Sunday, 1 November 2009

October 3 2009: Just the naked eye

Detroit Publishing Co. Great Grand Ma 1900
Thisbe, 'quite the Babylonian'

Ilargi: I’m starting to wonder how many people there are left who actually believe all the talk about the economic recovery we're supposed to have entered. You know, the one proclaimed by governments, central bankers, institutions such as the IMF and the entire flock of parrots and parakeets that call themselves media and are all set 24/7 to repeat their every word, chirping, tweeting and twittering as they go along. And I'm afraid there still are far too many such believers left. They have a great shot at losing a lot of money in the next few months.

I also wonder how many people have gotten real nervous by now. Who've asked themselves what I asked a while back: what are the odds that the stock markets will keep on rising? And on what grounds would they do so? Surely many must have realized by now that perhaps that talk about a recovery is just that, talk. The strength of their belief may depend, to a large degree, on the job market. After all, it should be obvious that "jobless recovery" is a term used exclusively by people who do have jobs, and often cushy ones.

I like this little graph, because it provides a very nice picture of the effect of the hundreds of billions in taxpayer money spent by the American government on the job market. From about May through September the country has bought itself a slight decrease in the rate of job losses. Still, the unemployment rate has gone up despite all the cash and credit so generously supplied by you, the taxpayer. And it by no means tells the entire story; indeed, it may well relate only the rosiest parts available.

Now other, less positive, parts are slowly being revealed that could change and even shatter the image we have of the job market. Here's a few choice bullet points from the reports that came out this week:
  • Job losses for September, according to the Bureau of Labor Statistics' U3 calculations, were 263.000.
  • This brings the U3 unemployment rate to 9.8%.
  • While the U6 rate reached 17%.
  • The household survey by the same BLS indicates that employment fell by 785,000.
  • An alternate view at the household survey suggest 995,000 fewer people were working in September than in August, while the labor force contracted by 1,262,000 people and the number of people "not in the labor force" rose by 1,516,000.
  • More than a half a million people dropped out of the labor force
  • 551,000 initial jobless claims were filed.

I don't know about you, but I assure you that I have a hard time seeing the forest through the trees here. It's simply too much of a strange coincidence that the number most trumpeted in the media is always the lowest (U3) one. As soon as you peel away just the first few underlying layers, it becomes clear that this number merely scratches the surface. Most of the 10 million or so people who get counted in U6, but not in U3, are very much unemployed or at least underemployed. The bottom line is that even though the 263,000 number is unrealistically low, likely by a lot, it is the one that government and media stubbornly keep providing, as if the American people, who after all pay the salaries of the BLS employees, are too stupid to have a right to hear the real data.

The latest report does lift the veil a little bit: The Labor Department yesterday admitted it may have underestimated unemployment numbers by as much as 17%, partly because of its faulty birth/death model, which is a useless tool in times like these. The BLS data missed 824,000 lost jobs for the year through last March, with most of the additional job loss occurring in the first quarter of 2009. The potential revision would mean that the economy lost 5.6 million jobs for the period instead of the 4.8 million suggested until now.
[..] the tax records showed the Labor Department’s payrolls figures overestimated payrolls by about 150,000 [..] That implies the estimates missed the mark by about 675,000 in the first quarter of this year [or 225,000 per month] , which currently shows a 2.1 million drop in payrolls.[..]

Calculated Risk added these new numbers to his usual graph which compares job loss percentages in recessions.

Catherine Rampell at Economix provides a similar graph, but using the share of employment:

Awfully bad as it is, the unemployment situation, of course, is but one aspect of an economy that will now grow weaker at a rapid clip.
  • US personal bankruptcy filings will exceed 1.4 Million by the end of the year, more than the 1.3 million they reached right before the bankruptcy laws were altered with aim of bringing bankruptcy numbers down.
  • Bank card delinquencies hit a record high last month.
  • Meredith Whitney says:
    • Anyone counting on a meaningful economic recovery will be greatly disappointed. How do I know? I follow credit, and credit is contracting. Access to credit is being denied at an accelerating pace. Large, well-capitalized companies have no problem finding credit. Small businesses, on the other hand, have never had a harder time getting a loan.
    • Small business loans are hard to find, and credit-card lines (a critical funding source to small businesses) have been cut by 25% since last year.
    • [..] more than 32% of U.S. homes are worth less than their mortgages.
    • Small businesses primarily fund themselves through credit cards and loans from local lenders. In the past two years, credit-card lines have been cut by over $1.25 trillion. During the same time, 10% of all credit-card accounts have been cancelled.

But the worst part of it all is that deflation is here, and it’s here to stay for a while. In the past few days, we could see heavy hitters like David Rosenberg, Joseph Stiglitz, Janet Tavakoli address deflation in the same way that we at The Automatic Earth have even for longer than the 20 months that this site exists. Ironically, at about the exact same moment when we figured perhaps we were the only ones left (with Mike Shedlock, Bob Prechter and a few Minyans) to warn of the perils of deflation, it is slowly turning into a mainstream concern. As Tavakoli tells Max Keiser (who still can't believe it), the debts are simply too overwhelming. Not that anyone has seriously attempted to address them.

  • "We are certainly in a deflationary state," said David Rosenberg, chief economist and strategist with Gluskin Sheff and Associates in Toronto. "Of that, there's no doubt."
  • "I think people still have no clue as to just how weak the economy is," Mr. Rosenberg said. Remove the "impressive medication" administered by governments, and most economies are at a virtual standstill. The U.S. economy faces a decade of stagnation, he said.
  • [..]"deflation will last until we see the next secular trend of expanding household balance sheets, and that is some time away" Mr. Rosenberg said.

The Federal Reserve decides to stick with another label for the exact same phenomenon.
  • "Disinflationary winds are blowing with gale-force effect," [Chicago Fed president] Evans said in a Sept. 9 speech in New York.
  • The Fed needs to "keep inflation expectations from slipping to undesirably low levels in order to prevent unwanted disinflation," Vice Chairman Donald Kohn said Sept. 10 in Washington during a speech at the Brookings Institution.

In other words, the government's unemployment data have proven to be unreliable. That in itself is not new, but what is, is the Labor Department's own admission that its stats are flawed. It still hasn't fully opened up by any means, but the cracks are now visible to the naked eye.

The potential for a continued rally in the stock markets is becoming more questionable by the day. If those markets start caving in, as we think they simply must, the hollowness of the recovery proclaimed by governments and media will also lie exposed to naked eye. Whether or not the government and the Federal Reserve have been busy painting lipstick on the markets pig though the past 6 months is no longer even relevant; they will be powerless to do so going forward.

We have the likes of Paul Krugman, Robert Reich and, in the UK, Samuel Brittan, shrieking loudly for more, much more, stimulus. They see the problem coming, that's true, but they fail to see that the US and UK governments opted sometime in 2007-2008 to pour money into their financial systems, and that money cannot be spent a second time.

Many of us remember how a trillion here and a trillion there were doled out withe message that the taxpayer was likely to make a healthy profit on this "investment". Haven't heard that one for a bit. The reality is that between what Washington has thrown into AIG, the Wall Street banks and the Fannie and Freddie and Ginnie family, as bankrupt as it is incestuous, there are only losses.

If and when financials stocks get hammered, banks and insurers -among others- will be forced to execute additional gigantic writedowns and losses. With a 3.6 million official housing inventory, to which we can add a 7 million shadow one, America will have a 25 month supply of unsold homes. If Fannie and Freddie weren't dead yet, that would do it. The losses are yours.

The Krugman clan now wants you to finance a second stimulus. And it will come (albeit under an alternative moniker), but it can bring only more misery for the people. The government will get a little more transparent in a desperate fight for credibility, but it was lost a long time ago. And it's not a specific government, it's the entire system that's morally broke. The entire economic, financial and political sytems, all of it and all of them, broke, broker and broken.

I asked above how many people are left that still believe all the talk about that heavily promoted recovery. And though I know they are there, scores of them, that at the same time is something that I'm starting to find hard to believe. Look at the numbers, and never forget that many of them are not even anywhere near as bad as the real ones.

Yes, consider this your storm warning. Batten down the hatches, don’t let your kids wander off, and please, take off those silly rose-colored glasses. From now on in, just the naked eye.

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