Initial claims came in at -457K this morning, this is not good, and last week’s figures were revised from -472K to 476K, really not good. This has little to do with the oil leak in the Gulf and anyone making that claim disqualifies themselves from the conversation. This has to do with a weak economy, pure and simple. We are entering a double dip recession and as the stimulus is pulled back it is going to get worse, much worse.
Your first warnings came from Best Buy and Fedex, but no one listened to what they had to say. Frankly, the real warnings were always in the weekly claims reports, but everyone dismissed them as a “lagging indicator” which is simply not true in a post credit collapse economy. If we were in a normal inventory recession I would agree that employment is a lagging indicator, but when the economy blows up because people cannot pay their bills, well, employment is a leading indicator. That is where economists missed the mark and failed to adjust their models, those that fail to change will go the way of the dinosaur, it is inevitable that natural selection weeds out the weak and that is what is happening now.
To top off the situation we did the worst thing possible, we tried to cure a debt problem with more debt. You cannot do that, it just doesn’t work. Take a look at Greek bonds, the 10 year is over 10% again, why? They have austerity measures in place. They have access to special funding, etc. yet their bonds are yielding over 10%. That is telling you there is no fix for the problem as the smart money is always, I cannot stress this enough, always in the credit markets. We have treasuries climbing with 2 year yields pushing .64%! Are you kidding me? This is not normal and while I bought when yields hit 1.10% on the 2 year, taking much flak from friends and family I might add, I figured the yield would drop to .77% or so, within the trading range, but they broke out. This is a sign that things are not as they seem and extreme caution is merited. Where treasury yields can go is the big question, certainly zero is not out of the question and negative yields have happened before, watch the credit markets.
Europe is a problem and will continue to be a problem, remember that the EU is China’s biggest market and the EU is responsible for 30% of the S&P 500’s earnings, not an issue for 2Q, but 3Q I would not be long in 3Q. Unemployment in the U.S. will climb higher, I am sad to report, especially as Europe deteriorates and much to Mr. Krugman’s chagrin forcing the EU members to increase their deficits is not a good idea. Their deficits are the problem and making them bigger will not solve their problems. Europe could lead to much higher unemployment in the U.S. and one has to remember that Europe did make the Depression much worse in America in the 1930’s as well, history does repeat itself.
To top it all off we do have the moratorium for drilling in the Gulf, it may get overturned again, but assume it will not. What does that mean? That means at least 10,000 jobs will be lost within the first few weeks. After that it could get worse as it creates a negative feed loop and the loss of one job means others will lose their jobs over time. From my lens the moratorium is insane. The leak is horrible, we all know that, but this is the first oil leak we have had in the region, ever, out of how many wells? Perhaps if the government puts a safety inspector on each rig that may solve the safety concerns, but that idea was rejected. Instead, let’s halt the entire industry and watch them all go to Mexico or Brazil instead so we can lose those jobs for years to come in the best case scenario or forever in the worst case scenario.
Employment is indicating things are mildly better, but merely stabilized at “less bad” which is not good overall. Housing, the release yesterday, solidified that we will have a double dip as housing is about 21% of GDP and we just saw the worst housing data since they started recording the data series. How much more evidence do we need to have? We also created false demand which means we had distorted housing data for the past year. How in the world are we supposed to know how far forward we pulled demand? Months? Years? This is the problem with Keynesian economics especially when it is used wrong, which we certainly did.
The bottom line is this, unemployment is going to grow outside of government rolls, period. Housing is going to go lower meaning GDP is going to be bad in the second half of this year, if not negative. The employment report, due out soon, will show more government jobs which will not be positive for the markets. The ISM surveys are rolling over. The leading indicators are pointing down, hard. Inflation is nil right now. Treasuries are telling you something big is going to happen. Europe is in major trouble. How you can believe the long only permabulls being paraded on the TV is beyond me. They get paid to have your money in their funds whether it goes up or down. I get nothing whether you invest or not. Frankly, the facts at this point are irrefutable.
I guess a few firms had to be to Scrooge given the 452K initial claims we saw this morning. Anyone expecting a larger number than we got is crazy because companies just do not or try not to fire people around the holidays. In fact, I am shocked that we saw claims as high as we saw today which reinforces my thought that the employment picture is not getting any better, I know I wouldn’t know a V shaped recovery if it hit me in the head because employment is a lagging indicator. That would be true for an inventory recession, but not for a credit collapse or do I have my type of recessions mixed up?
These initial claims and the ISM data is still not consistent with the magical -11K employment report we got in November, sorry for being a doubter. I simply do not trust government data and neither should you because the BLS along with this administration, any administration for that matter, will do anything to make themselves look better. For example, even though banks are not lending the BLS insists that 30K people started their own businesses in November, really, that is what the birth/death model says. Go back a year ago when things were really bad and the numbers are even higher, 100K+ people were starting their own businesses when the credit markets were frozen solid, so trust those BLS numbers all you want, I don’t.
To further illustrate this point, last month the BLS reduced the number of people in the work force by some 130K, they just took them out of the work force, why? Because they gave up looking for a job, or could not find one, and that is how you get a -11K employment report and massively revised prior reports. I wish we could all doctor our books like the government as we would all be rich. However, did you hear Steve Liesman tell you about how the BLS removed people from the workforce? Nope, you did not. Santelli told you about it and Santelli told you about how retail sales were doctored, but none of the other talking heads, why? I don’t have an answer, I really want to know why. I get that no one wants all bad news all the time, even I don’t want that, but I do want the truth.
My point is that last week and this week we will see soft initial claims numbers and December’s employment report will probably be OK, unless they doctor it up again. If they doctor the report, which will be unnecessary, it will be spectacular and completely unbelievable which will be the problem. Moving forward credibility will be an issue for the government, kind of like the USSR in the 1980’s when they said everything was fine and we knew it wasn’t, we are trying to do the same freaking thing. The thing is when 20% of the population is unemployed/underemployed, 1 out of 5 people, you cannot lie your way out of that and you will pay through the elections. This AM on Squawk even Liesman finally admitted that the Bush “economic recovery” was very poor and we are right where we were at the beginning of the decade. We need massive job growth, 300K+ a month now to turn this around and that is not going to happen.
The economy is bad and without government intervention there is no green shoots, period. The housing data yesterday proves that because that was the first look at housing starts without the tax credit, starts were down 11% when expectations were for +6%, ouch. That is quantifiable proof that the private sector is doing nothing right now and it is 110% government intervention growing the economy which has zero multiplier effect, it actually destroys wealth especially when your country has to borrow 100% of the money. That one data point on its own destroys the V shapers story, but if you combine it with any other data point it completely buries it. Let us not forget that if this was a V shape the Fed would have at least changed its language during the last meeting, but nope they did not even do that. Keep in mind I want out of this to, but I am just not delusional. Sure stocks are higher, but that doesn’t mean the economy is OK and in fact it means there is pain coming hard and fast somewhere along the way. Oh, where’s the volume?
Just how bad are things? Well, banks aren’t lending to the wealthy either. I spoke to a very wealthy friend of mine yesterday in Florida which is telling of what is really going on in the mortgage market right now. Now, I know how lending works, but there is simply no excuse for what he is going through right now in trying to refinance his condo in Florida, I know it is a hard hit area, but hear out the story before passing judgment. His condo was worth 7 figures before, but now in the high 6 figures and he has zero debt, $2M in cash, 790 FICO score and he is self employed. Now his self employed status is an issue because he has inconsistent income, $40K a year to $400K a year which is wild swings, but not bad considering he only wants to refinance $200K.
Here is the thing, he cannot get any financing from any bank anywhere. He wants to refi a portion of his condo, so it is totally secured, he has cash, credit, no debt and income with no bank wanting the business. Keep in mind I am not talking about a second lien where if he filed for bankruptcy the bank gets nothing, we are talking first lien here. So, how can this be if banks are ‘eager’ to lend, the credit markets are fully functional or the economy is just fine? It is not possible as this guy is prime to lend to. Now, if a bank is not going to lend to him, which is a collateralized loan I might add, then they are not going to lend to a small business or consumers in general.
All of this points to much tighter credit and much higher unemployment coming soon. Especially since banks are dumping TARP as fast as they can because they do not want to be told to lend by the administration or they want that one last big payday before the whole thing comes down. Actually, my belief is that why wouldn’t banks not want to repay TARP since they know they could get it back anytime they want. Either way, banks do not want to lend and they are not going. No lending, no growth.
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