Tuesday, September 8, 2009

Singing the Post-Labor Day Blues

Please click on the image shown for greater detail.
The basic image is one that Calculated Risk creates periodically. One can see that to date, the current/recent "banana" is the single worst unemployment event in the post-WW II era. The discontinuous magenta line was added by Mike (Mish) Shedlock in today's post on whether this is/was a "depression" (a word scrubbed after the Great D).
EBR presents this because Mish has been projecting unemployment rates when the Fed and ECRI were acknowledging the existence of a mild recession. Even after the Lehman collapse, Mish's unemployment rate projections have been more accurate than that of the Fed, such as those the Fed used in its "stress tests" of bank holding companies.
If he's correct again, we have another 2 years to go to get back to where we are now; but of course the labor force is expanding each year, so a true reversion toward a healthy economy would be some ways off. The only way to get "organic" inflation out of this sort of projection is either to literally drop bills from helicopters; command and control stuff such as massive Government spending much greater than from the "stimulus" package; or a boom elsewhere in the world.
In that vein, David Rosenberg cuts to the chase in his last Breakfast with Dave for a week:

M1 fell 1.0% in the August 24th week and over the past four weeks is down at a 6.5% annual rate. M2 has contracted in each of the past four weeks too and over that time has slipped at a 12.2% annualized pace, which is a near-record decline. We see the same trend in the broad MZM money measure — off at a 15.8% annual rate over the past month. Bank credit also remains in a fundamental downtrend — contracting at an epic 9% annualized pace over the past four weeks.

So for the first time in the post-WWII era, we have deflation in credit, wages and rents, and from our lens this is a toxic brew that in the end will ensure that the focus on capital preservation and income orientation will be the winning strategy over a strict reliance on capital appreciation.
(Emphasis added)
Dr. Rosenberg continues:

In case you are wondering how it is that the housing market has suddenly sprung back, it’s because the era of free money is back, courtesy of the benevolent U.S. government. The FHA’s share of the mortgage market has ballooned from a residual 3.0% in 2006 to 23.0% currently as the government moves in to replace the private subprime lending industry. So now we are back to the thought process that insuring mortgages with a 3.5% down payment is a good thing for the economy — little surprise that the FHA delinquency rate has soared to nearly 8.0% from 5.4% a year ago, and the taxpayer is on the hook. How is it that there is no public outrage for a government policy of giving another shot of scotch to the drunken sailor is totally beyond our comprehension.
Finally, just in case you're not depressed enough, here is Bruce Krasting from Zero Hedge on the Social Security Trust Fund (SSTF) in SSTF Shocker - $6B August Deficit:
Based on the past twelve months performance I now estimate that the Net Present Value of future committed liabilities is in deficit by $7 trillion. To plug this sized hole would require a significant increase in payroll taxes. That isn’t going to happen. Raising payroll taxes by 4% would kill the economy. No White House economist would advocate that. The alternative of cutting benefits would be very unpopular. There are currently 52 million beneficiaries of the system. A lot of them vote. To shore up the fund would require across the board cuts greater than 20%. While that may not be a hardship for some it most certainly will be for others. The only way to address this inequity will be a means test.
The August deficit reconfirms that the Funds foundations are wobbly. Some observations:
-In August the US Treasury had to borrow an additional $6 billion in the public market to finance the cash shortfall of Social Security. We already have too much paper for sale to fund the budget deficit. SS added to the supply problem last month.
-The 2037 Future Value of the August deficit is -$17b based on a 4% return. What this means is that there will be a very significant revision in the 2037 drop-dead date. Based on current trends the go broke date is closer to 2025.
-This is not just a bad month. The net decline in the Funds assets for June/July/August comes to $7 billion. In 08 that period was in surplus by $5 billion, In 07 it was +$7b and in 06 it was +$13b.
-The decline in payrolls is hurting the Funds’ top line. January-July 2009 payroll tax receipts were down from 2008 by $5 billion or 1%. While the monthly declines in payrolls will fall over the next six months it is unlikely that there will be much net increase either. It will be a very long time before we see monthly gains of 250k. Without that kind of growth the Fund will quickly fall into annual deficits.
-The expense side is exploding. The September monthly benefits cost will be $56.6b up from $51.5 in 2008, a 10% increase.
-In 2007 the SSTF produced a surplus of $191b that it invested in the US economy. This year it will be closer to $100b. Based on the current trends that surplus will be gone by 2012. Six years earlier than the Trustees forecast in June of this year.
SS is the mother of all systemic risks. Even the debate on this topic brings risk. It will expose an additional $7trillion unfunded liability. Another reason for holders of dollars to worry.
There is no fix to this. Raising taxes is a dead end. Age warfare is a possible social consequence. The really bad news is that no one will touch this for another year. By then it might be too late.
Your humble blogger has no interest in predicting the course of the U. S. dollar vs. other fiat currencies. The stock market would be very attractive to one such as me who agrees with John Mauldin about a "muddle-through" outlook, except that it appears that the lower the dividend yield, the better the performance: too much like 1999 to suit me. "Cash is trash" but reasonably secure; 5-10 year Treasuries make sense; well-chosen Ginnie Maes make even more sense (discuss with an expert if you don't understand mortgage-backed securities as investments); nothing has really changed in the comments made here all year regarding gold.
Gold has endured as a store of value for, say, 5000 years. Much as I love democracy, I don't think that government allocates capital as well as private enterprise; and governments have printing presses that private borrowers and lenders lack.
The more the stock and credit markets "normalize" a la 2002-4 on a sea of Fed and Federal credit creation, the more gold has pushed upward in price. Other than price volatility, gold reminds me of the NASDAQ in the 1990s before it got truly crazy: the Force was with it.

There are numerous ways to invest in gold. These include physical ownership of bars or coins; exchange-traded funds (see, GLD and GTU); custodial accounts (see, Bullionvault and Goldmoney). In a crazy bull market for gold, gold stocks should be the best performers, but look at the performance of Newmont Mining the last four years: unchanged in price while gold bullion has doubled.
Here is a quote attributed to Mark Twain, namely that a mine is "a hole in the ground owned by a liar".
In the real world, a gold bar in the hand (or vault) should be worth many in the ground.
Copyright (C) Long Lake LLC 2009
The contents herein do not constitute investment advice. Neither the author nor the site is an investment adviser.

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