Saturday, June 6, 2009

Week-Ending Thoughts

The Bureau of Labor Statistics released its monthly report on employment and unemployment today. The results have a wide error range. Most people do not know that rather than stating the fact that the BLS does not know what very small businesses may be forming or closing, it guesses at the net formation or loss of jobs in what it strangely calls a (business) "birth/death adjustment". For May, the BLS estimates that 220,000 jobs were created that it did not know about. For April, the guesstimate was a net creation of 226,000 jobs.

At a time of massive economic contraction (green shoots of growth or not), the BLS is estimating the 426,000 jobs were formed. There is no basis for this estimate. It would appear much more likely that 426,000 jobs were lost rather than created that the BLS did not know about.

In addition to the above almost unbelievable but true lunacy, there is a wide error range for the monthly estimates.

What does stand out is that the factory workweek shrank to its lowest level ever, and wage deflation is here.

California and Minnesota are two states that come to mind that are cutting expenses significantly. The fears of inflation (and even hyperinflation) that have accompanied soaring Treasury yields recently occurred in the Great Depression and were followed by new lows in Government interest rates. This appears to be a regular occurrence in deflationary bursting of credit bubbles.

What is happening in this country was predicted by a very small number of people. These include Michael Shedlock, who follows the "Austrian School" of economic thinking and blogs at, and Robert Prechter, the well-known Elliot Wave Theorist.

The economy is probably cyclically forming a bottom. This happened in 2001, and the stock market did not bottom for good until winter-spring of 2003. Adjusted for inflation, the main stock averages are, following a 40% rise off the bottom of 3 months ago, roughly equal to their lowest point in 2002. That is correct: it took this massive rise to get back in real terms to their low point of the last economic cycle. Whether this fact has any predictive value is not clear, however; rather, I find it interesting. Many markets and cycles are balanced on, as it were, a knife's edge.

Given the extraordinary credit conditions and Fed balance sheet in force, the crisis continues.

Eyes and ears need to be kept open. Even though inflation is as low as or lower than in the 1950's, this is not the Eisenhower era. Anything could happen.

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