March 8, 2010
The most recent report from the Bureau of Labor Statistics concerning non-farm payrolls for the month of February has surprised most people and it has left a number of commentators feeling upbeat. Reuters had reported that “The median forecast from the ten most accurate forecasters is for payrolls to fall by 70,000.” Nevertheless, the BLS report disclosed a figure of approximately half that much. Only 36,000 jobs had been lost and unemployment was holding at 9.7%. One enthusiastic reaction to that news came from the Mad Hedge Fund Trader:
While the employment rate for those with no high school diploma is 16%, the kind of worker who lost their manufacturing jobs to China, the jobless rate for those with college degrees is only 4.5%. This is proof that the dying sectors of the US economy are delivering the highest unemployment rates, and that America is clawing its way up the value chain in the global race for economic supremacy. It is what America does best, creative destruction with a turbocharger. There is a third influence here, which could be huge. The BLS only contacts existing businesses for its survey.
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The bottom line is that payroll figures are much better than they appear at first glance.
Prior to the release of that report, many commentators had been expressing their disappointment concerning the most recent economic indicators. I discussed that subject on March 1. On the following day, John Crudele of The New York Post focused on the dramatic drop in the Consumer Confidence Index, released by The Conference Board — a drop to 46 in February from January’s 56.5. Here is the conclusion Mr. Crudele reached in assessing what most middle-class Americans understand about our current economic state:
Even with the stock market still bubbling and media trying its damnedest to convince us at least a million times a day that there’s an economic recovery, the American public isn’t buying it.
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The economy has stabilized since then, helped greatly by the fact that some wealthy people feel wealthier because of an unbelievable snap back by the stock market during 2009. (And by unbelievable in this context I mean that what happened shouldn’t be believed as either legitimate or sustainable.)
Don Luskin of The Wall Street Journal’s Smart Money blog articulated his dissatisfaction with the most recent economic indicators on February 26. One week later, Luskin presented us with a very informative analysis for understanding the true value of one’s investments. Luskin spelled it out this way:
Consider stocks priced not in money, but in gold. In other words, instead of thinking of stocks as investments you make in order to increase your wealth in dollars, think of them as something to increase your wealth in gold. After all, you don’t want to make money for its own sake — you want the money for what you can buy with it. Gold is a symbol for all the things you might want to buy.
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It’s easy to track stocks priced in gold because the price of the S&P 500 and the price of an ounce of gold vary closely with one another. As of Thursday’s close, they were only about $10 apart, with the S&P 500 at 1123, and gold at about 1133.
How about a year ago, on the day of the bottom for stocks on March 9? That day the S&P 500 closed at 676.53. Gold closed at 920.85. That means that one “unit” of the S&P could have bought 73% of an ounce of gold.
Today, with stocks and gold each having risen over the last year — but with stocks rising more — one “unit” of the S&P can buy 99% of an ounce of gold. All we have to do is compare 73% a year ago to 99% now, and we can see that stocks, priced in gold, have risen 34.9%.
A 34.9% gain for stocks priced in gold is pretty good for a year’s work. But it’s a far cry from the 69.1% that stocks have gained when they are priced in dollars. Do you see what has happened here? Stocks have made you lots of dollars. But the dollar itself has fallen in value compared to the real and eternal value represented by gold.
Here’s the most troubling part. The entire 34.9% gain made by stocks — priced in gold, that is — was achieved in just the first five weeks of rallying from the March 2009 bottom. That means for most of the last year, since mid-April, while it has appeared that stocks have been furiously rallying, in reality they’ve just been sitting there. All risk, no reward.
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So why, then, did stocks — priced in dollars, not gold — continue so much higher? Simple: We experienced inflation-induced growth. Throw enough stimulus money, an “extended period” of zero interest rates from the Fed, and a big dose of government debt at the economy, and you will get some growth — and, eventually, lots of inflation.
Luskin concluded the piece by explaining that if stocks move higher while gold moves lower, we will be seeing evidence of real growth. On the other hand, if gold increases in value while stocks go down or simply get stuck where they are, there is no economic growth.
Luskin’s approach allows us to see through all that money-printing and excess liquidity Ben Bernanke has brought to the stock market, creating an illusion of increased value.
Everyone is hoping to see evidence of economic recovery as soon as possible. Don Luskin has provided us with the “x-ray specs” for seeing through the hype to determine whether some of that evidence is real.
Deceptive Oversight
March 17, 2010
March 16 brought us a few more provocative essays about the Lehman Brothers scandal. The most prominent subject discussed in the reactions to the Valukas Report has been the complete lack of oversight by the Federal Reserve Bank of New York — the entity with investigators in place inside of Lehman Brothers after the collapse of Bear Stearns. The FRBNY had the perfect vantage point to conduct effective oversight of Lehman. Not only did the FRBNY fail to do so — it actually helped Lehman maintain a false image of being financially solvent. It is important to keep in mind that Lehman CEO Richard Fuld was a class B director of the FRBNY during this period. Does that sound like a conflict of interest to anyone besides me? The Securities and Exchange Commission (under the direction of Christopher Cox at the time) has become another subject of scrutiny for its own dubious semblance of oversight.
Eliot Spitzer and William Black (a professor of economics and law at the University of Missouri – Kansas City) recently posted a great article at the New Deal 2.0 website. Among the memorable points from that piece is the assertion that accounting is “the weapon of choice” for financial deception. The Valukas Report has exposed such extensive accounting fraud at Lehman, it will be impossible for the Federal Reserve Bank of New York to feign ignorance of that activity. Another memorable aspect of the Spitzer – Black piece is its reference to those “too big to fail” financial institutions as “SDIs” or systemically dangerous institutions. Here is some of what Spitzer and Black had to say about how the FRBNY became enmeshed in Lehman’s sleazy accounting tactics:
The consequences of the New York Fed’s involvement in this scam were discussed in an article by Andrew Ross Sorkin from the March 16 edition of The New York Times. (You may recall that Andrew Ross Sorkin is the author of the book, Too Big To Fail.) He pointed out that the consequences of the Lehman scandal could be very far-reaching:
The question as to whether similar accounting tricks were being performed at “other Wall Street banks as well” opens a very huge can of worms. It’s time for the government to step back and assess the larger picture of what the systemic problem really is. In a speech before the Senate, Delaware Senator Ted Kaufman emphasized that the government needs to return the rule of law to Wall Street:
The nagging suspicion that those nefarious activities at Lehman Brothers could be taking place “at other banks as well” became a key point in Senator Kaufman’s speech:
We can only hope that a continued investigation into the Lehman scandal will result in a very bright light directed on those privileged plutocrats who consider themselves above the law.