© 2008 – 2018 John T. Burke, Jr.

Jobs And Propaganda

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August 10, 2009

On Friday, Wall Street celebrated a “less bad” Employment Situation Report from the Bureau of Labor Statistics.  Although the consensus estimate for jobs lost during the month of July was 345,000 — the report from the BLS on Friday recited that non-farm payrolls decreased by 247,000.  You may have heard the BLS referred to as the “Bureau of Lies and Statistics” by those who see BLS reports as “cooked data” for propaganda purposes.  Criticism of the spin given to the report could be found at the Zero Hedge website, which featured an entry with the title:  “The Truth Behind Today’s BLS Report” with quotes from such authorities as consulting economist John Williams and economist David Rosenberg.  Mr. Rosenberg was quoted as providing this caveat:

It may be dangerous to extrapolate today’s report into a view that we are about to turn the corner on the job market front.

At The Atlantic Online, Daniel Indiviglio wrote a piece entitled:  “Did the Unemployment Rate Really Go Down?”  Among his points were these:

As a recession drags on for this long, and people are unable to find jobs, they begin leaving the workforce.  They become discouraged regarding job prospects.  BLS offers an unemployment rate that includes these discouraged workers.  In June 2009, that was 10.1%.  For July, it was 10.2%.

Given this change in unemployment including discouraged workers, I think it’s pretty clear that the 0.1% decrease in the reported unemployment rate can be misleading.  In reality, those who would like a job but don’t have one increased by 0.1% up to10.2%.

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I just think we need to be careful not to get too excited about today’s numbers.  Although they appear to show a decrease in the unemployment rate, the deeper numbers show the contrary.  We may see the light at the end of the tunnel, but we’ve got a ways to go.

Claims of “good news” about the unemployment picture are regularly contradicted, if not by our own personal experiences, then by those of our relatives and friends.  Beyond that, we see daily reports of middle-class families using food stamps for the first time in their lives and we read about escalating bankruptcy filings.

One article I found particularly interesting was written by Nancy Cook for Newsweek on August 7.  It concerned the problems faced by teenagers this year, who sought summer jobs.  They weren’t able to get those jobs because they found themselves “competing with unemployed adults who are now willing to take positions that were considered entry-level in prerecessionary times.”  Ms. Cook discussed how the inability of teenagers to obtain summer jobs impairs their personal and professional development:

Where does that leave high-school- and college-age students, apart from spending their summers lying on the couch?  It leaves them with little income and, worse, few job skills, says Andrew Sum, director of the Center for Labor Market Studies at Northeastern University in Boston.  “It hurts their ability to get jobs in the future,” he says.  Teens who work in high school and college on average earn salaries 16 percent higher than teens who don’t work, according to the center’s research.

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Working summer jobs certainly translates into higher earning power in the long term, but more important, it gives teens “soft skills.”  Those skills teach them to be punctual, write professional e-mails, and work well in teams.  “There’s lots of evidence that shows that employers place a high premium on those skills,” Sum says.  “If you don’t work, you develop cultural signals from other kids, from the streets, or from sitting at home in front of a computer, which is the worst way to learn how to get along with people.”

I find it difficult to believe that normal, human, retail investors would find so much encouragement from reading about the BLS report.  The use of the BLS data to justify Friday’s market pop appears as just another excuse to explain the ongoing inflation of equities prices, caused by banks playing with TARP and other bailout money for their own benefit.

The Scary Stuff

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July 6, 2009

During the past week, a good number of Americans had been soothing themselves in Michael Jackson nostalgia  . . .  others watched tennis, many were intrigued by the military coup in Honduras and everyone tried to figure out what was going on in Sarah Palin’s mind.  Meanwhile  . . .  there was some really scary stuff in the news.  With Fourth of July behind us, it’s time to start looking forward to Halloween.  We need not look very far to get a good scare.  Those of us who still have jobs are afraid they may lose them.  Those who have lost their jobs wonder how long they can stay afloat before chaos finally takes over.  Many wise people, despite their comfortable positions in life (for now) have been discussing these types of problems lately.  Their opinions and outlooks are getting more and more ink (or electrons) as the economic crisis continues to unfold.

As we look at the current situation,  let’s check in with the guy who has the biggest mouth.  During an interview on ABC’s This Week with George Stephanopoulos, Vice-President Joe Biden admitted that “we and everyone else misread the economy”:

Biden acknowledged administration officials were too optimistic earlier this year when they predicted the unemployment rate would peak at 8 percent as part of their effort to sell the stimulus package.  The national unemployment rate has ballooned to 9.5 percent in June  —  the worst in 26 years.

This was basically a concession, validating the long-standing criticism by economists such as Nouriel Roubini (a/k/a “Dr.Doom”) who refuted the administration’s view of this crisis.  Many economists (including Roubini) have emphasized the administration’s unrealistic perception of the unemployment problem as a primary flaw in the “bank stress tests” as established by Treasury Secretary “Turbo” Tim Geithner.  Now we’re finding out how ugly this picture really is.  Here are some points raised by Dr. Roubini on July 2:

The June employment report suggests that the alleged “green shoots” are mostly yellow weeds that may eventually turn into brown manure.  The employment report shows that conditions in the labor market continue to be extremely weak, with job losses in June of over 460,000.

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The other important aspect of the labor market is that if the unemployment rate is going to peak around 11 percent next year, the expected losses for banks on their loans and securities are going to be much higher than the ones estimated in the recent stress tests.  You plug an unemployment rate of 11 percent in any model of loan losses and recovery rates and you get very ugly losses for subprime, near-prime, prime, home equity loan lines, credit cards, auto loans, student loans, leverage loans, and commercial loans — much bigger numbers than what the stress tests projected.

In the stress tests, the average unemployment rate next year was assumed to be 10.3 percent in the most adverse scenario. We’ll be already at 10.3 percent by the fall or the winter of this year, and certainly well above that and close to 11% at some point next year.

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The job market report is essentially the tip of the iceberg.  It’s a significant signal of the weaknesses in the economy.  It affects consumer confidence.  It affects labor income.  It affects consumption.  It affects the willingness of firms to start increasing production.  It has significant consequences of the housing market.  And it has significant consequences, of course, on the banking system.

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But eventually, large budget deficits and their monetization are going to lead — towards the end of next year and in 2011 — to an increase in expected inflation that may lead to a further increase in ten-year treasuries and other long-term government bond yields, and thus mortgage and private-market rates.  Together with higher oil prices driven up in part by this wall of liquidity rather than fundamentals alone, this could be a double whammy that could push the economy into a double-dip or W-shaped recession by late 2010 or 2011.   So the outlook for the US and global economy remains extremely weak ahead.  The recent rally in global equities, commodities and credit may soon fizzle out as an onslaught of worse-than-expected macro, earnings and financial news take a toll on this rally,which has gotten way ahead of improvement in actual macro data.

All right  .  .  .   So you may be thinking that this is exactly the type of pessimism we can expect from someone with the nickname “Dr. Doom”.  However, if you take a look at the July 2 article by Tom Lindmark on the Seeking Alpha website, you will find some important concurrence.  Mr. Lindmark discussed his own observation about the unemployment crisis:

All of these people do have to find jobs again sometime and I suspect, as do many others, that the numbers understate the extent of the problem.  There are a lot of people working for ten or twelve bucks an hour that used to make multiples of those numbers.  That’s what you do to survive.   So as we all probably know intuitively, the truth is worse than the picture the numbers paint.

Lindmark included the reactions of several economists to the latest unemployment data, as quoted from The Wall Street Journal Real Time Economics Blog.  It’s more of the same — not happy stuff.  Federal Reserve Chairman Ben Bernanke’s self-serving, self-congratulatory claim that “green shoots” could be found in the economy was made during a discussion on 60 Minutes back on March 15.  That’s what you call:   “premature shoots”.

Just in case you aren’t getting scared yet, take a look at what Ambrose Evans-Pritchard had to say in the Telegraph UK.  He draws our reluctant attention to the possibility that there might just be a violent reaction from the masses, once the ugliness of our situation finally sets in:

One dog has yet to bark in this long winding crisis.  Beyond riots in Athens and a Baltic bust-up, we have not seen evidence of bitter political protest as the slump eats away at the legitimacy of governing elites in North America, Europe, and Japan.  It may just be a matter of time.

One of my odd experiences covering the US in the early 1990s was visiting militia groups that sprang up in Texas, Idaho, and Ohio in the aftermath of recession.  These were mostly blue-collar workers, —  early victims of global “labour arbitrage” — angry enough with Washington to spend weekends in fatigues with M16 rifles.  Most backed protest candidate Ross Perot, who won 19pc of the presidential vote in 1992 with talk of shutting trade with Mexico.

The inchoate protest dissipated once recovery fed through to jobs, although one fringe group blew up the Oklahoma City Federal Building in 1995.  Unfortunately, there will be no such jobs this time.  Capacity use has fallen to record-low levels (68pc in the US,71 in the eurozone).  A deep purge of labour is yet to come.

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The Centre for Labour Market Studies (CLMS) in Boston says US unemployment is now 18.2pc, counting the old-fashioned way.  The reason why this does not “feel” like the 1930s is that we tend to compress the chronology of the Depression.  It takes time for people to deplete their savings and sink into destitution.  Perhaps our greater cushion of wealth today will prevent another Grapes of Wrath, but 20m US homeowners are already in negative equity ( data).  Evictions are running at a terrifying pace.

Some 342,000 homes were foreclosed in April, pushing a small army of children into a network of charity shelters.  This compares to 273,000 homes lost in the entire year of 1932. Sheriffs in Michigan and Illinois are quietly refusing to toss families on to the streets, like the non-compliance of Catholic police in the Slump.

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The message has not reached Wall Street or the City.  If bankers know what is good for them, they will take a teacher’s salary for a few years until the storm passes.  If they proceed with the bonuses now on the table, even as taxpayers pay for the errors of their caste, they must expect a ferocious backlash.

Do you think those bankers are saying “EEEEEK!” yet?  They probably aren’t.  Many other similarly-situated individuals are likely turning the page to have a look at the action in “emerging markets”.  Nevertheless, Mr. Evans-Pritchard, in another piece, exposed the hopelessness of those expectations:

Russia is sinking into a swamp of bad loans.

The scale of credit rot in the Russian banking system exposed by Fitch Ratings this week is truly staggering.  The report is yet another cold douche to those betting that the BRICs (Brazil, Russia, India, and China) can pull us out of our mess.

So there you have it.  You wanted to see Thriller again?  Now you have it in real life.  This time, neither Boris Karloff nor Michael Jackson will be around to keep it “lite”.  This is our reality in July of 2009.  Hang on.