As the financial media obsess over data like this morning’s payroll numbers, it’s interesting to observe trends in the direction and degree of “surprises” about the data.
Here is the Citigroup Economic Surprise Index for the US:
I love it when a reporter catches a high-profile official letting down his guard:
SEWARD, NE—Claiming he wasn’t afraid to let everyone in attendance know about “the real mess we’re in,” Federal Reserve chairman Ben Bernanke reportedly got drunk Tuesday and told everyone at Elwood’s Corner Tavern about how absolutely fucked the U.S. economy actually is.
Bernanke, who sources confirmed was “totally sloshed,” arrived at the drinking establishment at approximately 5:30 p.m., ensconced himself upon a bar stool, and consumed several bottles of Miller High Life and a half-dozen shots of whiskey while loudly proclaiming to any patron who would listen that the economic outlook was “pretty goddamned awful if you want the God’s honest truth.”
“Look, they don’t want anyone except for the Washington, D.C. bigwigs to know how bad shit really is,” said Bernanke, slurring his words as he spoke. “Mounting debt exacerbated—and not relieved—by unchecked consumption, spiraling interest rates, and the grim realities of an inevitable worldwide energy crisis are projected to leave our entire economy in the shitter for, like, a generation, man, I’m telling you.”
“And hell, as long as we’re being honest, I might as well tell you that a truer estimate of the U.S. unemployment rate is actually up around 16 percent, with a 0.7 percent annual rate of economic growth if we’re lucky—if we’re lucky,” continued Bernanke, nearly knocking a full beer over while gesturing with his hands…
…Numerous bar patrons slowly nodded in agreement as Bernanke went on to suggest the United States could pass three or four more stimulus packages and “it wouldn’t even matter.”
“You think that’s going to create long-term economic growth, let alone promote job creation?” Bernanke said. “We’re way beyond that, my friend. There are no jobs, okay? There’s nothing. I think that calls for another drink, don’t you?”
While using beer bottles and pretzel sticks in an attempt to explain to the bartender the importance of infusing $650 billion into the bond market, the inebriated Fed chairman nearly fell off his stool and had to be held up by the patron sitting next to him.
Another bargoer confirmed Bernanke stood about 2 inches from her face and sprayed her with saliva, claiming inflation was going to “totally screw” consumer confidence and then asking if he could bum a smoke.
“Sure, we could hold down long-term interest rates and pursue a program of quantitative easing, but c’mon, we all know that’s not going to make the slightest bit of difference when it comes to output, demand, or employment,” Bernanke said before being told to “try to keep [his] voice down” by the bartender. “And trust me, with the value of the U.S. dollar in the toilet, import costs going through the roof, and numerous world governments unprepared for their own substantial debt burdens, shit’s not looking too good for us abroad, either.”
“God, I’m so wasted,” added Bernanke, resting his head on the bar.
Customers at the bar told reporters the “shitfaced” and disruptive Bernanke refused to pay for his drinks with U.S. currency, claiming it was “worthless.” Witnesses also confirmed that near the end of the evening, Bernanke put money into the jukebox and selected Dire Straits’ “Money For Nothing” to play five times in a row.
And who knew Bernanke and I had similar tastes in music?
This via Dave Rosenberg (free sign-up required):
BLEAK JOB MARKET OUTLOOK
We said before that what really stood out in this “Great Recession” was the permanency of the job decay. Of the eight million jobs lost, three-quarters were in positions that are not likely coming back.
We just heard from the National Association of Manufacturers that fewer than 30% of the manufacturing jobs lost in the sector will be recouped in the next six years. So here’s a bit of math: if this holds true for the economy as a whole, and assuming a normal cyclical upturn in the labour force participation rate, then the nationwide unemployment rate would be 15% in six years’ time. How anyone can believe that we can squeeze inflation out of that scenario is truly one of life’s many mysteries.
We have to let Kondratieff winter play out and do its job of debt liquidation before the long-term employment cycle can start up again. With extend-and-pretend and mark-to-fantasy, this is going to be a long process.
Long Wave Analyst
As for manufacturing jobs, good luck with that. The US educational system pretty much seals the fate of anything engineering rated — my advice there is keep your kids out of those unionized prisons. Better to pool resources with friends and hire tutors and (Chinese-speaking) nannies. I wonder, how many government teachers can an iPad replace?
Maybe legislators are finally ditching Keynesianism for some real solutions, while acknowledging the reality of what is likely to be a decades-long slump:
WASHINGTON—In a bold new measure intended to address unemployment among young professionals, lawmakers from across the political spectrum agreed on legislation Tuesday to subsidize the cryogenic freezing of recent college graduates until the job market recovers.
The bill, expected to swiftly pass in both houses, would facilitate the subzero preservation of any graduate of a two- or four-year educational institution. Sponsors of the initiative said that with the national unemployment rate at just under 10 percent, it only made sense for young job-seekers to temporarily enter a state of supercooled stasis.
“Finding employment is extremely difficult for today’s college graduate,” Sen. Kay Bailey Hutchison (R-TX) said. “Our current economy offers few options for the millions of young men and women desperate to join the workforce.”
“Were we to freeze these graduates at the height of vigor and ambition, however, there’s a chance we could revive them during a more prosperous time,” Hutchinson continued. “When the economy finally bounces back—10, 20, even 30 years from now—we’ll have an entire generation thawed out and ready to contribute.”
Bloomberg is reporting that some lame-brain economists are excited about the employment boost of the 2010 census:
Jan. 8 (Bloomberg) — The 2010 census couldn’t have come at a better time for the U.S. economy.
The government will hire about 1.2 million temporary workers in the first half of the year to administer the decennial population count, possibly providing a bridge to gains in private employment later in the year.
The surge will probably dwarf any hiring by private employers early in 2010 as companies delay adding staff until they are convinced the economic recovery will be sustained. Money earned by the clipboard-toting workers going door-to-door to verify the government population survey is likely to be spent, giving the economy an extra lift.
“It’s a short-term stimulus program in which the government’s injecting money into the economy through additional paychecks,” said Dean Maki, chief U.S. economist at Barclays Capital Inc. in New York, who projects that 2.5 million more Americans will be working at the end of the year. “This will support consumer income during those months.”
(cont…) The stimulus bill President Barack Obama signed in February and additional funding by Congress provided enough money to hire 1.4 million Americans in total for the census, almost three times as many as in 2000. About 160,000 were already employed last year to do preliminary work.
The Census Bureau anticipates hiring about 181,000 workers from January through March and about 971,000 in the following three months.
First Five Months
The economy may add about 700,000 jobs in May alone, mostly because of the census, Gault said. Even Maki’s more optimistic assessment of the employment outlook means the U.S. may take years to recover the 7.2 million jobs lost since the recession began in December 2007.
“The bulk of these employees are from the low end of the income distribution; they are cash-constrained,” said Neal Soss, chief economist at Credit Suisse in New York who forecasts the economy will add a little more than 1 million jobs this year. “Having a paycheck is allowing them to spend in a way that they wouldn’t otherwise.”
Hiring for the census may also help lower the unemployment rate early this year, economists said, though the influence will be less than in payrolls. For example, some of the people hired may have other part-time jobs, limiting the impact on joblessness.
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This is typical mainstream Keynesian hogwash, which always supports government spending, no matter how useless or counterproductive. The less a corrupt government knows about the people who live under its rule, the better. Aside from that, in hard times wasteful programs like the Census should be completely dispensed with or postponed. For goodness’ sake, I bet a private firm could assemble better data for 1/100th the cost (if they haven’t already done so and sold it at a profit).
Keynesians never consider where the capital comes from for all of this useless employment. Capital can’t be created at will by bureaucrats. It has to be produced through intelligently orchestrated labor and saved by not consuming the fruits of that labor. This is what is stolen by the government when it taxes, prints money or issues debt to “create jobs.” It drains the economy of the savings needed to create real jobs and keeps us from building up the capital we need to grow out of depressions. This is what put the Great in the depression of the 1930s.
(Edit: checking Mish just now, I see that he posted on this same topic today)
This morning’s Breakfast With Dave is good one.
There are so many headwinds confronting the U.S. consumer it’s not even funny. For a look at the new harsh reality of soaring usage of grocery vouchers, as well as other supplements to the household budget, have a look at the grim article on page 2 of the weekend FT (Families Take Up Food Stamps as Wages Shrink). On the very same page, there is an article on the latest trend in terms of 21st-century breadlines — Middle Classes Turn to Car Park Handouts. To think we still get asked why we aren’t more bullish over the outlook for spending. Truly amazing.
TREMENDOUS UNDEREMPLOYMENT
The U.S. economy is actually 9.4 million jobs short of being anywhere remotely close to being fully employed, which is why any inflation that can somehow be created by the Fed is simply going to be unsustainable noise along a fundamental downtrend in pricing power. After last Friday’s report, we have now lost 6.9 million positions that have been cut during this recession and we have to count in the additional 2.5 million jobs that need to be created — but never were — just to absorb the new entrants into the labour market. The ‘real’ unemployment rate is now 16.8%, so to suggest that this down-cycle was anything but a depression is basically a misrepresentation of the facts.
MONEY AND CREDIT AGGREGATES ARE NOW DEFLATING
It is interesting that the equity market has begun to wobble (fade last Friday’s rally on such low volume) because we have noticed that some key liquidity indicators are not behaving very well, all of a sudden. M1 fell 1.0% in the August 24th week and over the past four weeks is down at a 6.5% annual rate. M2 has contracted in each of the past four weeks too and over that time has slipped at a 12.2% annualized pace, which is a near-record decline. We see the same trend in the broad MZM money measure — off at a 15.8% annual rate over the past month. Bank credit also remains in a fundamental downtrend — contracting at an epic 9% annualized pace over the past four weeks.
So for the first time in the post-WWII era, we have deflation in credit, wages and rents, and from our lens this is a toxic brew that in the end will ensure that the focus on capital preservation and income orientation will be the winning strategy over a strict reliance on capital appreciation.
This post started as an email that got way too long. I added some charts and put it up here:
The rally has not surprised me (on March 31 I expressed the opinion that we would hit 900 or higher by summer:
…more likely in my mind is a protracted rally extending to 900 or higher by summer, then rolling over to meet a date with 400 next winter. Look at last year’s rallies from March to May and July to August for an idea of what this might look like, though on a larger percentage and time scale because we are correcting a larger sell-off. The case for such a move is bolstered when you hear major investment banks’ strategists calling this a dead cat bounce. Too many people are still afraid to call a bottom, and they need to be suckered into long positions before this is over (along the same lines, too many traders are embracing the dead cat bounce and need to be shaken out before it can get back to leading the buy-and-holders to slaughter).
That said, I was leaning closer towards 900 than 1050:
I am highly skeptical, though respectful, of calls for a the mother of all bear market rallies. Robert Prechter and some other Elliott Wavers, as well as Tim Knight (slopeofhope.com) seem to be anticipating a 6-month or longer rally to as high as 1050. I simply don’t see why that is necessary in this environment. This is a depression, and the last one was accompanied by bear market that, after the first 6 months, maintained the momentum of a cruising supertanker. Rallies of 20 percent and 2 months were about all you got from April 1930 to July 1932 as the Dow dropped from about 295 to 41. That deflation-driven event was a much more orderly bear market than the jagged trajectory of the dot-com crash, which occured while the credit bubble continued to expand. Interestingly, the 1966-1982 secular bear (a brutal 75% loss in real terms) also traced out such a series of steep plunges and rallies as the bubble kept inflating thanks to a compliant Fed and the abandonment of the last trace of the gold standard. Employment was down, but animal spirits were still running high with the computing boom, the advent of securitization, and new innovations in consumer credit.
Though I saw this rally coming a mile away, I have traded it very poorly. First, I put too much emphasis on picking the absolute bottom for a buy-in. Back in Feb and March I got out of most of my shorts by the time we were under 700, and I entered a bunch of limit orders to put over 1/2 of my net worth in SPY on the long side. Unfortunately, those orders started at 620, and we bottomed at 666. So I missed the bounce, and not only that, starting in April I began to short the junk stocks that were flying the highest and have been the real driver of this market. That was way too soon, and they kept on going, to the surprise of many a long-short fund as well. The outperformance of junk was a surprise, but the overall bounce has not been. When you have mood as compressed as it was back in March and you reach an exhaustion point after 18 months of a strong bear trend, you get a big reversal, which can then generate the extremes of optimism needed to set up the next plunge.
I’ve been buying long-term puts on the S&P and Nasdaq again since late March (way too soon, considering that I expected the rally to continue). I bought a bunch more yesterday, by the way. I view it as extremely unlikely that this market doesn’t decline to the point where solid value offers support — that would be a sub-10 PE and dividend yield of over 5% on dividends that have to fall by 50% or more from here to around $12 for the S&P. That would be the 240 level, but it should take at least a couple more years to get there (or below), if not four or five.
What has always worried me as a short in this market is not a 5-8 month rally, but a 12-18 month affair like some of those that Japan has experienced in its long bear market since 1989:
Source: Yahoo! finance
That said, Japan’s financial sector was deflating while exports were improving, families had savings and the rest of the world was growing. Today’s situation is much, much more severe of course, and we can only find a parallel in the Great Depression for so many of the economic trends we are seeing. The longest bounce in that bear market was 5 months, and it was of similar magnitude (48% from Nov. ’29 to April ’30; we’re up 47% in the 4.5 months since March 6).
This is the Dow from 1928 to 1931:
Source: Yahoo! finance
And here’s how that bounce looked from 1933:
Source: Yahoo! finance
The S&P500 is now the most overvalued in history by PE (infinite as of this quarter’s running 12 month total, or a dot-com-esque 32 times current annualized earnings levels, about $7.50 per quarter). The dividend yield is about 2.5%, but dividends are nearly as high as earnings right now, which is completely unsustainable (they should be less than half of earnings). On a sustainable basis, the yield is 1.0 – 1.25%.
Here is the S&P PE ratio (TTM data through 12.31.08) going back to 1936. (the dates read right to left, since I can’t figure out how to reverse them in Excel). Data through 6.30.09 would be off the chart:
Real (U-6) unemployment is approaching 17% and climbing, and that is if you exclude the likely 6 million illegal immigrants who are out of work now (who used to take home $100 per day as construction cleanup boys or dishwashers). Throw them in, as we would have in the 1930s, and you get a solidly depressionary 20%.
Credit is still being withdrawn everywhere you look, whether in home equity, credit cards or small business loans. There has been a bounce in the corporate bond market, but that is due to the same technical forces that are driving the stock market, and the big bankruptcies are just beginning. Only the very weakest have gone under so far, like the car companies.
So with this backdrop, I don’t expect this summer’s good feelings to last into the holidays. The markets should start to roll over again soon, since the big-money value investors needed for a sustained advance can find no reason to buy in, and the little guy has been burned too many times to chase this market very far. Volume is very thin, and an unusually large fraction of trading is taking place between automated programs.
When the data to back up the green shoots theory fails to show up after another few weeks or months, and even official unemployment is solidly into the double digits and climbing, while another huge wave of mortgage resets hits the middle class, there will be no hope at all left to support this market, and it will slide to levels not seen since George Bush Sr. was in office.
It will then still not be a safe long-term buy. For that, considering all of the obstacles that the government has created to profit-making, we need to get back to Reagan-era levels, somewhere under the bottom of the 1987 crash.
S&P500:
Source: Google finance
The bounce has been faster and more comprehensive than I expected. I was thinking that we would top around these levels, but by summer or fall, not early May. I have continued to scale into distant-expiry SPY and QQQQ puts, favoring ITM and ATM, and have now deployed about 1/3 of the money I am willing to allocate to shorts. I also have a smidgen of shorter-term positions in certain ridiculously high-flying restaurant and other consumer stocks.
The bond sell-off and commodities rally indicate that inflation fears now have the upper hand, as most people still believe deflation will be a short-lived phenomenon. The aforementioned movements are setting up nicely for long and short replays, respectively.
Notwithstanding a long-overdue correction, I suspect that stocks have further to run, and am no longer such a skeptic of certain Elliott wavers’ target of S&P 1050. Bullishness is now at 80%, up from 2% in March, but judging from attitudes on TV, there is still a great deal of skepticism to be overcome before we can call a top. That said, the speed and evenness of the advance leads me to expect much more choppiness for the remainder.
Shorting precious metals has been frustrating, and I suspect that we are repeating the pattern of last spring, when we had to work our way through several months of chop after receding from manic levels (1030 gold that time, vs 1007 in February).
It is important to keep in mind the real situation, not just the current market mood (though you can’t trade on fundamentals alone). We can’t work off the greatest credit bubble in history in 18 months and just a 57% loss in the stock market. The real (private, productive) economy is not going to stop shedding jobs, let alone add them, for years, and people are so indebted that they cannot be enticed to reflate the asset bubble or return to previous levels of wasteful spending. It will take a generation to work through our debt and lifestyle delusions.
It bears repeating that today’s official headline unemployment number (8.9%) cannot be compared to numbers from before the 1990s, when the Clinton administration changed the reporting methodology to exclude large segments of unemployed. A more useful measure for historical comparisons is U-6 unemployment, which now stands at 15.8% for April. Today on Bloomberg I heard Christina Romer say that things were nothing like the Great Depression, as she compared apples to oranges. In reality, we are at solidly depressionary levels already.
Also bear in mind that stock valuations remain at bubble levels. This is easy to see when you remember that stocks have no intrinsic value other than marked to market book value and heavily discounted future earnings. The major indexes’ trailing PE’s on net earnings will be under 10 by the time this is over. We still need to work off the bubble that was blown in the 1990s, which didn’t finish deflating in 2003 because of the easing of credit. Every kind of credit is tightening now, unless of course you are a bank holding company.
