MacroScope

The St. Louis Fed had a public forum this week to talk about their research into the ailing U.S. jobs market. Not a feel-good scenario.

The bottom line was something the regional Fed bank’s research director Christopher Waller told Reuters in a recent interview: the last three recessions have brought jobless recoveries and this one is no exception. No one can clearly explain why, except that employers are less likely to hire back workers they’ve fired than in the past, and that with so much of the recent downturn due to the collapse of housing, it’s evident that unemployed construction workers can’t easily find new work in, say, nursing or IT.

At this week’s gathering, Waller and his staff fleshed out their research with a number of interesting take-aways. In no particular order:

- Don’t blame China: labor there has become more expensive and labor in the United States cheaper. GE has reloacted a plant from the Middle Kingdom to the Midwest in part because labor costs no longer favored keeping it out of the United States.

- Almost 2 million of the jobs lost during the recession were in construction.

- Even if government programs help make a dent in foreclosures, who’s going to buy new homes? Household formation — the number of immigrants or young people moving into their own digs — is down 75 percent from pre-crisis norms.

The Federal Reserve, which on Wednesday sharply downgraded its outlook for U.S. economic growth and employment, appears to be seriously considering another round of monetary easing. In what would represent a policy U-turn, any third round of quantitative easing or QE3 appears increasingly likely to be heavily tilted toward purchases of mortgage-backed securities.

The idea was recently floated rather surprisingly by Fed Governor Daniel Tarullo, who normally focuses on regulatory issues. Some analysts had speculated Tarullo might not have broad support, but Fed Chairman Ben Bernanke’s comments on the matter during his post-meeting press conference on Wednesday suggested otherwise:

The housing sector is a very important sector. Problems in that sector are a big reason why our economy’s not recovering more quickly. I do think that purchases of mortgage-backed securities is a viable option. Certainly, something we would consider if the condition were appropriate. So the answer is yes, we will certainly look into that.

Paul Volcker famously joked in the wake of the 2008 credit crisis that the most important financial innovation of the last few decades had come not from Wall Street’s fancy footwork but rather the engineering acumen that created the ATM. A paper published by the National Bureau for Economic Research lends some academic credence to Volcker’s view. In particular, the research of Alp Simsek, a Harvard economist, finds the very uncertainty that esoteric new securities introduce into financial markets eats away at benefits arising from greater credit availability:

Financial innovation always decreases the uninsurable variance because new assets increase the possibilities for risk sharing. My main result shows that financial innovation also always increases the speculative variance. This is true even if traders completely agree about the payoffs of new assets. The intuition behind this result is the hedge-more/bet-more effect: Traders use new assets to hedge their bets on existing assets, which in turn enables them to place larger bets and take on greater risks. This effect suggests that financial innovation is more likely to be destabilizing in more complete financial markets and when it concerns derivative assets.

The author argues that rules prohibiting too many new types of securities from being introduced at once – so that traders don’t go too crazy too quickly – isn’t enough. As the crisis showed, when push comes to shove, hard-and-fast rules deliver better results than efforts at industry self-discipline.

It was his first speech on the economy in almost three years in office, but Daniel Tarullo did not pull any punches. The Federal Reserve Board governor, who tends to focus primarily on regulation, on Thursday called for the central bank to step up its purchases of mortgage bonds:

I believe we should move back up toward the top of the list of options the large-scale purchase of additional mortgage-backed securities (MBS), something the FOMC first did in November 2008 and then in greater amounts beginning in March 2009 in order to provide more support to mortgage lending and housing markets.

More broadly, Tarullo made a strong call for further monetary easing, arguing quite dovishly that the recovery is still too weak for the central bank not to take further action.

While financial markets are primarily focused on “Operation Twist,” the Fed’s return to buying mortgage-backed securities has helped that market. MBS have outperformed Treasuries and interest rate swaps since the FOMC announcement.

This has yet to translate into much of a drop in mortgage rates for consumers, however. And even if it does, many economists doubt lower mortgage rates can do much to boost home sales and refinancing, helping to put more cash in consumers’ pockets. Banks are reluctant to lend for a variety of reasons, while consumers are reluctant to borrow due to worries about their jobs and the poor outlook for the economy. Homeowners with underwater mortgages remain unable to refinance their loans — barring a sudden improvement in the market or some type of relief from Washington.

As of early Thursday, the current coupon 30-year MBS were 10 basis points tighter in spread versus Treasuries after a 15 basis points tightening on Wednesday, but the average 30-year mortgage rate is down only 3 basis points overnight to 4.10 percent (albeit a record low) according to Bankrate.com.

As the U.S. economic recovery stumbles, most observers Federal Reserve policy expect the central bank next week to announce an initiative to replace shorter-term securities on its balance sheet with longer-term ones in a bid to drive longer-term interest rates lower.

Fed watchers call the maneuver Operation Twist after a like-named Cold War-era initiative in which the Fed bought longer term securities with a similar objective.

A twist action could stimulate mortgage refinancing and push investors to invest in corporate bonds, which could spur business borrowing, or in equities, which might help stocks recover, the Fed believes. By adjusting the composition of its portfolio rather than launching an aggressive new round of bond buying, also known as quantitative easing, the Fed would be taking a relatively modest easing step, but be acting all the same.

Wal-Mart, the world's largest retailer, now has 189 stories in China, according to its website. Soon it will have many more.  The U.S. chain has announced plans to open a series of "compact hypermarkets", using a bare-bones model developed in Latin America, the Financial Times said.

Wal-Mart stores are a bit different than the one's you might find in, say, Little Rock Arkansas. They sell live toads and turtles for one thing, The Economist reported. But they also sell the appliances, gadgets, and housewares that Wal-Mart stores merchandise everywhere.

And business is booming. Third-quarters sales in China soared 15.2 percent from a year earlier, according to the Financial Times story, compared with a paltry 1.4 percent inthe United States.

Better-than-expected retail sales data eased recession fears today but not by much. The lukewarm reaction from many analysts doesn’t exactly paint a clear picture for the economy.

“I think the number is OK. Sentiment had gotten so negative that a more mediocre number like this isn’t terrible,” said James Dailey, portfolio manager for TEAM Asset Strategy Fund.

Retail sales data beat expectations but an analysis by Anooja Debnath and Emily Kaiser points out that even the expectation water-mark is not as clear as it once was. Economic forecasts are all over the map and the consensus forecast does not necessarily represent what most economists think.

Selling your house? Worried about having to lower the price to get it to move?

How about a $1.275 million price reduction? That’s how much former Fannie Mae CEO Daniel H. Mudd had to cut the asking price on his 11,500 square foot, six bedroom, six full bath (plus three half baths) mansion to find a buyer.  Originally listed for $8.9 million on September 11, the transaction closed on December 11 for $7.625 million.

Don’t worry too much for Mr. Mudd, though. He paid $5.15 million for the place in June 2000, leaving him with a 48 percent return on his investment, excluding any renovation costs. And even though he was booted from Fannie Mae when the government took over the housing giant in September 2008 and reportedly wasn’t paid his multi-million dollar severance package, he’s landed on his feet. New York’s Fortress Investment Group named him CEO in August.

Wondering what you could have bought from the son of the former NBC News anchor Roger Mudd? Here’s the listing agent’s description:

BULLHEAD CITY, Arizona – Not so long ago this town on the Nevada border was in full boom mode.

It was a magnet for people coming to work in the casinos across the Colorado River in Laughlin, plus Californians looking to retire here or have a second home at a fraction of the cost in their own state. Construction workers flocked here to build homes and roads.

All told, successive booms turned Bullhead City from a fishing village just a few decades ago to being a city of more than 40,000 people.