There was so much information in today’s Nonfarm Payroll report it’s hard to make sense of it all.  I’ll just bullet point the highlights.

1. Nonfarm Payrolls fell by 20k vs. the expected gain of 15k and the whisper number of +60k.
2. The Unemployment Rate actually fell from 10% to 9.7%.  But this was some Bureau of Labor Statistics magic.  They dropped another 250,000 people out of the labor pool.  They also sharply increased the number of new businesses opened that hired workers.  (Do you believe that?)
3. The annual benchmark adjustment for the period between March 2008 and March 2009 resulted in a whopping 930,000 fewer workers.  This is more than twice the usual benchmark adjustment.

Now it really gets messy.  The BLS normally issues revisions to the prior two months, if necessary, each month.  This time they reached further back in time, and adjusted the numbers for most of 2009.  This resulted in a net additional job loss of over 200,000.  The net effect is that since the beginning of the recession the U.S. has lost 8.4 million jobs instead of the 7.2 million jobs the BLS had been telling us the country lost.

Now some good news and mixed news:

1. Hours worked moved higher by .1 hours.
2. Overtime hours rose.
3. Temporary workers rose.
4. Manufacturing added 11k workers for the first gain in that sector since November 2007.
5. The government worker sector fell by 8k, but this hides the real  story.  The state and local government worker sector (the sector I’m concerned about this year) actually fell by 41k, but the federal government added 33k.
6. Construction workers fell by 75k.

Setting aside all of the revisions, which is ancient history now, there seems to be slightly more good news components than bad.  But, the fact that there was no real job growth tops all the positives.  The temp workers and hours worked is the best news.  I don’t count the Unemployment Rate as good news because that is just a BLS fairy tale.

But, as I mentioned in yesterday’s Daily Comment on wescorp.org, the jobs report wouldn’t have the usual impact because of the debt scare in Europe.  That is exactly what we’re seeing today.  The stock market has attempted to rally from time to time only to be pushed down as the dollar surges.  Each time the dollar retreats, stocks try to rally back. It’s a silly game of following the bouncing dollar, but that’s the only thing driving the markets now.

To put in the simplest terms possible, I’ll boil things down to one type of trade.  As risk concerns faded last year, big investors and hedge funds around the globe would borrow in Japan and the U.S. because of our near zero rates.  They would then take those dollar/yen loans and convert them to other currencies.  In the current example, they would sell dollars and buy euros in order to buy debt of Greece, Spain, etc.  They leveraged this to the max to earn big spreads between borrowing costs and the rate on the bond.  The problem is that their bonds have now plunged in value, triggering margin calls on the dollar/year loans.  This forces them to sell those bonds, which feeds the debt crisis fears in Europe.  Moreover, this causes the dollar/yen to rally as the hedge fund then sells the euros to buy dollars to pay back the loans.  The strong dollar/yen means investors who did the same thing but put money in other riskier global assets are facing big losses on the currency side of the equation.  This then triggers them to sell other assets.  You might have to read this a few times to get it, but this is potentially the enormous leveraged trade unwind I’ve mentioned before as the great risk going forward.

Talking Heads of the EU

Over the weekend there could be an emergency meeting of the ministers of the European Union.  If they are able to emerge from that meeting with a plausible plan to address the debt crisis, this might blow over.  But the market will have to believe the plan is plausible and not just hollow words.  Remember, this crisis is like the mortgage meltdown.  The initial liquidity crisis came because the securities were actually taking losses.  It came because investors lost confidence in the securities.  Just because no sovereign has actually defaulted, doesn’t mean the markets won’t treat the bonds as such.  Fun times.

I’ve written some long pieces lately for the www.wescorp.org website, and I’ve of course written a lot of daily comments.  I hope you check in there from time to time.  I thought I’d use this space today for a Cliff notes version about what I’m thinking now.

 I expected a rally last year from the lows, but this one far exceeded what I expected.  With that caveat, I do think we’ve seen the highs for this year.   Stocks are down about 5-6% or so from the January 19 high.  Once stocks approach a 10% retracement, I would expect a lot of buying by speculative crowd and a quick sharp bounce higher.  But that bounce will be over quickly, and I believe the next selloff will be quick, vicious, and decisive.  Sometime over the next 12-18 months, I believe we’ll see new lows for all indexes. 

 If you’ve read my past writings you know that it’s because we have not “fixed” anything that is fundamentally wrong in the global financial system.  We also have markets that are priced to economies that can stand alone after the overwhelming stimulus in 2009. 

 Look just at the U.S.  Putting aside the $2 trillion monetary stimulus, and just focus on the stimulus side.  The amount of pure fiscal stimulus last year provided by the government was well in excess of $1 trillion.  This includes the stimulus bill, cash-for-clunkers, home tax credit, extended unemployment benefits, money to GM and Chrysler, etc.  Consider that the U.S. annual GDP is roughly $14 trillion.  Economists believe we’ll grow at 3% this year – that’s $420 billion.  Yet, this year the economy will have to somehow make up for the lack of over $1 trillion from the government.  And, this is as jobs and wages are stagnant.  I don’t see how that can happen. 

On the bank side, banks, with the complicity of the regulators, are playing the extend and pretend game.  They delay foreclosures, restructure failing corporate debt, and restructure disastrous commercial real estate loans all in order to avoid taking realized losses.  Banks are hoping to earn enough during this “extend” period to cover eventual losses.  They are wrong.  They can’t outrun or out earn what will likely be another $1-1.5 trillion in losses. 

Ultimately, the deficit and monetary expansion might result in an inflationary environment, but this won’t happen this year, the next, or even the next.  I see the odds tilting more with each passing month toward a Japanese style environment for years to come.  I expect home prices to fall further, gold to retreat substantially, stocks to make new lows, and longer-term interest rates to plummet.  At the beginning of 2009 I said that once the deep recession ended (thank goodness it did) I thought we would enter a 5-10 period of mini-recoveries and mini-recessions.  I believe the first mini-recovery we are in now will end the first half of this year. 

Okay, now that I’ve cheered you up.  I want you to print this.  That way when everything I’ve said here turns out to be wrong, you bake it a pie for me to eat.    

Okay this wasn’t exactly the Cliff’s notes version but, boy, are there a lot of moving parts to this.  

Finally, don’t listen to me.  I think everyone should pay close attention to Jim Cramer’s predictions.  He is the perfect reverse-indicator.  His latest folly was on January 19, which was the peak in the stock market so far this year.  He predicted that a Republican victory in Massachusetts would ignite an “explosive” rally the next day and beyond.  It’s been straight downhill ever since.  It’s amazing this man still has his show and columns.  But, I guess I’m just jealous.  He’s laughing all the way to the bank.

For the first time in this long first year of Obama’s term in office, the President actually spoke with some fire and proposed something meaningful – the reform of financial institutions.  In the past, whether the fiscal stimulus package or health care, the President just tossed the idea out there to Congress and let them hack it to death as only our Congress can do.  Obviously, the election in Massachusetts delivered a message that he received. 

His basic proposal is to separate risk taking trading activity from normal deposit and loan making operations.  In theory, the risk trading would stand on its own.  For many of the giant firms this would necessity a break up and sale of the parts.  Boo hoo.  Wall Street wants things to stay just as they are.  While they have been quick to shoot down any ideas for change to prevent a repeated meltdown, they have offered no alternative solutions.  Maybe the Administration finally has had enough.  Yes, this is politically motivated.  But, this could still achieve the reform that is desperately needed.  I’ve written often in the past few months how worrisome it is that nothing fundamental has changed.  Maybe this is a first step.  I just hope it’s not too late.  

One thing we do know is that the proposal must have some substance to it, because Wall Street’s financial stocks got hit hard on the proposal and the talking heads on CNBC were all wailing and gnashing of teeth.  That’s the first positive sign.  The second very big positive sign is that standing beside Obama was not Treasury Secretary Geithner or Bernanke, but Paul Volker – the forgotten man.  Volker has been shoved aside from the beginning in favor of Geithner and others like the questionable Larry Summers. But the plan Obama rolled out was basically all Paul Volker.  Hurray!  I just hope this isn’t phony production staged for political purposes only.  I don’t think so because the President did throw the gauntlet down on this one.  It would be hard to backtrack on this one.     

Of course the President will have to work hard to overcome the gigantic obstacle in front of him called Congress.  Even in his own party his proposal will encounter great opposition.  Why?  Money.  Wall Street’s lobbyists have been lavishing money on both sides of the aisle.  If we start seeing Congress purposely drag its heels and water down any proposal, all of this will be for naught.  But, this is a very encouraging first step.

 The following is my stab at the annual outlook.  This is Part I. I posted the commentary on the WesCorp web site as well if you visit that one.  —–

Remember back to a kinder, gentler time, specifically January 1, 2000.  Our only worry, or so we thought, was would our computers turn on that morning?  Once that mini-scare was behind us, we were free to be excited about the first decade in the new millennium.  Well, we should have known we were in trouble when no one could even figure out what to call the decade – the aughts?  naughts?  the oo’s? double zeroes?  Nothing ever really clicked for the entire ten-year period.  I think I finally have the name for the decade.  It’s the “orphan decade”.  It’s the ten-year period no one wants to remember or look back on with fond memories. 

2009 – A “Learning” Experience 

As I started to think about writing this 2009 review and 2010 outlook, I started to think of all the bad things I could say about the decade.  Here’s my Top Ten bummers of the decade past:  1. 9/11  2. Hurricane Katrina  3. 2005 Indonesian tsunami  4. Two U.S. wars  5. 2000-2001 bursting of the NASDAQ bubble  6. 2008-2009 stock market collapse  7. One gigantic housing bubble and crash  8.  One near-miss global financial meltdown   9. Worst job losses since the Great Depression  10. Tiger Woods.   Okay, maybe not #10, but there was much to loathe about the decade.  Before I started writing this, I read in various business journals and general newspapers other “odes” to the decade past.  The common theme was it was the worst decade ever and better forgotten quickly.  The tomes were so brutal I started feeling kind of sorry for the decade.  (I’m not sure you can feel sorry for a period of time, but I do if you can.)  So rather than insult and then forget the aughts or 00’s, maybe we should spend some time trying to figure out what we learned the past ten years and how that can help us going forward.    

First and foremost, we should remember that the last ten years were probably great for many people.  People got married (hopefully still happily), had babies, got degrees, were promoted, got new jobs, etc.  Life isn’t just about macro events that impact the world.  Second, we learned that the threat of terrorism is something that will be part of our lives for decades to come.  I think we’re well on our way to adjusting to whatever new inconveniences preventive measures might cause.  (Although if the Shoe Bomber made us all take off our shoes at the screening, I don’t even want to think about the changes coming from the Underwear Bomber.)  Third, Mother Nature will always do her thing.  But we should try to be better prepared and limit consequences.  

The rest of the items on my personal bummer list are things of an economic and/or financial nature.  You might not agree with some of the lessons, but these are my takeaways.  When it comes to the stock market, I think many time-honored adages melted away this past decade.  Buy and hold, average in, and the 10-year virtuous cycle theories all withered in the debacles.  We were fortunate to have two decades (1980-2000) in which those conventional pearls of wisdom held up well.  But the past decade should have taught us that those days are over.  We’re going to have to be much more opportunistic.  If you were fortunate enough to sell stocks before the meltdowns in 2001 or 2008, you came out well.  If you bought stocks early in 2009, you’re a shining star.  Unfortunately, the opposite actions were not friendly.  The point is that the financial world is more complicated and unpredictable than ever, and information travels faster than ever forcing quick decisions.  The globe is more interconnected, and that means we are no longer complete masters of our own fates.  There will be a lot of opportunities ahead, but this is no longer a one-way street. 

On the housing front, the lessons learned there are numerous, and I’ll just mention a few.  We should have learned that a house is a place in which to live; it’s not an asset plan for retirement.  As borrowers or lenders, we should have learned that what matters is the ability to repay debt based on income, not on the perceived future value of the collateral.  We should now know that the mortgage securitization market is years away from functioning outside of Fannie and Freddie.  The government will keep these beasts alive at all costs.  By failing to allow the capital markets to deal with the fallout from the mortgage debacle and the agencies’ roles in that debacle, the government has effectively taken over the mortgage business for years to come.  It’s going to cost us. 

The lost decade in the job market has some very hard lessons for the future.  The divide between upper-management and wage-earners has grown to canyon-like proportions.  Executive compensation based on short-term results is what drives most businesses now, not long-term benefits for stock holders or employees.  Management is rewarded for making quick and draconian cuts at the first sign of a slowdown.  The wage discrepancy and lack of loyalty to employees really doesn’t mean much when jobs are scarce, as they are now.  There can be no employee backlash.  But as some point in the future, jobs for good workers will become more plentiful and competition for well-trained and knowledgeable workers will increase.  Companies which have shown no respect for employees will be at a distinct disadvantage.  Again, I said these are lessons we should have learned.  But based on the way we still see businesses operate, few have thought that far ahead. 

Perhaps the one area in which more lessons were there to be learned was in financial institution arena.  Since money makes the world go around, it’s vital to keep that money flowing.  Yet, we came within a hair of witnessing the upending of the entire financial structure.  So, we should have made progress on getting away from the “too big to fail” mentality which almost destroyed the system.  We should have made progress on derivative market reform, especially regarding credit default swaps. We should have made progress on reforms in accounting and loss recognition on bank balance sheets.  We should have started to deal with long-term solutions for Fannie and Freddie other than throwing in the towel and just having the Treasury and taxpayers take on the burden of the mortgage business.  We certainly should have learned that bankers will always shoot-for-the-moon when given access to virtually free money for funding.  Yet, nothing has changed.  The lessons were there for the learning, but we (collectively speaking with the government) seemed be paralyzed by the initial shocks and then were inept at developing and implementing any future vision.  With global investment bankers now emboldened by the “miraculous” recovery and the lack of governmental demand for changes and protection, the opportunity for reform is slipping away.  This means the opportunity for the next meltdown is around some corner ahead.  

As credit union leaders, I’m sure you have your own list of lessons learned.  Even if you fared very well in the last decade, there is always something to learn.  I won’t guess.  But, there was one broad lesson that covers a lot of credit unions.  Capital.  Over the past go-go decade, a lot of credit unions came under pressure for being over-capitalized. How dare you be so conservative when times are great!  Can’t you see all the growth opportunities you’re missing?  Of course the lesson is in Aesop’s tale of the ant and the grasshopper.  Even more relevant is the history of the founding fathers of Bank of America who were criticized for being conservative during the good times, like the 1920’s, in order to be there in the bad times.  That’s not to say credit unions shouldn’t strive to do everything they can to serve their members.  But credit unions should maintain some sense of what is truly in the interest of members and what is just in the interest of growth for growth’s sake.  Overall, most credit unions did resist the siren call of  straining capital during those good times, but to me it’s still the lesson of the decade for all financial institutions – there is no shame in saving for a rainy day. 

Thanks for indulging me with some “bigger” thoughts about the decade we have left behind.  After finishing the annual forecast write-up, I decided it was probably a little too long for one sitting for most of us.  I will follow this review of the past with Part II of the commentary in a few days in which we’ll get back to the grind to see what’s ahead for 2010.    

 

 

The jobs report was certainly a disappointment today (as was the game last night).  Nonfarm Payrolls fell by 85k.  Ironically, we did finally see Nonfarm Payrolls print a positive number, but it was in November instead of December.  The BLS revised the -11k November number to +4k.  Hours worked held steady, and hourly wage growth on an annualized basis rose by a pitiful 2.2%.    

The Unemployment Rate held steady at 10%.  The manufacturing sector lost jobs – again – and construction jobs declined by a surprisingly large 57k.  The construction jobs were mostly commercial real estate and some could be due to weather.  On the plus side, jobs for temporary workers did rise again.  We can hope that was not just a seasonal bump. But here is the really bad news in the report.  The household survey showed a huge decline of 560,000 people in the labor force.  This is not at all a good sign to have workers leaving the work force en masse if the economy is in fact improving.  

Don’t expect the stock pundits to worry about this for more than an hour or so.  Stocks are heading into earnings reporting season, and those headlines are expected to be wildly bullish for stocks as the comparisons are against a horrid 4^th quarter of 2008.   At least that’s the way things seem to have been set up.  Over the next few weeks you’ll be reading headline after headline about how XYZ company “beat” analysts’ earnings expectations by a mile or two.  This has been standard operating procedure for a while now.  What I never hear anyone say is, either analysts are all doing a really bad job or they are intentionally lying in the first place.  That’s exactly what this charade means though.  Wall Street’s best and brightest are either not bright or liars. 

I have truly grown to despise the Wall Street spin.  There’s something called “talking your position,” and it’s been around for years.  It’s trying to justify your position (long or short stocks or bonds) by focusing only on the merits of your argument and downplaying the faults.  That’s a time-honored tradition on Wall Street.  But over the past ten years I guess the potential payoff for these guys has grown so big, they have elevated spin to a whole new level.  I frequently cite examples of this.  I wish I had been keeping a log of this for the past two or three years.  I would have a novel’s worth by now.  Today, one of the CNBC regulars was spinning the jobs report.  His spin, which was quickly seconded by the hosts, was that the bad job number was really good for stocks.  His reasoning is that this pushes any potential rate increase even further into the future.  Great… let’s never add jobs, get the UR to 20%, and then we’ll never have to worry about Fed tightening.  That idiot (and I’ll try to find his name) knows he should be praying for a Fed rate increase.  A Fed tightening would mean the economy has in fact recovered.  Simple spinning or “talking your position” has been replaced by lying.   

Here’s something to keep on the back burner for a big news story if not a market-moving story.  It’s been discovered that when Treasury Secretary Geithner was the NY Fed President, the NY Fed apparently ordered AIG not to disclose to the public the money AIG paid to banks to make banks 100% whole during the meltdown.  Even Democrats are demanding an explanation.  As you know, I would be heartbroken to see Geithner go.

I’ll have a long-term piece next week, but I wanted to kick off the New Year with some random thoughts.  

The Dow is up 165 points as I pen this on the first day of the year.  Traders came in determined to get the market up and going early after a very slow December.  Sentiment and consensus readings are all wildly bullish for 2010.  But, don’t place much faith in what happens the first day of the year.  On January 2, 2009, the Dow closed higher by 259 points.  Ten days later the Dow was down by 561 points.  Being up big the first day of the year is just common.  Traders always seem excited at the start of a new year.  

After much perusing of periodicals, economic forecasts, and market newsletters, as well as watching annoying business television shows, there are three big themes that seem to be prevalent in 2010.  1.  Stocks will rise globally, foreign stock markets will outpace the U.S., and China will surge.  This is of course conventional wisdom at the beginning of every year.  2.  The dollar will continue to decline in 2010.  3. Longer-term interest rates will rise sharply.    

I’ve got news for those consensus thinkers.  If they are correct about either #2 or #3, they will be wrong on #1.  

The simple fact is that this economy will remain in the deleveraging mode for years to come.  We will have a series of hopefully minor recessions followed by minor recoveries.  We’re in the first minor recovery right now.  This one will fade soon.  The lack of job growth and the secular conversion of U.S. consumers from spenders to savers simply eliminate the likelihood of a rousing and long-term recovery.  

I also think we’re going to see a surprisingly grim second half of the year for the housing market.  Bernanke might stretch this out by adding to mortgage purchases.  Without that, mortgage rates alone will kill housing.  But banks are going to have to start selling the homes they have in foreclosure.  The pipeline of homes is expanding rapidly.  The banks’ strategies of “pretend and extend” can only go on so long.  

The short version is that I don’t see any big trends emerging this year.  But after a decade in which we saw two massive stock rallies and the biggest house price surge of all time all followed by collapses, I’m not sure a quiet decade would be such a bad thing.  I think we could all use a break from the roller coaster we’ve been on.  How about a ride on the tea cups instead?

For the past few months, stock traders have lived off of the weak dollar.  As long as the dollar was weak, that’s all they needed for prices to rise.  The theory was this would continue to pump money into higher risk trades around the globe.  The follow to this theory is that a rising dollar would be very bad for global risks trades.  

Last week the dollar started to rally, and stock pundits are now scrambling to spin the story to a positive one.  They seem to be having some success today.  The dollar is rallying, after falling at first, yet stocks are flying.  Some of this is merely because stock traders feel they are “owed” the traditional Santa Claus rally.  But pundits are now trying to spin the dollar’s rally as positive as a sure sign of recovery here.  Come on guys, you can’t have it both ways.  

The fact is that those global leverage plays are in danger.  One estimate is that there might be as much as $1.5 to $2.0 trillion in leveraged plays globally that rely at least partially on a weak dollar.  Just focusing on the euro, which is now 1.43 roughly, the danger zone probably is a dollar rally that carries it to below 1.40.  

It’s clear that the dollar’s rally has already had an impact on gold, which is now down $130 in less than two weeks.  But the big risk is those leveraged trades, especially the ones in which the assets were emerging market and high-yield debt instruments.  Be afraid, be very afraid. 

I commented on the WesCorp web site extensively on the Bernanke re-appointment and his ”honor” as  Time Magazine’s Person of the Year.  I think you know how I feel about Ben’s performance.  He’s sincere in what he believes, but he is playing academic what-if games with the real world’s global economy.  I think a year from now, Time Magazine might be running a cover that says “What Were We Thinking!”

The monthly job reports over the past year have been uniformly bad.  But, Wall Street spin-meisters were very good at turning bad news into good.  I’ve often been guilty of raining on the Wall Street parade by pointing out the reality of the numbers.  Finally, at long last, I am pleased to able to report on a jobs report that was truly good in almost every way.  Nonfarm Payrolls fell by only 11k vs. the expected -125k, and the Unemployment Rate fell to 10.0% from 10.2%.  There were also upward revisions of a +159k to prior months. The workweek, which had been sitting at a post WWII low and is a good leading indicator for jobs, actually rose by a full .2%.  I’m not done yet with good news. Hiring of temporary workers also rose by a strong 52,000.  This too is a good leading indicator for jobs.  While most of this hiring might be related to seasonal demand, it does still mean that businesses are lean enough to actually need new workers.  If even a small portion of the increase in activity is maintained, this could indicate that actual full-time hiring is ahead.    

Most of you have seen my chart this year my Nonfarm Payroll projections for 2009 in which I had the month of December actually turning slightly positive.  I didn’t feel very good about that forecast last month, but this report could be leading us there.  We won’t know that until January 8.  But the fact is this was the best payroll report since December 2007.  That’s a long stretch of bad news.  I’m glad to see the string broken.

After the first really good report in almost two years, I hate to mention anything negative, but it wasn’t all roses.  First, there were still sizeable losses in construction and manufacturing jobs. The size of losses shrank a bit from the prior months but was not insignificant.  Second, there are still questions about how much the seasonal factors might have made the numbers look better than they really were.  Third, the Bureau of Labor Statistics also said the pool of available workers shrank yet again.  As you recall, we need to see the pool grow because that is a sign that discouraged workers believe there jobs out there.  I’m sure that there might be other nits to pick once economists get a chance to dig into the details, but there is no denying this was at least one pretty good report.  In the first paragraph I characterized the jobs numbers as good in almost every way.   As long as there is even a 1,000 payroll loss and the Unemployment Rate is double digit, the job market will remain almost there.

Perhaps today was nothing more than a group of markets in the hands of a very few junior traders and none of the movements were related.  We’ll know better next week.  But, we did see something of possible note.  Until a few hours ago, the stock market had been responding positively to every tick lower in the dollar. This has been going on for weeks now.  The dollar was weak last night, seemed to be stabilizing this morning, but absolutely plunged in the last few hours.  The dollar broke down to new one-year lows against most major currencies. 

 You would have expected a surge in stocks, but the Dow is up only 30 points with 30 minutes of trading left in the day.  I’ve said in the past that, at some point in time, the weak dollar will cease being a positive for stocks and begin looking like a threat.  The threat would come from foreign sellers of U.S. assets given once their dollar losses threaten to overcome gains from U.S. stocks.  Given the size of today’s move in the dollar (1.496 to 1.5142 vs. the euro), we may be nearing that inflexion point.  If it had been business as usual, stocks would have surged to triple digit gains.  I’m probably jumping the gun here, but it’s something to watch for next week.  Remember the 1987 lesson?  The initial trigger for the crash was foreign equity selling because of dollar losses.

The home tax credit bill extension was signed into law on November 6, but homebuilders must not have been too confident of its passing in October because they slashed housing starts back to the lowest level since April.  The annualized pace is now 529 thousand.  Just for a point of reference, the peak pace was 2.2 million in 2006, and the ten-year average is 1.5 million.  But builders might also be realizing how much demand was pulled forward in July and August.  Back in those months, it appeared certain that the home tax credit would expire and a November 30 closing date was an absolute.  I think this pulled a lot of future demand forward.  The extension of the home tax credit will continue to help, but I think this will no longer be that big of a positive.  I think builders know this also.  

Speaking of gifts, that home tax credit extension also included yet another gift for homebuilders.  This had to do with granting them the ability to file for tax refunds from prior years based on this year’s losses.  The bill didn’t say homebuilders exclusively, but the way the bill was designed, the intent was clear.  The tab for this one could be $45 billion.  

Just think about the money poured into trying to save one sliver of our economy.  Then think about the money poured into the banking system that nearly died of self-inflicted wounds.  Very little in the way of real money has found its way into the broader economy. Need evidence of that claim?  How about a 10.2% Unemployment Rate.  I think this sums it up best – Never have so many (tax payers) done so much (trillions of dollars) for so few (builders and bankers).  

I posted the paragraphs below on the WesCorp web site this morning, but I thought it was worth repeating here: 

I am beginning to believe that the Federal Reserve Bank of the United States of America is on a mission to drive the dollar into the dirt.  By doing so, they must believe they can inflate our way out of our debt debacle.  They apparently also believe that asset-inflation will actually help the process along.  The Fed likely believes they can ultimately defeat inflation when it suits them.  How else can you explain recent comments by Ben Bernanke, Janet Yellen, and fresh comments by St. Louis Fed President Bullard?  Bullard is somewhat a new kid on the block (April ‘08) and will be a voting member for the first time next year.  He has just released text of a presentation in which he suggests the Fed will not raise rates until 2012!  Yes. A Fed official on record telling every global speculator to sell dollars, leverage up and go for the gold – literally.  This irresponsible rhetoric by the Fed is becoming suspiciously purposeful.  Back in 2003, Ben Bernanke acquired the moniker “helicopter Ben” because he made comments that he thought the Fed could be justify dumping dollars from helicopters if it prevented a depression. I guess we didn’t take him seriously enough.  

In Bullard’s defense, he did follow that 2012 comment up with a qualifier.  He said that the risk of keeping rates too low too long would weigh heavily on the Fed.  Huh?  So, perhaps in context the meaning wasn’t the same.  But the 2012 headline will remain in the minds of traders.   

Perhaps our best hope of preventing the Fed from driving us off a cliff is that even the greedy markets will get worried about killing the golden goose by creating an abundance of bubbles.

Since my Sunday post, the stock market has rallied by almost 700 Dow points and 70 S&P points.  I thought the rally would need to come from some mark-to-market news, but we didn’t really get that.  The House hearing was today, but all that came of that were some threats by Congress to do something and a vague commitment from the FASB Chairman to issue new guidance in about three weeks.  That seemed to be enough to keep hope alive! 

Of course the rally started Tuesday on the “leaked” Citibank memo about earning money so far this year.  Bank of America’s Ken Lewis told reporters today, “Me Too!”  So, great.  For the first two months of the year, these two banks are making money – as long as you don’t look at loan losses.  Yippee!

I’m not totally convinced the bear market rally has truly begun in earnest, but let’s assume it has.  Where will it go?  If it matches the last rally off new lows that started last November, the Dow should reach at least 8000 and the S&P 800.  That would be a 24% rally from the lows, roughly speaking. 

But don’t lose sight of the following:  1. The future of the financial system is still unknown.  Geithner is merely stalling.  2. There are no signs job losses are near a turnaround.  3. Foreclosures are not abating even with moratoriums in place. 4. And, global economic conditions are worsening. 

But, I don’t want to spoil the party.  As you know my theme for the next 10 years or so is that we have to be willing to trade the market for some bigger trend moves.  This is a fun rally and playable, but I’m looking for something from new lows and something that could last at least two months or longer.  I could be dead wrong, but I don’t think this is it.  It’s pretty and fun, but I don’t want to marry this one. 

Finally a quick rant.  Fannie and Freddie have roughly 3 trillion in outstanding agency debenture debt (this does not include the mortgage securities they guarantee).  I’m not sure how much of that has matured and will mature over the next few months, but it is considerable.  They have been issuing huge size recently to rollover maturities and raise new money to fund their growing balance sheets.  Since these are still “private” companies, they pay a premium of roughly 50 basis points over treasuries.  Today, Freddie Mac issued a 7-year maturity at 90 over.  The point is this.  The Treasury is playing this pretend game that someday Fannie and Freddie could be private again.  And, by not putting them on the Treasury’s balance sheet, we can pretend the taxpayer is not on the hook for this debt.  Does the Treasury think we’re stupid?  Apparently so.  Investors certainly like this arrangement, because they get the same government guarantee but at a higher rate.  In the meantime, the government (taxpayers) get to eat the cost for the additional, totally unnecessary interest premium.  There’s one form of government waste I have a quick and easy solution for.

The following post is an article I just finished for the Wescorp web site, but I decided to post it here as well.

In last month’s Longer-term Commentary I discussed the difference between reality and perception, reality being the world regular people like us actually live in and perception being Wall Street’s fantasy land.  That disconnect shows no signs of letting up.  Over the past month, stocks have continued to push higher (with a minor setback last week) while more and more people continue to join the unemployment lines and incomes shrink.

No Longer “Less Bad”; Just “Not Worse”

The only thing positive about the latest Nonfarm Payroll number was the headline which read “August Nonfarm Payrolls decline less than in July.”  Beyond that headline, the details of the report were a bust.  First, the Bureau of Labor Statistics (BLS) increased the jobs lost in prior months by 49k.  Effectively, that made August payrolls a decline of 265k instead of 216k.  Second, the Unemployment Rate rose from 9.4% to 9.7%.  A rise in the Unemployment Rate can actually be a good thing at the end of a recession if the increase is the result of a bigger labor pool.  As job conditions improve, people are encouraged to at least re-enter the job hunting market and this temporarily increases the Unemployment rate.  But this rise in the Unemployment Rate was not due to labor pool adjustments by the BLS.  The jump to a 26-year high in the Unemployment Rate was the result of true job losses, not a labor pool adjustment.

The two leading indicators in the report that are important to watch also disappointed.  The workweek, which finally rose by .1% for the first time in July, failed to budge further in August from the post-WW II low.  Even the separately reported factory workweek failed to rise, despite the assumption that industrial production is rising on re-building of inventories.  The second leading indicator, temporary workers, was expected to finally turn positive after a string of declines stretching back eighteen months.  Unfortunately, that string grew to nineteen months as another decline was recorded.

We’ve now hit an extraordinary string of twenty months of job losses totaling almost seven million workers.  Roughly six million workers that want or need full-time work are only employed part-time.  The workweek remains down by .9 hours since 2007, which is equivalent income of roughly 3.5 million workers.  The Unemployment Rate of 9.7% is now up a huge 5.1% since December 2007.  The average post-Depression recessions resulted in an unemployment rate increase of 2.3%, with the worst coming in 1980-1981 with a 3.1% jump in the rate.  Despite the money from the fiscal stimulus package going to states, we’re now finding that states are just beginning to be forced to cut back as state revenues are falling faster than anticipated.  Most states, like California, are trying to limit job cuts.  But in doing so, they are reducing the incomes of workers by 15% through the use of furloughs.  In a recent Los Angeles Times article, the writer interviewed a number of state workers that have job stability but are living paycheck to paycheck, and now those 15% smaller paychecks don’t cover all of the mortgage payment and monthly bills.

As I said last month, yes, the recession is almost certainly over “technically.”  We’ll have one or two quarters of positive growth as the result some inventory re-building (cars and more) and a smaller trade gap.  What seems to be lost on Wall Street is that the “technical” end of the recession might very well result in no job gains at all.  If consumer spending continues to contract, production levels will merely retreat to past lows.  Only if consumers begin to spend again will this recession end in more than just “technical” terms.

But in this current economic and financial environment less income to spend is almost secondary to the importance of less income to pay mortgages and other consumer debts.

Bank Worries Behind or Ahead?

With the rally in financial stocks, it’s assumed on Wall Street that the financial sector is in the clear.  Oh sure, the FDIC closes an average of four banks every weekend, but at least the big boys are okay.  But the danger is very real that, even if we don’t have to worry as much about the top ten, we have to worry more about the rest of the banking industry.  The FDIC admitted as much by announcing their list of “problem banks” has jumped from just over 200 to over 400 in the last quarter, and these aren’t just small banks.  There are a number of larger regional banks.  In fact the last two big failures, Colonial and Guaranty Bank, had assets totaling $40 billion!  As in all recent bank failures, the event didn’t cause a ripple as the FDIC smoothly transitioned the good assets to other institutions while retaining the bad assets.  But what happens to the other good institutional buyers as these failures escalate.  At some point in time, the quality banks will run out of capital to take over the failures.  This might be why the FDIC has recently lowered the capital requirements for private buyers to buy failed banks.

The reason it would be wrong to assume we no longer have to worry about bank losses is that credit quality has deteriorated at an alarming pace – in the prime borrower category.  Subprime mortgage delinquencies seems to have leveled out at something over 25%.  Horrific to be sure, but “not worse.”  What is worse is that prime borrowers are now delinquent on mortgages at a record level in excess of 9%, and the numbers are escalating at a rapid pace. What makes this more alarming than the subprime numbers is the fact that 80% of all mortgages were considered “prime” at issue, and financial institutions typically kept more of those on their books.  This is especially true in second mortgages.  Many banks, especially regionals, sold off prime first mortgages in order to hold more seconds at higher rates.  Prime defaults will not reach the level of subprime but, given that prime mortgages constitute more that four times the volume of subprime, it’s a huge concern.  At the same time, all forms of prime consumer debts, including credit cards, are exhibiting deteriorating performance.

Why?  See the section above on jobs and income.  The job losses started mostly with lower income workers but have clearly stretched into all income levels.  Even medical workers, teachers, state workers, etc. are no longer immune.  When workers with “prime” credit scores lose their jobs, this category of workers typically will have some resources to continue to pay bills until new employment is found.   The problem now is that they are using up all of those resources because the time between jobs is at the worst (most time) level since the Depression.  You’ve read the stories.  They are agonizing to read but no longer uncommon, nor do they represent rare, isolated cases.

So let’s say you lost your job one year ago when businesses began the major blood-letting of jobs.  You weren’t too worried at first but now, not only are you running through your savings, but you’re faced with perhaps dipping into your 401k.  Looming ahead is the end to your unemployment benefits.  What do you do?  You look at your mortgage payment – the biggest bang for the buck.  You look at the real estate section and see that you’re roughly 125-150% LTV.  Why keep paying?  You know from your neighbor’s experience you won’t lose your house for six months or longer.  I think you can see where this is going.  This is happening all across the U.S. with ten states showing Unemployment Rates of over 10% and another fifteen just below that level.  It seems almost inevitable that we will see another wave of big mortgage-related losses over the next twelve months.

Want more reasons to worry about banks?  How about the fact they haven’t even begun to recognize future losses on commercial real estate lending.  This lending sector is especially important to regional banks.  It’s not even a secret any longer that loan loss reserves on commercial real estate  loans are well short of any reasonable projections; it’s a common topic in most business journals.  But the concerns are being dismissed because “it’s a small part of the market.”  Where have you heard that before?  The $3 trillion commercial market is smaller than residential but hardly insignificant.  The apologists continue that recovery experience is higher in commercial real estate (arguable), and that banks can easily handle the losses.  I might give that some credence if commercial real estate was the only problem area.  Unfortunately, commercial real estate is merely joining its ugly siblings, residential mortgages and consumer debt.

There is a lot of talk about banks not lending.  But banks are lending – just not to you or small businesses.  It seems banks have decided to start lending again to hedge funds and private equity funds against “distressed assets.”  Yes, those are the same assets that were “prime” in 2007, the last time banks loaned against them.  A well-respected bank analyst recently reported that banks are not only loaning against these assets, they are also loaning to allow the level of leverage that existed just after the collapse in 2007.  Banks counter by saying that more leverage is reasonable because market values have already been market down so drastically.  In other words, there is little risk in the low-valued assets.  Unless these assets are priced at $0.00, there is still risk.

Finally, I’ll end my ranting about financial worries with this forgotten fact.  Think way back, say three or four months ago.  Remember the government’s vaunted “stress tests?”  Those were the tests that told us we didn’t have to worry about our biggest banks.  The base case showed “only” another $599 billion in losses was at risk.  Remember what the base case was based on?  I didn’t either.  The base case forecast for the Unemployment Rate, which drives the loss assumptions for obvious reasons, was 8.4% in 2009 and 8.8% in 2010.  Those were rates that produced the $599 billion loss.  We’re at 9.7% and climbing.  Yet, we’re not hearing anything about how that might impact the losses ahead for banks.  That story is buried by reporting on the happy events in Wall Street World.

The Real Danger of InflationI still think it’s too early to spend a lot of time arguing about inflation – in the traditional sense of rising prices for goods and services.  We’ll start that argument sometime in the next six months or so.  But there is an inflation concern emerging in something else – asset prices.  From 2002 onward, there was concern in the economic community that leaving rates so low for such a long time would result in inflation.  Of course that didn’t happen in the traditional sense.  But leaving rates so low for so long did result serious inflation in asset prices of houses and stocks.  Let’s also not forget that the low rates allowed for what was effectively inflation in the value of less quality debt.

Leverage borrowing exploded as low short-term rates vs. returns in other markets resulted in huge gains.  The huge gains in asset prices made everyone (especially lenders) feel there was no risk, which in turn led to more leverage and less concern about credit quality or much of anything else for that matter.  We know how that story ended.

It’s entirely possible that the stock market could continue to run ahead.  So far at least, mediocre economic improvement from near-depression like lows has not been a deterrent, nor has lack of revenue growth. (Earnings have grown, but that is due to slashing costs and people not growing revenues.)  As long as analysts and pundits keep the expectations bar on the ground, it’s easy to hop over.  And make no mistake about it; low interest rates this time is what is attracting risk capital and leverage.  It’s not a sudden surge in confidence by big time players in the economy, real estate market, or anything else.  It’s cheap money.  Even for non-leveraged investors, low rates provide an incentive to move toward greater risk.  The problem is this can go too far, as we all well know.  And don’t count on recent experience to necessarily deter anyone.  Remember, “it’s different this time” is a phrase that always seems to work on Wall Street. It’s easy to imagine a runaway stock market and collapsing credit spreads as investors interpret the stock market’s upward movement as reflecting the underlying fundamentals of the future of the real world.  In fact though, we’re a long way from correcting our debt problems.  But risk concerns could once again become a casualty of asset-inflation.

Unfortunately, this runaway asset-inflation scenario is not too farfetched.  The Fed is almost powerless to raise the cost of money to pop a burgeoning asset bubble, given an Unemployment Rate of around 10%.  That would only happen if Ben Bernanke is replaced by Paul Volker.  More importantly, while there has been a lot of talk about the regulatory changes for all financial institutions, there have been no meaningful regulatory changes adopted and implemented.  Perhaps even more important is the fact there has been no adoption of any changes about compensation at financial institutions.  There has been a lot of talk, and in this case talk is not cheap.  As long as it remains in the “talking” stage, financial institutions are free to do what they will – and they have, as evidenced by bonuses disclosed at Morgan Stanley and Goldman just to name two.  So those running major institutions are looking at a landscape where the appetite for risk is ramping up again, higher stock prices has muted all discussions of concerns and open challenges to management decisions, and a window to rack up another round of huge bonuses.  If you asked me a few months ago if it was possible to return so quickly to an era of big leveraged risk taking and big Wall Street bonuses, I would have said “absolutely no way.”  But I have underestimated Wall Street again.  Maybe that’s why I’m on Overland Court instead.

There are two points to take away from this.  First, the stock market is not the economy.  Just as the stock market and the home prices did not reflect reality at the peak in 2007 (and we all paid the price), we are at risk of repeating the error.  I know you’re tempted to want to recover all your lost 401k value in a short period of time, but this could be just setting us up for an even greater fall.  Let’s hope the stock market stays grounded until the economy eventually catches up. Second, if another asset bubble does in fact form, we’ll need to use that window to prepare for the next meltdown.

Knowing My Place

Over the past few months, I’ve often felt remorse when I’ve written about what I’ve viewed as negative developments.  In fact, if you look back at previous articles, I’ve tried to present potential positive outcomes as well just the negative, though you always knew where I stood.  In the last couple of months, I’ve felt even worse about it because it seems that everyone is so upbeat these days.  It’s happy talk all the time on CNBC, The Wall Street Journal and business magazines are full of positive articles on everything but the government, the economists’ consensus has swung completely around to a very bullish economic outlook, and investor sentiment is back to the most bullish since 2007.  The Nonfarm Payroll number gave us a classic example of the psychology.  Stocks ended the day higher by 100 points as the consensus viewpoint gelled around the belief  that the number was probably the last bad number –  given that the economy was really taking off.  CNBC also resorted to bringing on one guest economist who expressed concern about the report only to be shouted down by three who weren’t bothered.  That was the programming game played so often in 2006 and 2007 should anyone dare to question the housing market’s invincibility.

But this from this month on, I’ve determined to stop feeling guilty.  The relentless message from Wall Street is nothing but the positive.  I can see the potential positive outcome as well, but I still view the risks to a more negative outcome as far greater.  So, I know you’re well covered on getting happy news, and I’ll unashamedly continue to try to fairly present the risks ahead.  No more apologies.

Dwight Johnston

I haven’t posted in a while since there really hasn’t been much new to add that I didn’t say in my previous blog.  Stocks are continuing to move higher on pure momentum.  News, whether good or bad, seems to impact stocks.  It is a steady drip, drip, drip — that is, if things can drip up.  I still contend most of this is fueled by the power of 0% money.  Zero percent money encourages investors with money to take additional risks to earn something more, and nothing is wrong with that up to a point.  But we’re not really seeing a flood of money from traditional individual investors.  In fact, stock equity funds actually fell in August.  The ability to borrow at 0% is what is truly fueling the market.  I talked about this in my latest post, and I think you’re going to start hearing more about it — now that we are the cheapest place on earth to borrow.

I stand by the statement that I fear the creation of a dangerous bubble in stocks, some commodities, and lesser quality debt.  Left unchecked, I think things could implode again with 12-24 months.  And this time, I don’t think Bernanke or Humpty-Dumpty could put it back together again.

A subtle squeeze may be due

So, what should the Fed do about this, if anything?  I think the Fed should tighten – sort of.  I know coming from me that sounds insane given the state of the economy.  And, quite frankly, it would be political suicide for the Fed to start raising rates this soon, although I fail to see what damage a token rate increase of 50 basis points or so would do.  But they could certainly send a subtle message to the markets that they will not stand idly by (as they have in the past) and watch dangerous, over-leveraged markets develop all over again.  They could reduce their various borrowing facilities.  They could stop buying mortgage debt.  And, they could do various subtle things through open market operations.  While there would be no overt tightening, the markets would certainly get the message that the gravy train of 0% borrowing wouldn’t last forever.

Will the Fed be willing to be so bold?  Not at this time.  I do think it’s too early for that.  My preference would be for the stock market to cool, and some of the players in leveraged debt lose money on risk positions.  Not too much, though.  Just enough to remind everyone that the economy needs to catch up with the markets at some point in time.

How extreme is the disconnect between the markets and the economy?  David Rosenberg recently wrote that after past recessions and bearish stock markets, the recovery in stock prices equivalent to what we have seen this time has been realized, on average, three years after the trough of the recession and only after job growth has reached at last one million.  This time, we are perhaps three months from the trough, and we’ve lost 2.5 million jobs in the six month period.  Again, what makes this so dangerous is that this market miracle is being produced on borrowed money.

As mentioned in my post below, it has been over a year since Lehman, AIG, Fannie, Indymac, etc.— and absolutely nothing has been done by the government or regulators to prevent another taxpayer funded debacle in finance.  In fact, the government has almost enhanced the atmosphere that can produce a repeat.  If it weren’t so dangerous, it would be downright laughable.  Even The Daily Show gets it.  A couple of nights ago they had a clip of President Obama speaking about Wall Street and how we “need” to have regulations in place to prevent a repeat and how they are “working” on changes.

So where are the grown-ups?  Nowhere in sight.  But I’ll start the drumbeat for the Fed to tighten right here, right now.

In the previous post, I wrote about the circumstances in which the Fed should tighten or at least dangle that threat.  I didn’t give this much of a chance of happening, but maybe we heard the first shot across the bough this week.  Although the FOMC statement stayed away from addressing how and when they might reduce some liquidity facilities, the very next morning they announced the schedule for winding down two such facilities.  The Fed said it was not policy-related.  The facilities were meant to be temporary and were no longer needed.  But the Fed said they would be creating a new permanent facility.

But on Friday, something far more interesting came out.  Fed Governor Warsh published an op-ed in The Wall Street Journal regarding some sort of eventual tightening.  At first I dismissed it as just the usual Fed posturing, but on reflection perhaps it was more pointed.  This is what he said: “In this environment, market participants and policy makers alike should steer clear of ironclad policy prescriptions. Nonetheless, I would hazard the view that prudent risk management indicates that policy likely will need to begin normalization before it is obvious that it is necessary, possibly with greater force than is customary, and taking proper account of the policies being instituted by other authorities.”

“Whatever it takes” is said by some to be the maxim that marked the battle of the last year. But, it cannot be an asymmetric mantra, trotted out only during times of deep economic and financial distress, and discarded when the cycle turns. If “whatever it takes” was appropriate to arrest the panic, the refrain might turn out to be equally necessary at a stage during the recovery to ensure the Federal Reserve’s institutional credibility.”

This sounds a lot like the Fed wants the message out there that they will have the courage to act sooner rather than later.  Just as important, the message is that they won’t make the Greenspan mistake of tightening at a “measured pact.”

Will they in fact do anything if faced with an asset inflation bubble?  Who knows.  But at least they did see the need to get some sort of warning out there on record.  Clearly Fed officials are devoted readers of my blog.

(I just posted this commentary on the WesCorp website.  Thought I would use it here as well.  It’s interesting to watch these new bubbles developing.  Make that interesting and scary.  I have other comments I’ll add over the next few days. )

The stock market’s rally in September has sent a strong message to the masses – “It’s not the economy, stupid!”  Most economic statistics took at least a moderate turn for the worse over the past month.  The total weight of evidence is indicating this so-called recovery we’re in the midst of could turn out to be either very weak, very short, or both.  Yet despite the news, bullish stock market traders and pundits found a way to turn things around.  The most glaring example of this was the horrific Unemployment Report released on Friday, October 2.  The Dow closed lower by a whopping 20 points the day of the release but rallied 260 points in the next two days.  Half of that rally was supposedly based on a 25 basis point interest rate increase by Australia’s Central Bank.  So stocks barely move on a monthly U.S. job loss of 263,000 but rally 130 points on a .25% rate increase in Australia?  This is just one example of how Wall Street has decided to ignore economic red flags in order to keep stock prices moving higher.    

Another Downward Spiral Ahead? 

After declining by only 216,000 in August, economists were expecting the improvement in Nonfarm Payrolls to continue in September.  The estimate was for a job loss of 175,000.  Instead we got a job loss of 263,000, and that was the good news.  The report got worse from there.  The average workweek (a key leading indicator for jobs) fell back to the post WW II low of 33.0 hours after appearing to have turned the corner.  Payrolls of temporary workers (another leading indicator) fell again.  I had expected by this time that perhaps the construction and manufacturing industries would have fired enough people to be down to base levels.  But, alas, those sectors each managed to find yet another 50,000+ workers to fire. 

The Unemployment Rate rose to 9.8%, despite another huge fall in the labor pool.  Wall Street continues to say a “jobless recovery” is normal in the early stages, and the Unemployment Rate typically does rise just after the end of a recession.  But the reason the labor pool grows is because “discouraged workers” and others who declared themselves out of the labor pool are encouraged enough to return to job-seeking.  That’s not what is happening this time as the overall participation rate in the labor pool is the lowest since 1986, and the labor pool has continued to shrink.  

The Bureau of Labor Statistics (BLS) wasn’t done there.  They also issued the estimate of annual benchmark revisions.  They do this once a year for a one-year period dating back eighteen months.  This period was for March 2008 to March 2009.  This is when the BLS tells us how much they screwed up reporting Nonfarm Payroll numbers for that time period.  The BLS reported a staggering undercount of job losses of 824,000.  This is likely due to their erroneous birth/death adjustments for new businesses.  The BLS model continued to show job growth in this category despite the recession.  It was clear to all but the brain-dead that the BLS was understating job losses.  But those birth/death adjustments didn’t stop in March of this year.  The BLS has continued to use the same modeling assumptions and has continued to report phantom job growth in that category.  As bad as the job losses have been since March, it’s a safe bet that they have been understated by at least 400,000 jobs.  When you add this whole mess up, you come up with total Nonfarm Payroll losses officially over 8,000,000 since the beginning of 2008.  

As for as the outlook for jobs, I still hope my whole theory of “running out of people to fire” plays out, but I feel we’re in a similar spot as we were in 2008.  In mid-2008, monthly payrolls were declining by about 50k per month and the Unemployment Rate had moved up to 6%.  Based on some of the leading indicators in the job report I said I thought the Unemployment Rate would move to 8-9%.  But I also wrote and warned in presentations the risk was for a spiral in job losses.  Unfortunately that risk was realized, not my “optimistic” forecast. 

After some leveling off in job losses the last few months, I think we’re in the same spot we were a year ago.  The leading indicators and internals in the jobs report have worsened.  Additionally, we have to worry what happens during and after the Christmas season.  Retailers’ expectations aren’t high, and they won’t be disappointed with a very small decline in sales.  A significant shortfall in sales would likely trigger another scale down in operations for retailers and suppliers.  This is what happened last year.  Retailers were concerned about sales going into the season.  During the season they and their suppliers, knowing the consumer was in full retreat, set off on an intense job-cutting spree (over 600k cuts per month November through March). At the end of 2008, I had to boost my top end forecast for the Unemployment Rate to 9-10%.  Then by March I stepped it up to 10-11%.  The risk is growing that the belt loop might have be moved one more notch higher.   

You’ve probably read that adding in discouraged workers and full-timers forced into part-time jobs, we have a true Unemployment Rate of 17%.  While technically we are out of the recession for at least one quarter, we are not out woods on the economy.  But we are actually very fortunate in one important way.  The only thing missing in this environment is newspaper front page pictures of people standing in breadlines ala the Great Depression photos.  And the only reason we’re not seeing those photos is the broad safety net of unemployment benefits in place now unlike in the Great Depression.  In the Great Depression, the Unemployment Rate was estimated at 25% for much of the time.  At 17% we’re not that far away.  Without the safety net we have now we would have pictures of breadlines on our front pages.  Where do you think the stock market would be if that happened?  It’s time to face the facts that until further notice, the only thing our system has going for it is government support.  You might not like it, but it’s all we have now.  

Whether liberal or conservative, no one is happy or unconcerned with the huge deficit growth we’re experiencing.  We all know that we’re piling debt on top of debt for future generations.  Unfortunately, until the job market recovers that’s likely to continue.  Wall Street keeps telling us that job growth doesn’t really matter.  I beg to differ. It matters in many ways.    

The Power of Zero 

Last month I brought up the potential of the real inflation to fear was inflation in asset prices, or new bubbles in other words.  Low rates, or the power of zero as I call it, are making this all possible again. Of course our stock market seems overvalued, but it has a ways to go to reach bubble status.  Still it bears watching.  But it’s more than stocks.  Since late April the Dow has rallied almost 2,000 points.  Yet treasury rates are currently at the same levels prevailing in April.  Some of that is due to the fact some very large money managers believe that deflation will ultimately win out, but much of it is simple due to the power of zero.  

Banks are adding to their treasury portfolios at a record pace. While there is no credit risk there is interest rate risk.  But banks aren’t alone, leveraged players around the globe have returned to playing the yield curve in leveraged transactions.     

More aggressive managers have foregone buying lower-yielding treasury securities and have been buying more distressed assets, our friends the “toxic assets.”  It was clear that at least through March of this year, many mortgage-related securities were being grossly undervalued due to the lack of demand in the market.  That’s when the Treasury stepped in with the PIPP program designed to buy toxic assets off of bank balance sheets. You might recall at the time that the goal of the Treasury was to have the program up and running by July of this year with the eventual goal of buying up to $1 trillion in toxic assets.  The Treasury has just announced that some of the partnerships are finally in place after a three-month delay.  Based on the capital received, the total potential purchases of these partnerships are $12 billion.  That’s quite a shortfall from $1 trillion.  There are a number of reasons why this program can be labeled a failure, but maybe it should just be labeled as unnecessary instead.  

Since the time the program was announced there has been a dramatic improvement in the market prices of some of these “toxic assets.”  Clearly there are exceptions.  Securities originally rated below AA and those already taking losses aren’t improving.  But some of the grossly undervalued one-time AAA securities have soared in value.  As an example, the price on one particular AAA went from 30 to 70.  Those partners for the Treasury PIPP program have seen potential returns plummet, and banks are in no rush to sell any asset rising in price regardless.  

The PIPP story is emblematic of the major turnaround we’re seeing in distressed asset values.  That sounds like a good story until you consider that the actual underlying performance of the mortgages is deteriorating at an ever-increasing pace for most mortgage types.  At WesCorp, we can attest that mortgage pipeline characteristics have not improved.  Yet the power of zero is helping to drive demand for the most risky of assets as well as treasuries.  Another debt bubble debacle is in the making. 

In last month’s epistle I wrote that I felt the Bernanke Fed would be unwilling to risk sending a message to the markets that the Fed would act against dangerous bubbles.  I still believe that, but we might have seen some glimmer of hope on that front.  At least three Fed officials have recently stated that the Fed might need to start tightening before it was obvious, meaning before the Unemployment Rate declined.  While they stopped short of stating this might be necessary due to asset bubbles, I think the implications were strong.  This is still Bernanke’s Fed, but at some point in time a divided Fed could emerge. 

Bernanke has resisted this whole line of fighting asset bubbles saying the Fed could not necessarily identify a developing asset bubble.  To that, Mr. Bernanke, I say – something I can’t say here.  Bernanke apparently believes the Fed can identify the dangers of inflation in the Consumer Price Index, which has multiple inputs and components, but they can’t discern an unsustainable surge in the price of a single asset class.  Doesn’t add up to me.   

I’m not ready for the Fed to tighten just yet, although it would be fun to watch the reaction in the marketplace.  It would be hilarious watching all the color drain from Jim Cramer’s face. But the further that asset market values get out of alignment with the realities of a weak, job-starved economy, the more we might need to Fed to fire a warning shot.  They don’t need to raise interest rates.  They can just shut down some lending facilities (mostly unneeded now anyway), change reserve requirements, force margin changes on secured lending, or just increase the margin requirement on stock borrowings.  Go after the banker-speculator where he lives.  We can’t stomach Lehman II.  

Dwight Johnston

The Dow crossed 10,000 today, and the cheers on the floor of the exchange were much louder than you would expect.  If I were them, I would not want to point out the fact that U.S. stocks have been the worst investment on the face of the earth for the past ten years.  (The Dow hit 10,000 the first time in March of 1999)  Money markets, bonds of all stripes, foreign stocks, gold, oil, and you-name-it have all outperformed stocks.  Yet we continue to allow ourselves to obsess over this market, as well as hitch our retirement wagons to this machine.  The purpose of this machine seems to be to enrich those on Wall Street and in the upper echelons of corporate America.  Wow!  How liberal/socialist/Michael Moore did that sound? 

But think about it.  For all of these years, all other markets outperformed stocks.  Also consider that the U.S. GDP has expanded by roughly 30%.  Yet stocks are flat.  Why?  More competition both here and abroad?  Certainly part of it.  Stocks are simply grossly undervalued?  Highly unlikely looking at what EPS are being projected into the future.  Think about this though.  We know that those at the top of corporations have seen exponential growth in incomes over the years, while employee wages have been stagnant.  We also know that the shareholders of those corporations are also not being rewarded. Where is the money going?   The buck stops at the top – literally.  

Today the WSJ had an article which said that bonuses on Wall Street for 2009 will set a new record!  I don’t mean just better than last year; I mean better than the previous record set in 2007.  This is all coming after the Street managed to pillage the economy and us, the poor villagers.  They didn’t even bother rewarding their long-suffering stock holders with a few pennies in added dividends.  But it gets worse.  Also today, in the NY Times, there was an article regarding how wages and salaries to workers are actually being cut at a pace not seen since the Great Depression!  We’ve had a record setting nine straight months of declining wages.  Overall average compensation to workers is back to 2000 levels.  Just put those two articles from the WSJ and the NY Times side by side and read.  It should become clear what is happening.

The stock market has been the worst performer on the globe for the average investor.  But for Wall Street and the corporate kingpins, the stock market has been a virtual gold mine. 

The type of rally we’ve had this year would normally be attracting investors in droves.  Yet, that hasn’t happened.  There is a tremendous amount of money on the sidelines, which when it moves, has tended to go into bonds not stocks.  Wall Street keeps talking about how that wall of money will send stocks soaring.  Is it at all possible that the money is not coming back to be debased by Wall Street?  Did we all really figure out what Wall Street’s true game is all about?  Nah….we’ll get sucked back in again soon.  Would be nice to think otherwise though.

Despite a slight hiccup yesterday, the stock market continues to roll on.  I had thought that perhaps yesterday was a signal that the earnings charade was over.  About halfway through this reporting season, about 80% of all companies reported has “beat” earnings expectations of analysts.  Nineteen per cent have “met” expectations and only one per cent fell below.  As each report on the majors has come out, stocks dutifully rallied as if this was great news.  CNBC trots out every talking head they can get their hands on to keep pumping up this bull market.  

Not one single time have I heard anyone ask the obvious question.  Are the earnings really that good or are the analysts really really bad.  Basically, analysts have missed projections 80% of the time.  That sounds like a huge failure rate.  So why would anyone listen to them?  Because it’s part of the game.  The analysts who estimate various stock earnings are doing so because they are in the universe of stocks they analyze and recommend buy-sell-hold.  In over 90% of the cases, Wall Street analysts have “buy” recommendations on the stocks they follow.  There is no money for Wall Street or their analysts in following “sell” recommendations.  This means the analysts are rewarded for intentionally under-estimating earnings.  By putting out forecasts they know their companies will exceed, they are assured that the stocks will rally following that news.  This means that since they have a “buy” on the stocks, they will be rewarded for their tremendous stock-selection acumen.  This is nothing but pure fraud but one that goes rewarded not punished. 

You think I’m being too conspiracy-theorist?  Okay, then all of Wall Street’s analysts are stupid.  You can’t have it both ways with an 80% fail rate.  Either these analysts are liars or just plain stupid.  Take your pick.   

 More Fraud News 

While we’re on the subject of fraud there’s this.  The home tax credit bill extension is still a work-in-process, but a House subcommittee is holding hearings on how the program has worked so far.  Today’s testimony unfortunately centers on the fraud already unearthed in just a sampling of tax filings.  Fraud has included credit claims from those who already owned a home, investors claiming multiple new “primary” residences under various name combinations, those who never bought a home, and several children as young as four years old!  Now that’s an independent kid.  I can only imagine your surprise that there is fraud in a program that involves free government money.  But this testimony is not likely to derail the lobbying money train that is behind this bill.  

Shameful Politics – As Usual 

Weekly Jobless Claims certainly should have gotten some attention, but it doesn’t seem to have done much.  Claims were expected to remain at 515k, with the chance of a lower number due to the partial holiday last week.  But, new claims rose to 531k.  That isn’t a huge jump, but it isn’t welcome.  There is a bill in Congress to extend benefits in states in which the unemployment rate is over 8.5%, but a small band of Republicans in the Senate are stalling the bill.  They want to attach certain riders to the bill that the Democrats don’t want.  I guess these guys want to see pictures of breadlines on the front pages of their local newspapers.  That’s how close we’re getting.  Benefits are running out for about 300k people each month at this time, and the number will be escalating rapidly with each passing month.  Congress needs to find some other, less immediate issue to use to play out their silly games.

Newspaper headlines tomorrow will be screaming about how the GDP number was responsible for the huge rally in stocks today.  Don’t believe it.  Here is what has really played out.  Over the past five days, stocks have weakened as the dollar has gained some strength.  (Remember that traders are almost universally bullish on stocks and bearish on the dollar.)  But this five-day setback caused some traders to beging to sell stocks and cover short positions of the dollar.  Many traders also decided to change the bet entirely and bet against stocks and on the dollar.  Rolling into the close last night, chart formations for both the dollar and stocks had come to a point which indicated that either the market was really ready to rollover and plunge or an immediate reversal and recovery would ensue.

The GDP number this morning was fine, but it was as expected.  There was no surprise.  It was also clear that cash for clunkers and the home tax credit were the factors responsible for most of the growth, and that means it is most likely temporary.  But, the number was good enough to start a slight currency rally against the dollar.  This led to a commodity rally, which in turn fed into a stock rally.  In the good old days when you had normal investors and the standard traders and fund managers, the reaction would have been more subdued.  But in this environment, markets are under the control of a small band of mega-trading accounts that run their trades off mysterious algorithmic programs.  These high frequency traders tend to all run in a herd.  Once the GDP triggered the first minor move, this signaled the programs to reverse trading in all markets, since the key technical level had not been breeched.  This meant that anything sold or shorted over the past five days was repurchased.

These traders can’t control what the markets do from a long-term perspective, but they have total control over the way the market will trade at critical junctures.  Had GDP been weaker than expected, the first trade would have been a stronger dollar which would have triggered a massive wave of selling in commodities and stocks.  All of those high-frequency trades would have been more sells and not buys.  Market pundits, business writers, and the talking heads on CNBC all pretend everything is still tied to fundamentals and sound investment philosophies.  Don’t believe it for a minute.  It’s a different game now.  Just understand that.  If you like the economy and being invested for the long-term, that’s fine and act accordingly.  If you are unsure, do not let the arcade games being played on Wall Street influence you.  It’s their game and your only roll is to either give them money or stand aside.

For the glass half-full crowd, the Dow closed down 250 points, which was at least better than the -286 points level where the Dow stood with about an hour to go before the close.  Continuing that theme, on a month-over-month basis the Dow actually escaped the dreaded month of October by remaining unchanged on the month with a tiny 5 point loss.

For the glass half-empty crowd, the close on the day wiped out all of yesterday’s rebound and then some.  The S&P closed at 1036, which was below the 50-day moving average and below a key support level of 1042.  The Dow closed even on the month but down 3.8% from the high during the month.  The S&P and NADAQ both closed lower on the month and down over 6% from their highs of the month.

So what happened today?  Nothing really.  In the post below I talked about a game being played by big speculators with big computers.  Yesterday the programs all said buy and today sell.  The only news today was that the employment component of the Chicago ISM index fell, but that certainly wasn’t the reason for the sell-off today — any more than the GDP report was the reason the markets rose yesterday.

But before you get totally comfortable expecting the stock market to continue to sell off, remember that just yesterday traders were certain that stocks would continue to rally. What happens one day has no bearing on what might happen the next.

Looking ahead to next week and the FOMC announcement, the stakes are higher than they have been for months when it comes to the wording of the statement release.  Should the Fed change the wording of the statement to indicate that some sort of plan to withdraw monetary stimulus is under consideration, then that would send a strong message to the currency markets.  The dollar should rally sharply, and that would put immediate downward pressure on stocks.  Conversely, no indication of a shift away from “low rates for an extended period of time” policy would be an all clear signal for traders to resume dollar-bashing and stock buying.

Of course as soon as the FOMC meeting is out of the way, we’ll be staring down the barrel of the next Nonfarm Payroll number.  Should be a fun week.

It’s Warren Buffett to the rescue!  Markets around the globe were getting crushed last night and early this morning.  The dollar was surging and there was bad news on some big banks. UBS said losses were growing, and RBS and Lloyd’s had to go back for another helping of government support.  Most markets were down between 2-3%, and that looked like where the U.S. would open.

Buffett to the rescue

Enter Warren Buffett.  He announced that Berkshire Hathaway would buy the 77% of Burlington Northern Railroad it doesn’t already own and pay a big premium.  The total cash will be $34 billion plus the assumption of $10 billion in debt.  This is Buffett’s biggest-ever single play.  He termed it an “all-in” bet on the U.S. economy.  Few people will argue against Buffett, though even he would admit his share of mistakes.  His biggest sin has been that he has often been early on making moves.  But, he has rarely been wrong over the long-term. I’m hoping the early-but-not-wrong pattern holds.

The irony of this whole story is that if Warren is correct and the U.S. economy rebounds soon, rates will go up.  If rates go up, the dollar will follow.  If the dollar starts moving higher, the global carry trades will implode.  If global carry trades are forced to be unwound, the stock market will tumble.  Implosion of global carry trades means that global speculators will have to sell currencies and buy dollars to repay borrowing in dollars they took out here at near 0%.  For the past couple of months I’ve written about the danger of asset bubbles.   Frankly, I would like to think this is starting now.  I would rather see these carry trades forced to unwind now as opposed to later — when the damage could be much greater.

So, you can thank Warren for saving the market today if you wish.  But you should really thank stock traders for being so dumb they don’t even understand what Warren’s actions really mean.

The FOMC did exactly as Wall Street instructed them and left “low rates for an extended period of time” unchanged.  The FOMC has just signaled to the markets that they are perfectly OK with ramping up global leverage plays and allowing the dollar to fall.  As much as it pains me to say it, I fear that this Fed is going to allow devaluing the dollar in order to inflate our way out of the debt trap.  Bernanke and Co. would deny this, but it’s the only thing I can think of now to explain their lack of action, knowing they are risking another debacle of bubble implosions down the road.  Bernanke has given global speculators the green light to put the world’s financial system back at risk.

Speaking of games . . .  It’s widely known that Wells Fargo, thanks to their takeover of Wachovia, has more than $100 billion in Option ARMs on their balance sheet — which are facing resets requiring principal payments as well.  Given the horrendous equity positions of the borrowers, walk away risk is very high. But Wells Fargo has announced they will NOT require borrowers to meet the contract.  Wells is changing mortgages to interest only for another six to ten years.  This is a risky bet and a ploy to kick the can down the road.  We just simply cannot face the music.

Back in the March/April period I wrote that I thought the worst was over, temporarily at least, for the stock market.  In the April 1 post I even suggested that the Dow could get back to 10,000 before the rally was over.  But realistically, I didn’t really think stocks would get that high.  I also thought that as the year progressed, the risk of a setback would grow.  I thought by September or October at the latest, the stock market would be in another downdraft.  I WAS WRONG WRONG WRONG.

 What was my big mistake?  I expected the markets to be rational.  I’ve been around too long for that sort of thinking.  Once a certain psychology takes over, fundamentals cease to exist.  That’s certainly the atmosphere we’re in, and I’m not about to predict when and from what level the rally will stall out.  

From a fundamental perspective, I was right.  I was most worried about jobs and financial institutions.  In the most fundamental and long-term sense of all, job growth remains a significant problem.  Bank problems are absolutely still with us.  Banks are still failing at a near-record pace, but the FDIC has hit on efficient and quiet ways for these to play out.  Big bank problem loans are growing, but the banks, with full cooperation with regulators, are disguising the problems.  This is now a clear strategy.  As long as the banks are allowed to in effect kick the can down the road, they can continue to earn huge spreads.  The hope is that eventually those big earnings will build capital enough to cover the eventual losses. 

The bottom line of this is that I was wrong.  But am I ready to jump on board.  Come on.  You know me better than that.  I can just not get past how horrendous our employment situation is.  I can also not get over the fact of how much of this rally is based on a weak dollar.  Eventually a weak dollar simply has to start working against us.  But, I certainly won’t deny that the market is more likely to trade higher than lower.  I would like to think that traders would wake up to reality someday, but that no longer seems likely.  As I’ve written in the last few posts, this isn’t your father’s stock market.  This is a different ballgame with different rules.  Rules that even the Fed seems complicit in creating.  

But being wrong on the market won’t prevent me from railing at it.  I’ve copied in the space below a recap of the latest jobs number.  

A Very Scary Christmas 

For at least the past twenty-five years, economists and analysts of all sorts have wrung their hands as the Christmas season approaches.  Will the consumer spend given the headwinds of the’87 stock crash, the ’98 Asian meltdown, ’00 tech bubble burst, September 11, Hurricane Katrina, etc.?  The answer in all cases was yes, yes, yes.  For more than two decades you never really had to worry about the spending habits of Americans.  Have card will travel.  

The dependable American consumer always came through – until 2008.  Although the immediate financial meltdown crisis was abating during Christmas ‘08, longer-term concerns had not.  The monthly Nonfarm Payroll headlines had gone from roughly -75k per month through August to a huge -681k for the November data.  The last number was the one that hit the newspaper headlines on December 6 – not exactly the best timing.  While credit availability and other problems were factors as well, the poor sales at Christmas contributed greatly accelerated job cuts by businesses that carried well into the first part of 2009.  

The stock market looks better this year.  Certainly the Wall Street buzz is ridiculously positive.  But, are consumers really better off, and will those old spending spirits return?  The results of sales this Christmas season are almost as critical as it turned out that last year’s were.   The latest Unemployment Report might help us determine that.  We’ll also take a look at mortgage rates in 2010 when Santa Claus (the Fed) is scheduled to leave town.  

More Time to Shop!

 The good news is you’ll have more time to do your Christmas shopping this year.  The bad news is it’s because you’re fired.   The latest Unemployment Report was grim.  Nonfarm Payrolls fell by 190k.  That is worse than expected but not significantly worse than the -175k economists foresaw.  The BLS also revised lower by 91k the job losses for August and September.  This could be construed as good news, but that’s just spin.  Jobs are being lost.  A few economists are touting the fact that the three-month moving average of job losses is now down to 185k.  One thousand is too many in an economy that needs to be generating growth of at least 150k to 200k per month.  The only modestly good news was one of the leading indicators in the report, that of temporary workers.  Temporary workers grew by 33k, the first increase in almost two years.  Some of that might have been additions ahead of the Christmas season, but let’s take that at face value as good news.  

The rest of the report was all bad.  The headlines in newspapers over the weekend screamed “Unemployment Rate Soars to 10.2% – Worst in 26 Years!”  Of course the next 20 pages of the print editions will be ads to buy early for Christmas.  But, that headline could have a negative psychological impact heading into the season.  The worst news in the 10.2% was that the rise from 9.8% to 10.2% came despite the fact the BLS lowered the available labor pool.  As you know, a rising unemployment rate is not a bad sign if it is rising because the labor pool is increasing.  That can be a sign of optimism that jobs will be available.  But, the BLS added even more workers to the discouraged workers category and reduced the size of the pool.  More bad news was in the other leading indicator category, the workweek.  The workweek was expected to rise by .1% from the post-WWII low of 33.  Instead, it remained at 33.0.  The last piece of bad news came from the household survey.  The “establishment” survey is the one from which the Nonfarm Payroll number is derived.  This covers larger businesses.  The household survey comes from surveys of individual households.  In that survey, 589k jobs were lost last month, not 190k.  And over the past three months, 1.8 million jobs were destroyed, not the 555k as reported in the Nonfarm Payroll number.  The true unemployment rate (unemployed+discouraged workers+under-employed) stands at 17.5%.  

As many of you know, my theory for a job market turnaround was based on the highly complex theory that businesses would eventually run out of people to fire.  Based on this latest data, they’re still find bodies.  The leading indicators I watch most closely are not turning around as they should have long before this time.  Perhaps most disturbing is that we still have people leaving the work force in droves.  Maybe the next few months will see a miraculous turnaround, but just being “less bad” isn’t going to cut it anymore.  Now taking what we have learned in the latest data, let’s consider what this means going into the Christmas season.  

If you focus on the just the Nonfarm Payroll number, you might think that at least -190k sounds better than -681k headline of last December.  No argument there.  But since December 2008, 4,226,000 more people are unemployed than during the Christmas season last year.  Add to that number roughly another 2,000,000 people that are working part-time that were working full-time last year.  How reasonable is it to expect the Christmas sales will be robust?  About as reasonable to expect that you can squeeze blood from a stone.  

But let’s try to look as some positives, as there are a few mitigating factors.  Even with the horrendous unemployment situation, over 80% of the working population still has jobs.  Some of those consumers might have cut back drastically last year and held off buying during this past year due to fears of job losses that weren’t realized.  With economic headlines at least appearing more positive and the stock market in far better shape, you could definitely see how those still employed could ramp up spending.  But this is a hope not supported by any relevant data or surveys.  Preliminary surveys are saying that consumers are expected to spend 1% to 2% more this year.  Considering the number of newly unemployed this year that will spend much less, those estimates of Christmas sales are implying that the currently employed will ramp up spending far more than 1% to 2% to make up for those who have lost jobs.  But with this latest 10.2% unemployment headline number staring at them and with the next one likely worse, can we really expect good Christmas sales. 

Certainly the Wall Street spin will be positive.  The year-over-year comparisons we’ll see from stores will be good.  Comparing sales to last year’s sales sets a low bar to clear.  The other consideration is that existing retailers will have gained market share given the number of retailers that closed up shop in 2009.  Think about Best Buy’s sales this year in the context of not competing with Circuit City.  How about a retailer like Kohl’s without a Mervyns down the block?  Certainly there will be some feel-good stories coming out of the numbers.  But, once you total up all the sales from fewer retailers, what will the gross sales be?    That will be what determines how businesses will approach 2010 staffing levels. 

If sales are strong enough to deplete inventories plus encourage managers that the economy is truly rebounding, we could see producers add jobs next year.  Conversely, a weak season could easily trigger another retrenchment by businesses.  In the three months ahead of December 2008, businesses cut payrolls by 1.1 million.  In December alone, after realizing how much the recession was impacting activity, payrolls were cut by 681k.  In the first three months of 2009, post Christmas 2008, payrolls were slashed by 2.1 million workers.  Of course these jobs weren’t all retail or even retail related.  But businesses generally were afraid of the drastic decline in the level of activity they had seen and were seeing.   While Wall Street is still yammering about an inventory recovery, the consumer counts for 70% of the economy.  There will be no sustainable recovery without the consumer. 

Over my many years of being involved in the markets I’ve always thought the obsession over Christmas sales was unwarranted, and I’ve been right.  But, we haven’t been in a true job-based recession in the last several decades either.  Comparing this recession to any other post WWII recession is not valid.  The consumer always seemed to be able to weather whatever storm was besetting the markets and the economy, but they are the storm this time. 

 

In the immortal words of Rep. Joe Wilson, I say to Ben Bernanke “You Lie!”

Ben Bernanke is speaking to the NY Economic Club today and the text has been released.  Most of it is strictly boilerplate economic stuff.  The economy remains weak but has begun a rebound.  Unemployment is too high.  There is more work to do on the economy.  The financial system has improved but challenges remain.  blah blah blah.  He did reference the dollar though, which was somewhat surprising.  Fed Chairmen typically stay away from that in speeches.  What he said was pretty lame though — “Fed will watch the dollar closely” and  ”Fed policy will ensure dollar stays strong.”  The last statement certainly is a lie.  The Fed had a chance to demonstrate that with a subtle wording change in the last FOMC meeting, and they did nothing.  Clearly the Fed is perfectly happy to see dangerous asset bubbles inflate all around the globe.   They think we’ll safely inflate our way out of the latest debacle. They are wrong.

Very briefly after the headline that Bernanke was, in fact, aware of the existence of the dollar, the dollar rallied and stocks sold off slightly.  But that has already reversed as it has become clear that Bernanke’s emphasis is still on “low rates for an extended period of time.”  This is clearly his mantra now.  He chose to repeat that for emphasis.

I had my doubts about Bernanke when he took over.  But I thought he couldn’t do worse than Greenspan and might be able to improve.  I was wrong. He is heading down that same disastrous path even after seeing the wreckage that Greenspan wrought with the same policies.  Bernanke is digging a new hole, right beside and possible even bigger than the one Greenspan left.