We’ve been thinking about the unemployment number lately because it just doesn’t seem to want to go down.  Well, of course it doesn’t because the economy doesn’t seem to what to go up. Genius!

But how does the BLS come up with the unemployment numbers so frequently and with such seeming accuracy.  Well…if you really want to know…it guesses them.  Yes, you heard it right.  The numbers are guesstimates at best…in some cases supported by voluntary surveys…which we all know are infallible.  Right!

Take the numbers from July 6^th for example, which were reported for June, 2012.

The BLS represented that non-farm payrolls increased by 80,000 new jobs in June. Sounds good…well OK…right?

Not really.  At Craven, we’re guessing that it was more like a loss of 40,000 jobs.

Why…because the gentle lads and lasses at the BLS concluded that new businesses that started up in June created 126,000 new jobs.  Wow…fantastic…right?  Wrong.

This is a total guess based on what they call the birth/death ratio…which has nothing to do with crying babies or funeral parlors but does have something to do with fantasy land.  You just have to give it a fancy moniker like “the CESBD adjustment”, to make it sound official and therefore accurate…which it is not.  If it was, why would they have to constantly revise it.

The BLS really has no idea what new businesses started, let alone how many employees these new businesses hired.  Reality check!  When a small business starts up, it does not usually go out and hire up a storm of new employees.  Usually, such businesses are thinly capitalized and these days, so much of a new small business set up can be done using third party contractors and / or the web, that the need to hire employees is reduced from the get go.

The 126,000 number was added against the loss of 44,000 jobs to create the illusion of a positive number for the release of the June jobs report.   In reality the jobs number was probably flat to a loss.  But no one wants to hear that.

Everyone knows that the US needs150,000 new jobs each month just to break even with population growth, and we need millions more to put displaced workers back in a job.  It is just not happening but these bogus numbers help to perpetuate the fantasy so Gentle Ben can hope that the market will somehow make everyone rich and spendthrift again.

So the next time you hear the unemployment numbers move the market one way or the other, remind yourself that the BLS may have one too many syllables in its title…and be wary….especially as we get closer to November.

At Craven Capital, we’ve been thinking a lot about ions lately.  No…not those negative ions associated with crashing waves on the seashore that make you feel so positive.  The other ions that can make you feel so…well….negative.  You know them…Inflat-ion, Deflat-ion, Stagflat-ion and of course the big kahuna…Hyper-inflat-ion.

These days, it seems like a lot of people are thinking about ions.  When we are asked which ion we think will happen, we politely answer “yes”…because we think that all the ions could very well happen and to a certain extent…happen simultaneously.  Why?  Well…think about it for a moment.

Let’s start with Deflation.  We are definitely in a deflationary environment to some extent.  Wages are stagnant and falling which is deflationary.  Productivity is increasing in some areas (think computers and technology) which helps to bring down prices…which is also deflationary.  And most of all…the developed world is deleveraging from debt.  Baby boomers, of which we are not so proudly part, are wishing and wanting debt out of our lives so fast, it hurts. To any extent that we can, we are getting rid of debt and that means we are not using our money to buy stuff.  We are getting rid of stuff instead and using that money to get rid of debt.  That is definitely deflationary.

But what is deflation anyway?  As you know we like to keep things simple at Craven so we think it’s as simple as Sally telling Harry to keep his paper money in his pocket for now, because that cute IPad thingamajig that he’s wanting to buy today will likely cost less tomorrow.  Like all things economic, it is ultimately a state of mind, a perception of a future reality.   Economics, contrary to popular belief, is not a science…as much as the economists would want it to be…but that’s a topic for another day.

And that’s definitely enough ions (negative or positive) for today…we’ll continue our not so scientific discussion tomorrow.

In the meantime, we couldn’t help but notice the cover of Barrons yesterday morning.  Now, in the interests of full disclosure, let us say that we like Barrons.  We read Barrons and we occasionally enjoy the company of the very smart Barrons guys and gals.  They are good and bright folks and quite sociable.  But their editorial staff have a habit…not as bad as Time Magazine, by a long shot…of seeing their cover stories presaging a coming collapse.

http://www.usatoday.com/money/perfi/stocks/story/2012-04-25/stocks-magazine-cover-curse/54538018/1

So when we saw that this week’s cover was all about the best bond funds, we cringed a little.

http://online.barrons.com/home-page

As stated, we like Barrons and we’ve got nothing against bond funds per se….but we worry that bond funds have become so very popular at a time when interest rates (ergo yields) are so very low and really have not that much further to go.  Such perceived flights to safety can easily become unhinged when the demons of inflation take flight…or those nasty bond vigilantes come after Uncle Sam.  Both potentialities are lurking uncomfortably in the shadows.  At Craven, we prefer to know what we own and when, for example, Coke is paying far more in dividends than interest on its bonds and we have a chance to accumulate additional yields by way of covered call premiums on the Coke stocks we own, why should we rush off with the herd into a bond fund?

The problem with herds is that they tend to be skittish.  If we decide to own a bond, we would prefer to keep it or sell it when we choose and not be forced to liquidate prematurely because all our fellow buffaloes have their furry hides in a flutter.   And we don’t see any advantage to being a creditor of any company like Intel or Altria, with their fortress like balance sheets, fat margins, deep moats and oodles of free cash to pay us our handsome dividends.  So keep a keen eye on bonds and bond funds…and watch out for that shadowy figure in the corner…he might just be a vigilante.

There is so much to think about these days.  The Supremes rule on Barry’s plan to keep us all nicely covered and eligible for the best medical care that simply can’t be afforded.  There is so much conjecture out there from pundits far smarter than us so we’ll leave it to them to opine on things of such significance.

But at Craven we do love history…and especially the way it rhymes….often in the most ironic of ways.  Think about Germany for example.  After WWI (you know… “the war to end all wars”) Germany went through the most horrendous inflation, which ultimately became the infamous hyperinflation of the Weimar Republic in the early 1920s.  The Germans still feel the psychic pain…pain which was made far worse by France’s insistence on full reparation payments.  France was the big dog in Europe at the time and ran a healthy surplus.  Can’t you see the interesting and ironic historical rhyme?

Now, Germany is the big dog of Europe.  And France is beholden to them.  And Angela’s mob are holding tough…demanding reparations in the form of political sovereignty in order to instill fiscal discipline on those easy going Latins to the south.  But just like France needing Germany’s  coal from the Ruhr…which they ultimately tried to take by force…Germany needs its Latin friends.  When exports represent 45% of your GDP and the Chinese and Indians are sputtering a a wee bit, it’s even more important that they maintain a level (from their perspective anyway) trading arena.

But what if the Latins cried…”no mas” and decided to toss Germany out for their perceived lack of generosity?  After all, they have all the votes on the Euro commission.  What would happen?  Well…we think it unlikely…for like Goldie and Ben….they all need each other.  But what if they did?

In that case, we suspect that Germany would align with some mates to the west and north (think Holland, Finland, Belgium et al) to form the Neuro (the northern Eurozone) of responsible nations while the rest of those ditherers (possibly excluding basket case Greece) would align to form the Seuro….with France once again the top wolf of a very weak pack.  This idea was floated a couple years back and is not new…but maybe it’s an idea whose time has now come.

And now onto the world’s best looking banker…Jamie Dimon.  Not only is he good looking but he is smart.  Don’t you just hate people like him…good looking, smart and…rich!  So his $2bill loss is now looking far larger…but how far?  We suspect that good old..but young looking…Jamie is pulling a swifty.  The word is now leaked that the loss could be as much as $9bill, which would make a big hole in this year’s earnings indeed.  Our word from the street…and we are only about 100 yards from Wall St. (way too close for comfort)…is that the loss is probably more around 5 bill. So in this world of sound bites, fleeting memories and jaundiced perceptions, don’t you think it would be a smart move to leak 9 bill to set expectations low and then announce on July 13 (Black Friday for those into such things) that golly gee…the loss is actually so much less than perceived.  Then, instead of focusing on 2 bill ballooning out to 5, the market can swoon and say…”well, thank God…it wasn’t 9 bill after all…such good news”.   Let’s see if Jamie is really as smart as he is good looking.

At Craven Capital, we love days like yesterday.  Stocks down.  Volatility up.  We wake up. We pay attention.   Maybe there is an opportunity to buy the stock we like at the price we want?  Or maybe there’s an opportunity to buy back a covered call at a tidy profit…or sell a fearful investor a put on a stock that we would like to own but which is not quite at the price we’d like to own it…yet.

Dear reader…by now we should all realize that the only certainty is more uncertainty.  Accept that and you’ll rest easier.  Prepare for it and you’ll rest easier still.  Take advantage of it and you’ll be sleeping like a baby.

So…we were thinking…why would Moody’s take the hatchet to all those nice banks?

What could possibly be wrong?  Maybe we could understand the Euro banks being taken out to the woodshed because the Eurocrats have not thrown enough money at them yet.  But the US banks…my God…they must be flush with cash.  After all, Ben and the boys and girls at the Fed have thrown 4 trillion their way over the past 30 months or so.  What are they so worried about?

How about a hint….maybe it has something to do with the dirty “D” word.  Maybe the Moodys have the blues about the derivatives exposure of these banks.  So, let’s look at some big, big numbers…(these are approximations but you’ll get the message)

US GDP – 15 Trill.
Stock Market – 15 Trill.
Bond Market – 51 Trill.
Global GDP – 68 Trill.
Derivatives Market – 228 Trill. (that’s $228,000,000,000,000…a lot of zeros)

If you want to see an excellent visual representation of what all those zeros look like go to:

http://demonocracy.info/infographics/usa/derivatives/bank_exposure.html

My friends, there is not enough money in the world to cover the notional value of all these transactions. And the way they are set up…if one topples, they all topple.  Think of two drunks leaning against each other.  While they are both supporting each other, they will not fall over…but that does mean that they are now sober.  When one falls, the other will inevitably topple over too…probably on top of the first one.  Think of the global banks..as a conga line of drunks…with Ben Benanke, the ever willing barman, ready to pour some more vodka into the punch bowl.  This party will not end well.

And speaking of Ben…is the Fed’s love affair with Goldie over?  Why…it was only a few days ago that Jan Hatzius, Goldman’s chief economist was sprouting about the imminent inevitability of QE3 in June…usually a pretty good indicator for the markets.  But Ben was buying none of this pillow talk and decided that the only fun from this FOMC meeting would be to keep playing Chubby Checker’s twist music for another six months.  Goldie was not amused and countered yesterday with a call to short the S&P.  Forget women…apparently hell hath no fury as a banker scorned.  The market responded accordingly with its precipitous drop…to our unbridled glee.

But I suspect that the Fed and Goldie will make up.  They have to.  They are so mutually dependent.  They need each other.  Where would the Fed and Treasury get all their staff from if not from Goldie.  So they will make up.  And when Jan says to expect QE3 before or at the next FOMC meeting in August, you might want to take notice.  We will.

I was thinking how sad it was that the stock market…and the much wiser bond market…and all other markets for that matter…are now totally Fed propelled.  Little things like earnings and profits don’t matter.  It’s all about the Fed.  So today…as we wait for the all wise and all knowing Ben Bernanke to opine (after all, it’s only his opinion of what is best for all of us) the market will rise or fall based thereon.  That is very silly…but that is the way of things in the world of crony capitalism when the politicians and economists conclude that they know far more than the business people actually doing business and running businesses.  Of course, you just have to tolerate C-Span for a brief dose of congressional committee hearings to realize that the reality is far different.  But such is the world we live in as the battle for the heart and soul of capitalism rages back and forth.  And rage it will…at least until the politicians are not only broke, which they are now…but also out of credit…which will surely happen…just as day follows night.  In the interim, we will continue to simply look to take advantage of what the Fed inspired (or conspired) market gives us.

As for my prediction on the Fed today?  I predict that Ben Bernanke will look nervous…because he is!

Well…at least it seems that way.  This morning I was thinking about the 120 billion euros the rest of Euroland (read….Germany and France) is giving to Spain to bail out their ailing banks.

Don’t you ever wonder where that money comes from and where it goes…and why?

Well here are the answers in very simplistic terms (remember we at Craven Capital are simple folk):

1. The money is printed (digitally at first but some is ultimately circulated as paper…that’s where the tress come in).   So this money is an accounting fiction, nothing more.  It was never the result of prudent saving or smart investing or the result of efficient manufacturing or even the conversion of something real like gold.  It is created by bureaucrats with the modern age equivalent of the good old printing press.

2. The money goes to shore up the capital reserves of banks in Spain so that they don’t collapse as their customers get scared, withdraw their savings and put them under the bed…or send them to a “safer” country…like Germany (sense a bit of a merry go round here?).

3. The banks need the money because they made stupid loans to over-extended developers who sold overpriced condominiums to investors who thought they could make a quick..or a slow buck by on-selling to another fool.  So, just like in the good ol US of A, when the value of those condominiums dropped because, quite simply, there were more sellers than buyers, the value of the bank’s underlying collateral collapsed.  The remaining developers went broke (the smart ones were long gone with their profit), the property owners defaulted, the new buyers evaporated and the banks were left holding assets that were worth a lot less than the money they had loaned on them.  The 120 billion euros will go to help fill this vacuum.

The problem is that there is still a lot more vacuum to be filled.  So, look out below…and keep a very close eye on Italy.

The good news is that there may be even better seaside bargains in Spain to come.

But if you fancy a lovely Spanish casa del mar, don’t forget that while Spain is Europe’s 4th largest economy by GDP, it has only been a real democracy for the past 35 years…after a horrible civil war in the late 30s and the equivalent of martial law thereafter.  With 50% unemployment among its highly spirited youth, anything is possible.

What’s that old saying about history repeating…or rhyming?