The Employment Report and Current Events

Posted by Ray on February 5, 2011 under Main | Be the First to Comment

The world is in a very tough spot right now and the word of the day is social unrest. On top of the news from the Middle East we got some, in my opinion, pretty bad jobs numbers on Friday. Of course if it was a good report it is because of the ‘economic recovery’ and when the report is bad it is because of snow, rain, wind, Earth or whatever else they want to say instead of the truth, the economy stinks.

There was not one good piece in the jobs report, not one. Sure, an unemployment rate of 9% was the headline given to us, but doesn’t this strike you as being odd since the BLS just added in some 300K under reported job losses from last year? On top of that we had, unadjusted, horrible initial claims reports for January and even the adjusted reports stunk. Even though the economy did add jobs governments are laying people off which is a problem as this will likely continue on into the future. Overall, there is still some 5 people for every open job right now, think about that and then think about how long it will take for unemployment to actually come down, especially with new workers coming into the work force through population growth.

We are not going anywhere in the near future and for proof of this look at Bernanke’s speech the other day when he basically guaranteed QE3. As an aside, I love how he said QE2 worked because asset prices, stocks, and bond yields were going up. Umm, wasn’t QE2 supposed to create negative real interest rates? And since when do we use the stock market as a barometer for economic growth? In fact, QE2 did work if you thought it would benefit stocks, but it has failed miserably for the other areas it was supposed to help, i.e. jobs, economic growth and negative real interest rates.

However, QE2 did have a successful side effect that only a few people have realized, it has overthrown a couple of governments and probably will topple a few more in short order. Remember how I said you can get inflation without money velocity? It is kind of happening and just imagine what will happen when banks actually lend again. Now, Ben says food prices are from emerging market demand which is true, but it is also because of bad harvests, which will continue, and the fact that commodities are valued in USD’s which have been sliding down in recent weeks.

This means food prices have risen for the poorest countries in the world to levels that are just unsustainable. When food prices rise in America we can weather the storm for a while, but in some countries food at lower prices consume 50%+ of the average families budget so they do not have the luxury of riding out the storm or cutting back they simply go without. They can only do this for a little while before something gives and we have witnessed what happens when that something gives way. I also believe we have only seen the beginning of the problem as no one has figured out that this year’s wheat harvest is likely to be very, very, bad and we will see much higher prices in a few months. The weather is whacky and I have a strong suspicion that the Midwest will not produce what we are used too this year. If that happens things could get very interesting and perhaps, just maybe, we will stop paying farmers to grow food in order to turn it into fuel, use sugar instead which we pay farmers to not grow… get the picture yet?

Things are getting interesting and I am trying to stick around to see how it all ends. In the meantime I believe that one must be long commodities, silver and softies for sure, and stocks until QE is over, which is likely to be never. I say that with a caveat as I believe if QE3 does happen stocks might get very choppy and at some point people will figure out that ZIRP + interest on excess reserves + QE = Really Bad News and is bad monetary policy. Then again, only a few have figured it out so far so maybe I am too optimistic.

CNBC just doesn’t understand the markets

Posted by Ray on June 29, 2010 under Main | Be the First to Comment

At 9:50 AM Erin Burnett and Mark Haines were talking about what was driving the selloff in equities today. Erin Burnett says; “If it is the LEI number in China driving the markets, which is a number that was only created in May and just revised down, that shows how pathetic the global markets are.” Well, I hate to be one of those bloggers that the Fed says not to listen to, but the reason we are selling off is because of a failed sanitizing ECB bond offering and the banks in Europe are in trouble. Combine that with horrible housing data, high unemployment, record deficits, bond yields reaching new lows, deflationary forces, slower economic growth, ECRI numbers rolling over and the technical’s of the market being bearish I think you can see why equities are selling off.

This, more or less, proves that CNBC is a cheerleader devoid of understanding what is really happening in the equity markets and they simply do not know how to do basic research. This is what happens when you parade all bulls on your program and shout down their opposition, who have been far more accurate. The situation in Europe is serious and China’s economy is slowing because of a stronger Euro, how no one is putting this together yet is beyond me, and there is simply less end demand for products. The only area where pricing power really exists is in food stuffs and most other industries have zero pricing power. Why? Simple, there is no demand which is why we have deflation right now!

Besides the reporters being completely inept and derelict in their duties, they fail to see the most basic issues confronting us today. As I said before, initial claims data has been a leading indicator, right now, of what is happening out there, again, how this was not seen is beyond me, and showed that the economy is extremely weak and really never recovered.  It is insane that they keep talking about the Chinese LEI versus the real issues surrounding the equities markets, it is part of it, but it is the other issues I pointed out. How they kept on the bandwagon of the ‘recovery’ story is a wonder that helps mark the death of the old media outlets where bias is tried and true and a pretty face is worth more than actual knowledge of what is going on in the world.

The Next Market Rally

Posted by Ray on August 23, 2009 under Main | Be the First to Comment

This week should be fairly busy with market moving data points and bond auctions which will help gauge the economic recovery that we are told is happening now. The biggest data point, in my opinion, to watch is consumer spending which economists expect to grow at 50% of June’s rate. June delivered a ‘strong’ .4% increase in spending and July has a medium estimate of a .2% increase.

I have no idea which way the number will come in as the bar is set fairly low and people are out spending for back to school items. I believe there is a case for either an upside surprise or very dismal results. In general, I believe spending will continue to decline as unemployment appears to be on the rise again, but July may surprise us to the upside as sales and deep discounting of products is attracting consumers. However, discounted products squeeze profit margins and employers are getting more out of their existing workforce, mainly because people need to keep their jobs, but lower profit margins make it impossible to keep people employed.

The Case for an Upside Surprise

According to Bloomberg purchases, excluding automobiles, dropped .6% as of August 13^th. They went on to say that retail sales slipped .1% in July which leads me to lean towards an upside surprise in consumer spending. Mostly because of pent up demand, we love to spend money, along with deep discounts and kids just a couple of weeks to get ready for their first day of school are a recipe for a surprise. Frankly, the ingredients are there for people to spend more as they are told the economy is recovering and stocks are up.

Perhaps June’s numbers were so bad because people where saving money for July and August to buy their kids new clothes. If that is the case then we definitely could have a, albeit short-term, surprise to the upside which will surely cause the market to add 100 or so more points to its overbought averages. If we do get an upside surprise I am sure it will be a one-off event as people really are hurting.

The Case for a Downside Surprise

While people are told things are better, they know better because they live in the real world and not in statistics. Unemployment has been creeping up over the last two weeks and many people have lost access to emergency unemployment benefits which means hundreds of thousands of people are absolutely broke. For those who are employed, their falling home value and massive stock market losses from last year make them feel especially poor.

Not to mention, their credit card bills just went up by 2% and they either closed some credit cards or the credit card issuer closed the account for them. Either way, they have less available credit to buy things which will and cash, frankly, is in short supply. However, the kids got to have the new Nike’s or Guess jeans or whatever is cool and obscenely expensive nowadays and who are parents to say no. There is also the likelihood that people blew their money on a new car with the cash for clunkers program. A surprise to the downside would mean that the Dow would probably come off a good 50 points as it, inexplicitly, does not go down now, ever.

The End Result

No one has any idea what the number has in stored for us and I am much more interested in the unemployment numbers that will be out Thursday. Contrary to popular belief, I believe unemployment is a leading indicator for our current problems as this is a credit led recession, unlike other recessions we have had in recent decades. I am sure that the markets will blow off any bad news and continue to trade in the top end of its current range. Frankly, the markets behavior make no sense to me as it is so overbought right now and, regardless of what they say publicly, no one has a real explanation for its rapid and sustained gains.

The really good news is that I have also noticed that the crowds picked up at stores in the last month which means they may be out spending money. However, I am willing to bet the average transaction size is much smaller than it was last year at this time. Either way the numbers come I am sitting out of equities with only 25% exposure, the risk/reward ratio is just not attractive, and am looking for a sharp decline in September or October when liquidity returns to the market. While I could be wrong on the timing, I am not wrong overall as the markets have 4%+ GDP growth and a lot of very, very, good news priced into it right now.

Obama, our savior

Posted by Ray on July 31, 2009 under Main, Politics | Be the First to Comment

After watching Obama a few minutes ago it really disturbed me. I am fully aware that government spending created a “less bad” GDP report, but, as I have stated earlier, it is unsustainable. The stimulus has created a temporary works program accompanied by cash for clunkers and other miscellaneous programs, but is not a solid long-term solution.

I understand that the President has a deep desire to be loved and in the media everyday, I do not remember any President having this many press conferences, however, I find his optimism troubling. Since he misread didn’t have all the facts about the economy he has lost substantial credibility with me. The simple fact is that everyone knew how bad things were in 2008 i.e. $700 billion bank bailout and several prominent economists saying the trouble was only growing and going to get worse, so to deny that is disingenuous at best and a flat out lie at the worst.

I fully believe that he and his economic team had very little clue about what was really going on which is evident now. Even worse is that Obama and Co. went ahead with such a large stimulus that he did not want anyone to read in detail and urged a quick passage of the bill, contrary to his campaign promise to allow Congress 5 days to review any bill before voting on it to ensure all understood the contents of the bill. We now know why they weren’t given time to read it, it was all pet and one off projects with no real long-term solutions.

In a nutshell, he, in classic Obama fashion, moved too fast without having the “complete picture” or all the facts. Now, he wants us to trust him on health care as he urged Congress to get a bill together before the August recess which is very little time for such a huge undertaking. This is unbelievable to think our government is simply rushing bills through without giving ample time to read them let alone understand them when Obama himself seems to never have all the facts.

There is also talk about a second stimulus on top of the trillion dollar waste of money we already have. His narcissistic behavior has to go and he needs to make sure he has all the facts instead of just rushing things through. He is our representative and while we wanted change from Bush we did not want change for what America stood for and least of all we do not want a showboat President who loves himself more than out country.

To sum it up, this guy is dangerous for our economy long-term and the sooner we recognize this the better off we will be. President Obama, government spending is the propping up of the economy and not real growth. You are not responsible for this growth, American taxpayers are through your irresponsible spending. You have not fixed anything and it is unlikely that you will. You do not believe in real change, you are more of the same, but worse because you lack the knowledge of how money works and put in place who destroyed our banking system. You also have more lobbyists and Washington insiders in your administration than other Presidents which goes against your campaign promise. Get over yourself because at this rate you are going to make Carter look good.

While I did vote for the other guy, I am a political atheist as I voted for Clinton in the 90′s and Bush in 2000 so this is not a partisan hit piece, it is from a concerned citizen.

2Q09 Advance GDP Report

Posted by Ray on under Economy, Main | Be the First to Comment

The economy shrank at a “better than expected pace” which is just more lees bad economic data. There are some things with this GDP report which are extremely relevant and forward looking, which is not what the media is stating. Everything in the media is either backwards looking when it is less than rosy or forward looking when data is better than expected. In other words, they are cherry picking good data and down playing bad data.

The data contained in this report is less than positive and I am not sure if it is even less bad as being stated. If you exclude government spending then the report is worse than expected and the additional downward revision of 1Q09 is less than encouraging. I will agree that the headline number is a good number and beat my expectations, however consumption and employment are not showing improvements.

The advance report showed business investment decreased at an 8.9 percent rate in the second quarter after diving 39.2 percent in the previous quarter. Investment in nonresidential structures fell at an 8.9 percent rate compared to a 43.6 percent drop in the first quarter. How much do you want to bet when these numbers are finalized in the next report they are worse than what is currently stated. Additionally, business investment and investment in nonresidential structures is down cumulatively 48.1% and 52.5% in 2009.

Residential investment, which is at the core of the longest recession since the Great Depression, dropped at a 29.3 percent rate in the April-June period after plummeting by 38.2 percent in the first quarter. I thought housing was recovering, I must have misread the all the comments by CNBC and other cheerleaders in the media. This is a cumulative decline of 67.5% in 2009 which is a major issue and shows little sign of stopping there. When the perks for buying a home are gone and as rates creep up this number will get worse, probably in the 4Q GDP report. In the 3Q09 report, the next release, will show an improvement, but you should not think that improvement is part of a recovery, it is just the last of the tax credit buying we will see.

Business inventories continued to be a drag on overall GDP, declining by a record $141.1 billion in the second quarter as firms aggressively cut back on new production to reduce stockpiles of unsold goods. Inventories fell by $113.9 billion in the first quarter. The drop in inventories shaved 0.83 percentage points from second-quarter GDP. The inventory data will be better in 3Q09 as firms will restock, but demand is still weak so even as the number will appear better in 3Q09 it will more than likely get worse by 4Q09 unless the consumer gets back in the game. However, I do not think the consumer will come back until unemployment gets better, i.e. we do not have 500K+ weekly unemployment claims.

Spending was down pretty drastically in 2Q09 at a 1.2 percent rate in the second quarter after rising 0.6 percent in the previous quarter. This is the core of the problem, although it is actually a good thing because this means, hopefully, consumers are either saving their money or reducing debt. I fear that neither of my hopes are correct and the reduced spending is a factor of our high unemployment rate. If you are unemployed you are neither saving nor spending, you are simply getting along, but there is no way to qualify that with a data point.

The freefall in exports braked sharply in the second quarter. Exports fell at a 7.0 percent rate after plunging 29.9 percent in the first quarter. There is no surprise here because other countries are having a real recovery, but even their recoveries might be under pressure and more sluggish than predicted. Japan is still struggling and China is showing some signs of trouble, but that may be short lived.

Next quarter auto sales will also be fantastic as the government programs and ultra low pricing of cars will drive sales. I do not expect this trend to continue into 4Q09 especially if unemployment increases and incentives dry up. The “cash for clunkers” program will add another $2 billion to our national debt, but that is overlooked for short-term gains. Actually, that program is a joke as they let you buy SUV’s still as long as it gets a couple more MPG. They want us to use more fuel efficient cars and reduce greenhouse gases, but you can still get a SUV which could get less than 20 MPG, that makes sense.

Government spending is the major reason for our better than expected GDP report, but that is unsustainable as most of the stimulus is a joke with single pay projects. Government cannot support the economy forever and we certainly do not need another stimulus package as the IMF indicated. The more debt we add the bigger the strain on the dollar will be and the higher the likelihood of higher taxes moving forward.

Yes, we are having a sluggish recovery and even if I am wrong and we have a couple positive quarters of GDP we will likely not see anything dramatic and it will look like slight upward L recovery and will fell more like a depression than a recover. Again, most of the growth will be from the government, so how in the world can we call this a recovery. We need fewer stimuli from the government and more tax cuts for business and, perhaps, subsidize manufacturing to bring jobs back to the US instead of exporting our manufacturing.
The need for manufacturing is clear as we still have a high trade deficit. The trade gap shrank last quarter, preventing a steeper decline. The gap between exports and imports fell to $339.3 billion at an annual pace from $386.5 billion. These deficit is not because other economies cannot keep up with out growing demand, it is because we have little manufacturing and produce very little, except for big equipment, bombs and financial products, and import our hammers and nails from China.
If the government subsidized manufacturing with ultra low taxes and provided other incentives then we could return to a real economy where we produce things cheaper and with higher quality. However, our government continues its fruitless cause of maintaining our current economy which is 70% consumption and little real production. Without getting back to the basics we are simply re-inflating the very problem that got us here in the first place.

We seem to never learn from our previous errors which is scary because I fear that in a few months we will have another few hundred billion dollar stimulus package being voted on. Then the cycle continues of issuing more debt and helping consumers leverage up again. We really need to vote out our representatives as it is apparent that they may have been great lawyers, but they are horrible economists.