero, but personally I give that pretty low odds.

Those are, of course, the worst-case scenarios. The most optimistic case would be that the market is “base-building” right around where it is now and will launch a new, multi-year uptrend from here that will replenish all the 401(k) accounts and other investments that have been stripped in the past year. I’d feel a lot more confident about that scenario if it didn’t depend so much on believing that the same people who contributed so much to the current problems - and who are still apparently more interested in self-justification and self-aggrandizement than in doing anything for their society or their world - will somehow suddenly start making all the right decisions.

CPI Update

A quick note to update my previous posting: The Consumer Price Index for October was lower than expected, showing a full 1 percent decline from September (on both a seasonally adjusted and unadjusted basis). Analysts are interpreting this relatively steep decline as a sign of worse-than-expected economic weakness. In terms of the chart included with my last posting, however, all it did was bring the index back to the top of the red trend channel, so it isn't (yet) indicating that the steep rise in inflation of the past four-plus years is over. Any further such declines, though, might raise the possibility that a deflationary trend is developing, which would tend to suggest that the current economic downturn could turn into something worse than a recession.

The Price of Everything

With the release over the next two days of the government’s two main inflation indicators – the Producer Price Index, due Tuesday, and the Consumer Price Index, set to be announced Wednesday – the markets, policymakers and financial media are likely to be focusing on this topic for the first time in a while. Lately, the only thing price-wise that has gotten much attention is the big decline in oil prices since the all-time high in July.

Wall Street forecasters on average are predicting the CPI fell in October by 0.7 percent after zero change in September, and are looking for October’s year-on-year increase to be 4.0 percent after a 4.9 percent rise in September.

Those estimates are based on the seasonally adjusted index, of course. I’ve been looking at the unadjusted figures going back to 1913, and frankly I don’t see any evidence of strong seasonal tendencies in this index, which is already kind of overprocessed without adding seasonal assumptions to the brew. And I’m not even going to talk about the inane “core” inflation concept, which excludes food and energy prices, allegedly because of their “volatility.”

In any case, one group that ought to be paying close attention to these numbers, adjusted or not, is the Federal Reserve’s interest rate-setting Open Market Committee. The minutes from that august body’s latest meeting are due for release Wednesday afternoon. Given that the FOMC opted at that meeting to cut the Fed’s main interest rate again, it seems likely that they decided (again) that inflation isn’t much of a threat right now.

I’d say the following chart argues otherwise:



What the chart (click on it to enlarge; right click to open in a new window) shows is pretty straightforward, with no massaging or processing: It’s the CPI, not seasonally adjusted, going back to 1990.

The top line of the orange-colored trend channel actually connects all the way back to a big spike in inflation that resulted from war-related shortages – World War I, that is. So as a growth rate, it generally represents the maximum rate of increase in inflation over a period of about 90 years.

But as you can see toward the right side of the chart, the CPI’s rate of increase accelerated at the beginning of 2004, as indicated by the red trend channel. By the middle of 2005, the index had actually broken above the 90-year top trendline. And by April of this year, it outpaced even the new, faster rate of increase, as indicated by its breach of the upper red line.

The all-time high in the index was set this past July, and the index has declined slightly since then. As mentioned above, the forecasters on Wall Street believe it fell again in October, and if there’s any seasonal tendency in this index, it’s toward an easing of the rate of increase during the fourth quarter. If the prediction of a 0.7 percent dip is correct, it will be the biggest monthly drop in the CPI (seasonally unadjusted) since November 2005. But it won’t be enough to drop the index below the top red line on the chart, let alone to bring it back into the long-term trend channel.

For some time now, high inflation combined with an economy in recession – “stagflation,” to use the term coined in the 1970s – has been the ultimate nightmare scenario for policymakers, politicians and investors. The Fed clearly thinks it has a better chance of warding off recession, by cutting interest rates, than of cooling off inflation, which would require raising interest rates. But if the rate cuts don’t keep the economy from declining – and so far, they obviously haven’t, as the latest gross domestic product numbers attest – they still stand a good chance of keeping inflation climbing.

Illiteral

Having taken a broad swipe at the materialist-scientistic worldview last time, it seems only fair to balance that with a comment on the Christian fundamentalism that sets itself in opposition to science. Because I quoted Darwin in my previous posting, I was initially inclined to address the shortcomings of the literalist interpretation of the book of Genesis that underpins efforts either to ban the teaching of evolution or require the teaching of “creationism.” However, I think a more general comment may suffice.

So I’ll say simply that the fundamentalists’ claim that they interpret the Bible literally is false, or at least is only true some of the time – that is, when it suits them.

For example, we’ve all heard about TV evangelists’ use of the law of Moses to condemn homosexuality and anything else they don’t like. And anyone who belongs to a conservative Christian denomination is familiar with the use of the law to justify the practice of “tithing,” or donating one-tenth of one’s income to the church.

So how do those ministers justify those appeals to the ancient law of Israel if they take a literal view of these words from Paul’s letter to the Galatians (chapter 2, verses 16-21):

“Knowing that a man is not justified by the works of the law, but by the faith of Jesus Christ, even we have believed in Jesus Christ, that we might be justified by the faith of Christ, and not by the works of the law: for by the works of the law shall no flesh be justified. But if, while we seek to be justified by Christ, we ourselves also are found sinners, is therefore Christ the minister of sin? God forbid. For if I build again the things which I destroyed, I make myself a transgressor. For I through the law am dead to the law, that I might live unto God. I am crucified with Christ: nevertheless I live; yet not I, but Christ liveth in me: and the life which I now live in the flesh I live by the faith of the Son of God, who loved me, and gave himself for me. I do not frustrate the grace of God: for if righteousness come by the law, then Christ is dead in vain.”

Or these from Paul’s letter to the Romans (chapter 7, verses 4-6):

“Wherefore, my brethren, ye also are become dead to the law by the body of Christ; that ye should be married to another, even to him who is raised from the dead, that we should bring forth fruit unto God. For when we were in the flesh, the motions of sins, which were by the law, did work in our members to bring forth fruit unto death. But now we are delivered from the law, that being dead wherein we were held; that we should serve in newness of spirit, and not in the oldness of the letter.”

Returning to Galatians (chapter 5, verses 1-4), we find Paul issuing a specific warning to some early Christians who believed they needed to adhere to one particular point of the ancient law:

“It was for freedom that Christ set us free; therefore keep standing firm and do not be subject again to a yoke of slavery. Behold I, Paul, say to you that if you receive circumcision, Christ will be of no benefit to you. And I testify again to every man who receives circumcision, that he is under obligation to keep the whole Law. You have been severed from Christ, you who are seeking to be justified by law; you have fallen from grace.”

It seems to me that Paul’s warning can be applied in reverse to those who pick and choose among the laws of Moses to rationalize tithing or to condemn practices they disapprove of: You are under obligation to keep the whole law. So you need to start keeping kosher, and you need to make an appointment with your local mohel or mohelot.