Financial Review

Financial Review for Tuesday, January 07, 2012

DOW + 33 = 12, 878
SPX + 2 = 1347
NAS + 2 = 2904
10 YR YLD +.06 = 1.96%
OIL + 1.74 = 98.65
GOLD + 25.00 = 1744.90
SILV +.47 = 34.15
PLAT + 36.00 = 1647.00
I talked with a friend this weekend about the unbelievably better than expected jobs report on Friday. My friend was a bit surprised that I viewed the report favorably. I tried to explain that the report was deeply flawed, seriously imperfect, and likely not accurate, however it is probably still the best report to track the jobs picture, even with strange seasonal adjustments. The debate continued that the jobs report was certainly nothing more than a big BLS snow job, and if I bothered to look at the tax rolls, I would see that tax revenue declined while jobs were supposedly increasing. Of course, that’s what happens when you cut the payroll tax rates. Then I heard the argument that if we really counted the way we used to count in 1994 the unemployment rate would be 22.5%, and I was politely told about shadowstats. Well, I’ve met John Williams and I’ve cited John Williams, and if we compare today’s  unemployment rate to 1993, then he has a good point, but if we compare the unemployment rate from a year ago or 3 years ago then the jobs picture is improving; apples to apples and oranges to oranges.
Then my friend asked if the economy was recovering. I think we’re still in a small “d” depression. If you think about the Great Depression it didn’t mean the economy was always in recession; there were years of growth and years of contraction but it was a persistently depressed economy with interest rates up against the zero level and we’re in that situation again. The good news is that the current small “d” depression isn’t as bad as the Great Depression, at least in some ways. We don’t see lines outside the soup kitchens but if you are a keen observer, you will see people at the grocery store, paying with their food stamp cards. It is not 1933 but if you used the same methodology the Bureau of Labor Stats uses and applied that to 1937, the unemployment rate would have been about 9%. Britain is arguably in a longer, deeper slump than in the 1930’s. And things in the US are bad, probably not as bad as the 1930’s; but just because it isn’t as bad as the Great Depression, it doesn’t mean the economy is good.  We know that the unemployment numbers are manipulated; I’ve been telling you about that for years. That is not news. The unemployment numbers improved slightly last month but it doesn’t mean the economy has recovered from a depression.
One of the important things to remember about a depression is that it isn’t resolved with minor tweaking. A depression results from systemic imbalance and malinvestment. Recessions come and go. Depressions are persistent; in part because we deny the systemic failures and we have to see a change in the entrenched powers that be. The Great Depression seemed like it would have no end, until the massive public spending program known as World War II and the sequels: the Marshall Plan and the GI Bill. War is not the desired resolution to economic breakdown even though it has been a common resolution. Another precedent to consider is Japan, which had a lost decade and then started to revert to near trend. So, using Japan as a guide, we could be looking at 15 years to recovery; we are currently about 5 years along. And we still haven’t made a serious challenge to the systemic causes of the depression.
When you hear the uproar about the lies in the unemployment report, don’t be fooled. We know the numbers are manipulated. So what? Don’t be distracted from the real story, the largely untold story that we are in an economic depression. And it’s probably not halftime. It’s probably more like the second inning.
Understand that there is an ebb and flow, even in a depression. The stock market has been responding quite nicely. January was one of the best January’s in more than a decade. The S&P 500 Index has doubled from the March 2009 lows, but fewer and fewer people are investing in the stock market. Redemptions are high and volume is low. Gains in the market are concentrated and prosperity is not widespread. The NASDAQ is still down 42% from its 2000 highs. The S&P 500 has posted no gain from 12 years ago. Zero or negative returns are not a picture of success. Corporate America may have very low valuations but it doesn’t necessarily make them a buy. You should expect low valuations in a depression.
There are 242 million working age Americans. Only 142 million Americans are working. We are under-utilizing our population. Not only is unemployment at depression levels, but the people that have jobs are struggling. Wages have been going up at about 2% per year, which is not enough to keep up with inflation. The official inflation rate last year was 3%. So, the average wage earner lost one-percent in purchasing power. Of course, you know the inflation numbers are manipulated worse than the unemployment numbers. The government has little tricks, such as if a T-bone steak gets too expensive, they substitute hamburger. And if hamburger gets too expensive, they’ll substitute bread and when that gets too expensive they’ll substitute water. I prefer a good steak to a can of dog food and I don’t think I’ll ever again see gasoline under $2 dollars a gallon. The better estimates are that inflation is running close to 6%, and some estimates put it closer to 10%.
The Federal Reserve has been engaged in quantitative easing, which is another way of saying they’ve been printing money. The stimulus was specifically targeted to the financial sector. The money didn’t go to revitalizing the infrastructure; the money didn’t get spread throughout the economy; the money didn’t circulate. It served to prop up the very sector that was the systemic problem, the root cause of the problems. It encouraged more and more malinvestment.
We have been hearing for years that the housing market is vital to a strong economy, and so we will likely see an effort to inflate home prices this year. In an interesting twist, with record low home values, we are now adding jobs at a fairly steady pace. Maybe a booming economy doesn’t require booming home values. Maybe paying less to keep a roof over your head frees up capital for other purposes. Maybe home values won’t go up unless household incomes increase.
A funny thing happened in 2006 and 2007; housing prices peaked and the unemployment rate shot higher. Now we are seeing housing prices and the unemployment rate both moving lower. Maybe high real estate values weren’t the economic engine some imagined. Maybe a big mortgage and too much debt isn’t the path to prosperity. Surely part of the systemic problems that lead to the depression was too much debt. And so far, the attempts at solutions have been to increase the debt. Total credit market debt has increased since the previous 2008 peak. The national debt is just a little higher, you know, just a few trillion higher. And the big banks are bigger than ever. The threat of Too Big To Fail is an even bigger threat. The mortgage abuses are being dismissed with a slap on the wrist. The insolvent banks are bigger than ever, the toxic assets were not sold off, the executives were not fired, they got bonuses. The gamblers in the casino were protected. The guilty players were handed “Get out of jail, Free” cards. The systemic failures were denying, and almost nothing has been fixed.
Fed Chairman Ben Bernanke returned to Capitol Hill to talk to the Senators today.The quote of the day comes from David Stockman, former budget director under Reagan. Stockman says: “Bernanke testifying on the budget is about as credible as an arsonist lecturing on fire prevention.”
Fed Chair Bernanke cranked up the printing press and paid the big banks to park the money with the Fed; he sliced interest rates to the zero boundary and pushed investors out of savings and into risky investments such as stocks, all while encouraging Americans to spend and borrow. The problem was debt and the answer, the incorrect answer was to promote debt driven over-consumption. Maybe austerity is the answer. Maybe we should just choke off everything and see what survives. That’s one way to deal with malinvestment. The idea is that the economy will collapse, so why wait. Rip the band-aid from the wound or peel it off slowly. The problem is that we don’t have a free market any more than we have pink unicorns
The other way is to invest in productive ventures. That’s something we haven’t really tried yet. There has been plenty of Quantitative Easing, there has been stimulus, and it has almost all been misdirected. The money has gone to the banksters and the Wall Street accomplices, and the corporate cronies. And if austerity isn’t the solution, the banksters would have you believe the answer is billions more in debt, which can then be bundled into trillions in derivatives, but is still based upon consumption by people whose wages are eroding under the weight of inflation.
Corporate America has already gone through a deleveraging process, or at least they are trying to delever. The next step is for the consumer to delever, in other words, stop being a consumer or at least produce more than we consume. Part of that process is to cut back household debt from the current levels of around 110% of disposable personal income. Some think the level of debt to income should get back to pre-bubble levels of 70%, but this is more denial of the systemic problems that lead us into the depression.
What if we could cut the debt to income levels down below 50%? Down below 20%? That would leave plenty of money to spend on productive purpose. What could happen if we eliminated the cost of debt servicing? The real question is not whether we should have austerity. When someone is starving, you don’t take away his or her daily bread. And the real question is not a choice between austerity and stimulus. The real question is who is stealing all that stimulus money? And if we could stop them from stealing the stimulus money, what could we do – besides paying bankers’ bonuses, and besides funding offshore bank accounts in the Caymans? Maybe we could rebuild. Maybe we could educate. Maybe we could end hunger. Maybe we could eradicate diseases. Maybe we could end poverty. Could we use that money to grow out of the depression? If you want to see what a combination of austerity and misdirected stimulus looks like, just watch what is happening in Greece. The technocrat government is negotiating to make sure the bankers get a satisfying deal, and the Greek people are marching in the streets because the wage earners are being driven into poverty while the state assets are being sold off to the bankers. When you hear a debate about austerity versus stimulus, it isn’t a real debate. The austerity is just for the average wage earner and the stimulus is just for the Wall Street accomplices and the corporate cronies.
The real choice is not (A) austerity or (B) stimulus. The real choice is (C, remembering what the economy is for in the first place.
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