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Jobless Recovery Myth Is Dead

August 12th, 2010 Posted in Uncategorized
Aug, 12 2010
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August 12, 2010

On July 29, I discussed the fact that for over a year, many pundits have been anticipating a “jobless recovery”.  In other words:  don’t be concerned about the fact that so many people can’t find jobs – the economy will recover anyway.  Recent economic reports have exposed how the widespread corporate tactic of cost-cutting by mass layoffs (to gin-up the bottom line in time for earnings reports) has finally taken its toll.  Although this tactic has helped to inflate stock prices and produce the illusion that the broader economy is experiencing a sustained recovery, we are finding out that the opposite is true.  The “jobless recovery” advocates ignore the fact the American economy is 70 percent consumer-driven.  If those consumers don’t have jobs, they aren’t going to be spending money.  Timothy Homan and Alex Tanzi of Bloomberg News gave us the ugly truth on Wednesday:

A lack of jobs will shackle consumer spending and restrain the U.S. recovery more than previously estimated, according to economists polled by Bloomberg News.

*   *   *

“Simply put, job growth in the private sector hasn’t improved as we would’ve expected,” said John Silvia, chief economist at Wells Fargo Securities LLC in Charlotte, North Carolina.  “The consumer continues to contribute to growth but at a subpar pace.”

*   *   *

Purchases, which rose 3 percent on average over the past three decades, dropped 1.2 percent last year, the biggest decrease since 1942.

*   *   *

Joblessness will be slow to fall, signaling it will take years for the economy to recover the more than 8 million jobs lost during the recession that began in December 2007.  Unemployment will average 9.6 percent in 2010 and 9.1 percent next year, according to the survey.

*   *   *

“We need a stronger economy, job creation and better consumer confidence,” Richard Dugas, chief executive officer of Pulte Group Inc., said in an Aug. 4 conference call.  “Our industry continues to face incredibly low demand.”

The August 10 press release from the Federal Open Market Committee (FOMC) began this way:

Information received since the Federal Open Market Committee met in June indicates that the pace of recovery in output and employment has slowed in recent months.  Household spending is increasing gradually, but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit.  Business spending on equipment and software is rising; however, investment in nonresidential structures continues to be weak and employers remain reluctant to add to payrolls.  Housing starts remain at a depressed level.  Bank lending has continued to contract.

Steve Goldstein of MarketWatch recently wrote a piece entitled, “The jobless recovery won’t go further without jobs”.   Mr. Goldstein explains that the corporations relying on layoffs to juice their earnings reports are running out of people to sacrifice for their bottom line:

Earnings per share grew 43% for the 450 members of the S&P 500 that have reported second-quarter results, according to FactSet Research data.

So what these productivity figures may be showing is that, as the Great Recession blew into town, companies stretched their employees to the limit.

The data suggest companies won’t be able to job-cut their way to continued profit growth — and, at some point, if companies want to expand, they will need to start offering jobs to the pool of 14.6 million out of work in July.

Business consultant Matthew C. Keegan wrote an essay for the SayEducate website entitled, “Jobless Recovery & Other Illusions”.  He began the piece with this thought:

The economic numbers continue to pour in with very few people believing that they offer a promise of a sustained recovery.  That’s bad news for America, because high unemployment (9.5 percent in July 2010) means that every sector of the economy will remain depressed longer than some imagined it would.

Steve Goldstein’s MarketWatch article raised the possibility that this cloud may have a silver lining:

The productivity report isn’t great news, but at least it shows that the jobless recovery won’t be able to recover much further without employment making a significant contribution.

Another myth bites the dust.





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The War On YOU

July 26th, 2010 Posted in Uncategorized
Jul, 26 2010
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July 26, 2010

The fifth annual conclave of the Netroots Nation (a group of liberal bloggers) took place in Las Vegas last week.  Among the stories emerging from that event was the plea that progressive bloggers “quit beating up on Obama”.  I found this very amusing.  After Obama betrayed his supporters by pushing through a faux healthcare “reform” bill, which lacked the promised “public option” and turned out to be a giveaway to big pharma and the health insurance industry – the new President turned the long-overdue, financial “reform” bill into yet another hoax.

As I pointed out on July 12, Mike Konczal of the Roosevelt Institute documented the extent to which Obama’s Treasury Department undermined the financial reform bill at every step.  On the following day, Rich Miller of Bloomberg News examined the results of a Bloomberg National Poll, which measured the public’s reaction to the financial reform bill.  Almost eighty percent of those who responded were of the opinion that the new bill would do little or nothing to prevent or mitigate another financial crisis.  Beyond that, 47 percent shared the view that the bill would do more to protect the financial industry than consumers.  Both healthcare and financial “reform” legislation turned out to be “bait and switch” scams used by the Obama administration against its own supporters.  After that double-double-cross, the liberal blogosphere was being told to “pay no attention to that man behind the curtain”.

Despite the partisan efforts by Democrats to blame our nation’s economic decline exclusively on the Bush administration, reading between the lines of a recent essay by Senator Bernie Sanders provides some insight on how the problem he discusses has festered during the Obama administration:

The 400 richest families in America, who saw their wealth increase by some $400 billion during the Bush years, have now accumulated $1.27 trillion in wealth.  Four hundred families!  During the last fifteen years, while these enormously rich people became much richer their effective tax rates were slashed almost in half.  While the highest-paid 400 Americans had an average income of $345 million in 2007, as a result of Bush tax policy they now pay an effective tax rate of 16.6 percent, the lowest on record.

Let me get this straight  .  .  .   Is Senator Sanders telling us that it took the 400 families the entire eight Bush years just to pick up $400 billion and that once Obama came to the White House, those families were able to pick up another $827 billion in less than two years?  In fairness, Senator Sanders made a great argument to reinstate what I call, “the tax on dead millionaires”.  He began by discussing  the harsh reality experienced by mere mortals:

And while the Great Wall Street Recession has devastated the middle class, the truth is that working families have been experiencing a decline for decades.

Nevertheless, to understand how the middle class has been destroyed by those 400 families, their corporate alter egos and the lobbyists they employ, one need not rely on the words of a Senator, who is an “avowed socialist” (a real one – not just someone called a socialist by partisan blowhards).  Consider, for example, a great essay by Phil Davis, avowed capitalist and self-described “serial entrepreneur”.  The title of the piece might sound familiar:  “It’s the End of the World As We Know It”.  Mr. Davis discussed the latest battle in the war against Social Security and the current efforts to raise the retirement age to 70:

So, what is this all about?  It’s about forcing 5M people a year who reach the age 65 to remain in the work-force.  The top 0.01% have already taken your money, they have already put you in debt, they have already bankrupted the government as well so it has no choice but to do their bidding.  Now the top 0.01% want to make even MORE profits by paying American workers even LESS money.  If they raise the retirement age to 70 to “balance” Social Security – that will guarantee that another 25M people remain in the workforce (less the ones that drop dead on the job – saving the bother of paying them severance).

Those who believe that President Obama would never let this happen need look no further than a recent posting by Glenn Greenwald (a liberal Constitutional lawyer – just like our President) at Salon.com:

It is absolutely beyond the Republicans’ power to cut Social Security, even if they retake the House and Senate in November, since Obama will continue to wield veto power.  The real impetus for Social Security cuts is from the “Deficit Commission” which Obama created in January by Executive Order, then stacked with people (including its bipartisan co-Chairs) who have long favored slashing the program, and whose recommendations now enjoy the right of an up-or-down vote in Congress after the November election, thanks to the recent maneuvering by Nancy Pelosi.  The desire to cut Social Security is fully bipartisan (otherwise it couldn’t happen) and pushed by the billionaire class that controls the Government.

Despite the efforts to characterize Social Security as an “entitlement program” – it’s not.  It’s something you have already paid for – as documented by your income tax returns and W-2 forms.  Pay close attention and watch how our one-party system, controlled by the Republi-cratic Corporatist Party  steals that money away from you.  Both Phil Davis and Glenn Greenwald have each just given you a big “heads-up”.  What are you going to do about it?




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Still Wrong After All These Years

June 21st, 2010 Posted in Uncategorized
Jun, 21 2010
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June 21, 2010

I’m quite surprised by the fact that people continue to pay serious attention to the musings of Alan Greenspan.  On June 18, The Wall Street Journal saw fit to publish an opinion piece by the man referred to as “The Maestro” (although – these days – that expression is commonly used in sarcasm).  The former Fed chairman expounded that recent attempts to rein in the federal budget are coming “none too soon”.  Near the end of the article, Greenspan made the statement that will earn him a nomination for TheCenterLane.com’s Jackass of the Year Award:

I believe the fears of budget contraction inducing a renewed decline of economic activity are misplaced.

John Mauldin recently provided us with a thorough explanation of why Greenspan’s statement is wrong:

There are loud calls in the US and elsewhere for more fiscal constraints.  I am part of that call.  Fiscal deficits of 10% of GDP is a prescription for disaster.  As we have discussed in previous letters, the book by Rogoff and Reinhart (This Time is Different) clearly shows that at some point, bond investors start to ask for higher rates and then the interest rate becomes a spiral.  Think of Greece.  So, not dealing with the deficit is simply creating a future crisis even worse than the one we just had.

But cutting the deficit too fast could also throw the country back in a recession.  There has to be a balance.

*   *   *

That deficit reduction will also reduce GDP.  That means you collect less taxes which makes the deficits worse which means you have to make more cuts than planned which means lower tax receipts which means etc.  Ireland is working hard to reduce its deficits but their GDP has dropped by almost 20%! Latvia and Estonia have seen their nominal GDP drop by almost 30%!  That can only be characterized as a depression for them.

Robert Reich’s refutation of Greenspan’s article was right on target:

Contrary to Greenspan, today’s debt is not being driven by new spending initiatives.  It’s being driven by policies that Greenspan himself bears major responsibility for.

Greenspan supported George W. Bush’s gigantic tax cut in 2001 (that went mostly to the rich), and uttered no warnings about W’s subsequent spending frenzy on the military and a Medicare drug benefit (corporate welfare for Big Pharma) — all of which contributed massively to today’s debt.  Greenspan also lowered short-term interest rates to zero in 2002 but refused to monitor what Wall Street was doing with all this free money.  Years before that, he urged Congress to repeal the Glass-Steagall Act and he opposed oversight of derivative trading.  All this contributed to Wall Street’s implosion in 2008 that led to massive bailout, and a huge contraction of the economy that required the stimulus package.  These account for most of the rest of today’s debt.

If there’s a single American more responsible for today’s “federal debt explosion” than Alan Greenspan, I don’t know him.

But we can manage the Greenspan Debt if we get the U.S. economy growing again.  The only way to do that when consumers can’t and won’t spend and when corporations won’t invest is for the federal government to pick up the slack.

This brings us back to my initial question of why anyone would still take Alan Greenspan seriously.  As far back as April of 2008 – five months before the financial crisis hit the “meltdown” stage — Bernd Debusmann had this to say about The Maestro for Reuters, in a piece entitled, “Alan Greenspan, dented American idol”:

Instead of the fawning praise heaped on Greenspan when the economy was booming, there are now websites portraying him in dark colors.  One site is called The Mess That Greenspan Made, another Greenspan’s Body Count.  Greenspan’s memoirs, The Age of Turbulence, prompted hedge fund manager William Fleckenstein to write a book entitled Greenspan’s Bubbles, the Age of Ignorance at the Federal Reserve.  It’s in its fourth printing.

The day after Greenspan’s essay appeared in The Wall Street Journal, Howard Gold provided us with this recap of Greenspan’s Fed chairmanship in an article for MarketWatch:

The Fed chairman’s hands-off stance helped the housing bubble morph into a full-blown financial crisis when hundreds of billions of dollars’ worth of collateralized debt obligations, credit default swaps, and other unregulated derivatives — backed by subprime mortgages and other dubious instruments — went up in smoke.

Highly leveraged banks that bet on those vehicles soon were insolvent, too, and the Fed, the U.S. Treasury and, of course, taxpayers had to foot the bill.  We’re still paying.

But this was not just a case of unregulated markets run amok.  Government policies clearly made things much worse — and here, too, Greenspan was the culprit.

The Fed’s manipulation of interest rates in the middle of the last decade laid the groundwork for the most fevered stage of the housing bubble.  To this day, Greenspan, using heavy-duty statistical analysis, disputes the role his super-low federal funds rate played in encouraging risky behavior in housing and capital markets.

Among the harsh critiques of Greenspan’s career at the Fed, was Frederick Sheehan’s book, Panderer to Power.  Ryan McMaken’s review of the book recently appeared at the LewRockwell.com website – with the title, “The Real Legacy of Alan Greenspan”.   Here is some of what McMacken had to say:

.  .  .  Panderer to Power is the story of an economist whose primary skill was self-promotion, and who in the end became increasingly divorced from economic reality.  Even as early as April 2008 (before the bust was obvious to all), the L.A. Times, observing Greenspan’s post-retirement speaking tour, noted that “the unseemly, globe-trotting, money-grabbing, legacy-spinning, responsibility-denying tour of Alan Greenspan continues, as relentless as a bad toothache.”

*   *   *

Although Greenspan had always had a terrible record on perceiving trends in the economy, Sheehan’s story shows a Greenspan who becomes increasingly out to lunch with each passing year as he spun more and more outlandish theories about hidden profits and productivity in the economy that no one else could see.  He spoke incessantly on topics like oil and technology while the bubbles grew larger and larger.  And finally, in the end, he retired to the lecture circuit where he was forced to defend his tarnished record.

The ugly truth is that America has been in a bear market economy since 2000 (when “The Maestro” was still Fed chair).  In stark contrast to what you’ve been hearing from the people on TV, the folks at Comstock Partners put together a list of ten compelling reasons why “the stock market is in a secular (long-term) downtrend that began in early 2000 and still has some time to go.”  This essay is a “must read”.  Further undermining Greenspan’s recent opinion piece was the conclusion reached in the Comstock article:

The data cited here cover the major indicators of economic activity, and they paint a picture of an economy that has moved up, but only from extremely depressed numbers to a point where they are less depressed.  And keep in mind that this is the result of the most massive monetary and fiscal stimulus ever applied to a major economy.  In our view the ability of the economy to undergo a sustained recovery without continued massive help is still questionable.

As always, Alan Greenspan is still wrong.  Unfortunately, there are still too many people taking him seriously.




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The Employment Outlook Debate

March 10th, 2010 Posted in Uncategorized
Mar, 10 2010
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March 10. 2010

The February non-farm payrolls report from the Bureau of Labor Statistics boosted the optimism of many commentators who follow the unemployment crisis.  Nevertheless, predictions about the employment outlook for the remainder of 2010 are extremely conflicting.  Surfing around the web will give you completely divergent prognostications, usually depending on the locale.  Here are some examples:  Los Angeles job outlook expected to improve (Los Angeles Times); Atlanta employers expect to hold payrolls steady — neither hiring nor firing (Atlanta Journal-Constitution) Boston employers expected to add jobs (The Boston Globe — quoting a Manpower report); Employers still skittish on hiring (CNNMoney.com); Columbus hiring prospects for upcoming quarter weaken slightly (ledger-inquirer.com).

In an essay for the istockanalyst.com website, Ockham Research began by pointing out that 8.4 million jobs have been lost since the recession began in December of 2007.  The fact that the S&P 500 has advanced 70% during this time has encouraged pundits to believe in a jobless recovery.  After noting Senator Harry Reid’s odd reaction to the February non-farm payrolls report:  “Only 36,000 people lost their jobs today, which is really good” — the piece continued:

After that blunder, the report on Bloomberg.com struck us in just how optimistic it is towards March’s employment data, thanks in part to temporary hiring for census workers which could add more than 100,000 jobs this month.  However, a strategist for Goldman Sachs (GS) estimated 275,000 job gains; another economist predicted “easily” reaching 300,000.  Chief  US economist at Deutsche Bank (DB) took the prize though, saying that a gain of 450,000 “can’t be ruled out.”

The Ockham Research piece again emphasized that many of the optimistic views are based on the addition of census workers to the rolls of the employed, despite the fact that these are temporary positions, eventually disappearing in mid-summer.  Ockham Research was also dismissive of the inclusion of workers added to payrolls simply because of summertime seasonal employment opportunities.  They concluded on this note:

Of course, no one can predict the future and predictions about macroeconomic data points are extremely thorny.  As much as we would like to believe they are correct and job growth will return in robust fashion, we are a bit skeptical.  They have raised the bar for expectations, so it will be extremely interesting to see the market’s reaction when the data comes in.

The Seeking Alpha website featured a posting by David Goldman which began with these remarks:

.  .  .  it would be hard to envision significant declines in payroll employment from already miserable levels.  But the sort of things that generate jobs — venture capital investments, small business expansion, and so forth — are as dead as the Monty Python parrot.

Mr. Goldman focused on the February Small Business Confidence report by Discover Card, which revealed that America’s small business owners remained cautious about the economy during February as they expected economic conditions to stay largely the same during the coming months.  At the close of the piece, we are reminded of its title, “Where Will the Jobs Come From?”   —

With the continuing catastrophe in both the residential and commercial real estate markets, small business capital has imploded.  And small business surely isn’t getting help from the banking system, where loans still are contracting at the fastest pace on record.

Two economists for the Federal Reserve Bank of San Francisco, Mary Daly and Bart Hobijn, recently published a research paper addressing the surprisingly high unemployment rate for 2009, based on a principle known as Okun’s Law.  They explained it this way:

Okun’s law tells us that, for every 2% that real GDP falls below its trend, we will see a 1% increase in the unemployment rate.  Since real GDP was almost flat in 2009 while its trend level increased by 3%, the unemployment rate under Okun’s law should have increased by 1.5 percentage points.  Instead it rose by 3 percentage points, more than twice the predicted increase.

I will now fast-forward to their conclusion:

The data presented here consistently point to unusually strong productivity growth as the main driver of the departure from Okun’s law in 2009.  A key question that remains unanswered by this analysis is whether this pattern will continue in 2010.  Most forecasters assume that the economy will return to its historical path this year, following Okun’s two-to-one ratio of changes in GDP and changes in unemployment.  Under this scenario, unemployment would begin to edge down this year as the economy recovers and gains momentum.  But there are clearly risks to this view.            .  .   .

Anecdotal evidence suggests that efforts to contain costs and remain nimble in the face of uncertainty have become a fixture in business strategy.  If productivity keeps on growing at an above-average pace, then unemployment forecasts based on Okun’s law could continue to be overly optimistic.

So there you have it.  Pick your favorite prediction and run with it.  The Manpower Employment Outlook Survey seems to have a reasonable take on expectations for the second quarter of 2010:

“U.S. hiring activity is still in neutral, but revving toward first gear,” said Jonas Prising, Manpower president of the Americas.  “It’s moving in the right direction, but it will take some time, with no major speed bumps, before it can accelerate.”

Let’s just hope the road ahead doesn’t have any sinkholes.



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Jobs And Propaganda

August 10th, 2009 Posted in Uncategorized
Aug, 10 2009
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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%.

*   *   *

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.

*   *   *

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.

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The Scary Stuff

July 6th, 2009 Posted in Uncategorized
Jul, 06 2009
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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.

*   *   *

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.

*   *   *

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.

*   *   *

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.

*   *   *

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 (zillow.com 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.

*   *   *

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.

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Where The Money Is

June 1st, 2009 Posted in Uncategorized
Jun, 01 2009
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June 1, 2009

For the past few months we have been hearing TV “experts” tell us that “it’s almost over” when discussing the Great Recession.  Beyond that, many of the TV news-readers insist that the “bear market” is over and that we are now in a “bull market”.  In his new column for The Atlantic (named after his book A Failure of Capitalism) Judge Richard A. Posner is using the term “depression” rather than “recession” to describe the current state of the economy.  In other words, he’s being a little more blunt about the situation than most commentators would care to be.  Meanwhile, the “happy talk” people, who want everyone to throw what is left of their life savings back into the stock market, are saying that the recession is over.  If you look beyond the “good news” coming from the TV and pay attention to who the “financial experts” quoted in those stories are … you will find that they are salaried employees of such companies as Barclay’s Capital and Charles Schwab  … in other words:  the brokerages and asset managers who want your money.   A more sober report on the subject, prepared by the National Association for Business Economics (NABE) revealed that 74 percent of the economists it surveyed were of the opinion that the recession would end in the third quarter of this year.  Nineteen percent of the economists surveyed by the NABE predicted that the recession would end during the fourth quarter of 2009 and the remaining 7 percent opined that the recession would end during the first quarter of 2010.

Some investors, who would rather not wait for our recession to end before jumping back into the stock market, are rapidly flocking to what are called “emerging markets”.  To get a better understanding of what emerging markets are all about, read Chuan Li’s (mercifully short) paper on the subject for the University of Iowa Center for International Finance and Development.  The rising popularity of investing in emerging markets was evident in Fareed Zakaria’s article from the June 8 issue of Newsweek:

It is becoming increasingly clear that the story of the global economy is a tale of two worlds.  In one, there is only gloom and doom, and in the other there is light and hope.  In the traditional bastions of wealth and power — America, Europe and Japan — it is difficult to find much good news.  But there is a new world out there — China, India, Indonesia, Brazil — in which economic growth continues to power ahead, in which governments are not buried under a mountain of debt and in which citizens remain remarkably optimistic about their future.  This divergence, between the once rich and the once poor, might mark a turn in history.

*    *    *

Compare the two worlds.  On the one side is the West (plus Japan), with banks that are overleveraged and thus dysfunctional, governments groaning under debt, and consumers who are rebuilding their broken balance sheets. America is having trouble selling its IOUs at attractive prices (the last three Treasury auctions have gone badly); its largest state, California, is veering toward total fiscal collapse; and its budget deficit is going to surpass 13 percent of GDP —  a level last seen during World War II.  With all these burdens, even if there is a recovery, the United States might not return to fast-paced growth for a while.  And it’s probably more dynamic than Europe or Japan.

Meanwhile, emerging-market banks are largely healthy and profitable.  (Every Indian bank, government-owned and private, posted profits in the last quarter of 2008!)  The governments are in good fiscal shape.  China’s strengths are well known — $2 trillion in reserves, a budget deficit that is less than 3 percent of GDP — but consider Brazil, which is now posting a current account surplus.

On May 31, The Economic Times reported similarly good news for emerging markets:

Growth potential and a long-term outlook for emerging markets remain structurally intact despite cyclically declining exports and capital outflows, a research report released on Sunday said.

According to Credit Suisse Research’s latest edition of Global Investor, looking forward to an eventual recovery from the current crisis, growth led by domestic factors in emerging markets is set to succeed debt-fuelled US private consumption as the most important driver of global economic growth over coming years.

The Seeking Alpha website featured an article by David Hunkar, following a similar theme:

Emerging markets have easily outperformed the developed world markets since stocks rebounded from March this year. Emerging countries such as Brazil, India, China, etc. continue to attract capital and show strength relative to developed markets.

On May 29, The Wall Street Journal‘s Smart Money magazine ran a piece by Elizabeth O’Brien, featuring investment bargains in “re-emerging” markets:

As the U.S. struggles to reverse the economic slide, some emerging markets are ahead of the game.  The International Monetary Fund projects that while the world’s advanced economies will contract this year, emerging economies will expand by as much as 2.5 percent, and some countries will grow a lot faster.  Even better news:  Some pros are finding they don’t have to pay a lot to own profitable “foreign” stocks.  The valuations on foreign stocks have become “very, very attractive,” says Uri Landesman, chief equity strategist for asset manager ING Investment Management Americas.

As for The Wall Street Journal itself, the paper ran a June 1 article entitled: “New Driver for Stocks”, explaining that China and other emerging markets are responsible the rebound in the demand for oil:

International stock markets have long taken their cues from the U.S., but as it became clear that emerging-market economies would hold up best and rebound first from the downturn, the U.S. has in some ways moved over to the passenger seat.

Jim Lowell of MarketWatch wrote a June 1 commentary discussing some emerging market exchange-traded funds (ETFs), wherein he made note of his concern about the “socio-politico volatility” in some emerging market regions:

Daring to drink the water of the above funds could prove to be little more than a way to tap into Montezuma’s revenge.  But history tells us that investors who discount the rewards are as prone to disappointment as those who dismiss the risks.

On May 29, ETF Guide discussed some of the exchange-traded funds focused on emerging markets:

Don’t look now, but emerging markets have re-discovered their mojo.  After declining more than 50 percent last year and leading global stocks into a freefall, emerging markets stocks now find themselves with a 35 percent year-to-date gain on average.

A website focused solely on this area of investments is Emerging Index.

So if you have become too risk-averse to allow yourself to get hosed when this “bear market rally” ends, you may want to consider the advantages and disadvantages of investing in emerging markets.  Nevertheless, “emerging market” investments might seem problematic as a way of dodging whatever bullets come by, when American stock market indices sink.  The fact that the ETFs discussed in the above articles are traded on American exchanges raises a question in my mind as to whether they could be vulnerable to broad-market declines as they happen in this country.  That situation could be compounded by the fact that many of the underlying stocks for such funds are, themselves, traded on American exchanges, even though the stocks are for foreign corporations.  By way of disclosure, as of the time of writing this entry, I have no such investments myself, although by the time you read this  . . .   I just might.

Update: I subsequently “stuck my foot in the water” by investing in the iShares MSCI Brazil Index ETF (ticker symbol: EWZ).  Any guesses as to how long I stick with it?

June 3 Update: Today the S&P 500 dropped 1.37 percent and EWZ dropped 5.37 percent — similar to the losses posted by many American companies.   Suffice it to say:  I am not a happy camper!  I plan on unloading it.

DISCLAIMER:  NOTHING CONTAINED ANYWHERE ON THIS SITE CONSTITUTES ANY INVESTING ADVICE OR RECOMMENDATION.  ANY PURCHASES OR SALES OF SECURITIES ARE SOLELY AT THE DISCRETION OF THE READER.

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The News Nobody Wants To Hear

December 11th, 2008 Posted in Uncategorized
Dec, 11 2008
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December 11, 2008

You can’t watch a news program these days without hearing some “happy talk” about how our dismal economy is “on the verge of recovery”.  You have to remember that many of these shows are sponsored by brokerage firms.  That fact must be taken into consideration when you decide how much weight you will give the opinions of the so-called “experts” appearing on those programs to tell you that the stock market has reached “the bottom” and that it is now time to jump back in and start buying stocks.  Similarly, those people interested in making a home purchase (i.e. millionaires, who don’t have to worry about getting a mortgage) want to know when the residential real estate market will hit “bottom” so they can get the best value.  If I had a thousand dollars for every time during the past six months that some prognosticator has appeared on television to tell us that the stock market has “hit bottom”, I would have enough money to start my own geothermal power utility.

People interested in making investments have been scared away from stocks due to the pummeling that the markets have taken since the “mortgage crisis” raised its ugly head and devastated the world economy.  If those folks believe the hype and start buying stocks now, they are taking a greater risk than the enthusiastic promoters on TV might be willing to disclose.

People just don’t like bad news, especially when it is about the future and worse yet, if it’s about the economy.  On Friday, December 5, the stock market rallied, despite the dismal news that November’s non-farm employment loss was the greatest monthly employment decline in 34 years.  More than half a million people lost their jobs in November.  Despite this news, all of the major stock indices were up at least 3 percent for that day alone.  Have all these people bought into the magical thinking described in The Secret?  Do that many people believe that wishing hard enough can cause a dream to become reality?

There is one authority on the subject of economics, who earned quite a bit of “street cred” when our current economic crisis hit the fan. He is Nouriel Roubini, a professor of economics at New York University’s Stern School of Business. He earned the nickname “Doctor Doom” when he spoke before the International Monetary Fund (IMF) on September 7, 2006 and described, in precise detail, exactly what would bring the financial world to its knees, two years later.  In this time of uncertainty, many people (myself included) pay close attention to what Dr. Roubini has to say by regularly checking in on his website.  On December 5, we were surprised to hear Doctor Doom’s admission to Aaron Task (on the web TV show, Tech Ticker) that his own 401(k) plan is comprised entirely of stocks.  Dr. Roubini explained that he is not in the “Armageddon camp” and that for the long haul, stocks are still a good investment (although currently not a good idea for investors with more short-term goals).  Upon learning of this, I began to wonder if the revelation about Doctor Doom’s stock holdings could have been the reason for the stock market rally that day.

Yesterday, I had the pleasure of meeting Dr. Roubini at a lecture he gave within staggering distance of my home.  I was able to talk to him about my concern over Federal Reserve Chairman, Ben Bernanke’s idea of having the federal government purchase stocks in order to pep-up a depressed stock market.  How could this possibly be accomplished?  How could the Fed decide which stocks to buy to the exclusion of others?  Dr. Roubini told me that the government has already done this by purchasing preferred shares of stock issued by the banks participating in the TARP program.  He explained that rather than purchasing selected stocks of particular companies, the government would, more likely, invest in stock indices.  Before I get to Doctor Doom’s other points from his lecture, I will share this photo taken of yours truly and Doctor Roubini (who appears on your left):

Doctor Doom with Me

Dr. Roubini told the audience that he believes this recession will be worse than everyone expects. During the next few months, “the flow of macroeconomic news will be awful and worse than expected”. He opined that people are going to be surprised if they think that the stock market “bottom” will come in mid-2009. He expects that by the end of 2009 “things will still be bad” and unemployment will peak at 9% in early 2010. He thinks that the consensus on earnings-per-share estimates for stocks during the next year is “delusional”. He anticipates risk aversion among investors to be severe next year. We are now in a global recession and this has caused commodity prices to fall 30%. He pointed out that commodity prices could still fall another 20%. He considers it “very likely” that between 500 to 600 hedge funds will go out of business within the next six months. As this happens, the stocks held by these funds must be dumped onto the market. With respect to the beleaguered residential real estate market, he pointed out that home prices could fall another 15-20% by early 2010.

The good news provided by Dr. Roubini is that the global recession should end by the close of 2009. However, he expects recovery to be “weak” in 2010. He surmised that the possibility of a systemic meltdown has been minimized by the actions taken at the recent G7 meeting and most particularly with the G7 resolution to prevent further “Lehman Brothers-type” bankruptcies from taking place. He concluded that this recession should be nothing like the Japanese recession of the 1990s, which lasted nearly a decade.

So there you have it:  The news (almost) nobody wants to hear.  You can say these are the predictions voiced by one man who could be wrong.  Nevertheless, given Dr. Roubini’s track record, I and many others hold his opinions in high regard.  Now, let’s see how this all plays out.

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