The Silent Depression

In August 2007- 21 months ago- I remarked to a friend that I believed that the U. S. economy was in a domestic recession- - that aside from exports, which were booming due to the then-weak dollar, the downturn in the key industries of housing and autos were severe enough that a recession had begun. Re production for export- OK, we need foreign exchange and all that, but it's not bringing goods and services to anyone in the U. S.

What has ensued is an unremarked-upon (by the Establishment) Depression in the U. S. economy. There is a conspiracy afoot to ignore it. Only a chart of the stock market gives the public a full taste of it.

Here is evidence, if not proof. Please read the entire linked Bloomberg.com article, then read the Commerce Department's writeup of the briefly-mentioned inventories report.

From Bloomberg: U.S. Economy: Retail Sales Unexpectedly Fell in April (Update1)

Here is the relevant passage from the article:

A separate report from Commerce showed inventories at U.S. businesses fell 1 percent in March, a seventh consecutive drop as slumping sales forced companies to pull back. The streak of decreases is the longest since 2001-2002.

Now, here is the actual summary from the Commerce Department. Note that immense drop in business sales, which Commerce to its credit does not try to hide:

Business inventories in March 2009 declined 1.0% from the prior month and decreased 4.8% from the prior year, to $1,404.1 billion. Sales declined 1.6% from February 2009 and decreased 15.6% from March 2008, to $971.7 billion. (Emph. added)

Here are some links to the site: http://www.census.gov/cgi-bin/briefroom/BriefRm, and

http://www.census.gov/mtis/www/mtishist.html.

It is amazingly easy to receive economic reports directly from the Government, though not every release is available this way: sign up at http://www.economicindicators.gov/.

Where in the media did any outlet report this immense drop? The monthly sales of almost a trillion dollars, if annualized, basically comprise the entire economic output of the U. S.

Worse, this comparison is with a month about half a year into the Depression. The rate of change year to year is indeed dropping; the comparison was worse a few months ago. But so what? As T. S. Eliot said in the Four Quartets, "A people without history is not redeemed from time".

The salesmen and sales women in the MSM, Government, Wall Street, etc., having told the public at the onset of what was portrayed as a mild recession that it took a 10% drop in production to meet a common definition of a Depression, have forgotten to tell the public that the drop in perhaps the broadest measure of business was down close to 20% at the peak.

What they will trumpet is the inevitable upturn. They will distract the public with statistically meaningless month-to-month changes and when favorable with year on year changes, ignoring how bad matters have fallen.

As Meredith Whitney said in an interview this week on CNBC, the Government has done things recently re the banks that she never expected to see in her lifetime. In league with the financial press, they have hidden by far the worse economic downturn since the early 1930s from almost everyone, even financial professionals. Only the stock market really tells the tale, as it has tracked both better than and worse than the Great Depression when adjusted for inflation/deflation. Chart is from www.dshort.com; click on it to enlarge.





For about the past half year, the current stock downturn has played tag with the gray downturn from the Great Crash. The slopes of the downturns are similar, one to the other.

With unprecedented giveaways to the very perpetrators of the current fiasco, there can be no predictions of what the economy or the markets will do. Many people are worn out trying to keep up with this seemingly endless mess. I suspect that's in the Establishment's plan. That way, the ongoing disgrace of PPIP can be accomplished. As Mr. Geithner says, it's just a matter of willpower.

Illegitimi non carborundum.


Copyright (C) Long Lake LLC 2009

Sir Alan Opines Anew While America Grows an Underclass

It was reported today that Alan Greenspan espies an approaching bottom in housing, and that pronouncement allegedly spurred a turnaround in the Dow averages. EBR would simply comment that Mr. Greenspan is a hired hand for PIMCO; his pronouncements tie into PIMCO's strategy and are therefore worth no more than Bill Gross's or Mr. El-Erian's comments.

Of course housing construction cannot go much lower. In real terms, though, house prices can go much lower, as they are still well above historical averages relative to incomes and household net worth.

An interesting chart was posted at Zack's today:

Concomitant with the new economy of the 1980s and 1990s, more and more of the unemployed were long-term unemployed. This would not be and was not a "big deal" when unemployment was low. Now that U-3, the headline measure of unemployment, is around 9% and U-6, the broadest measurement of underemployment is around 16%, this ratio is a bad sign. Though hard to discern from the chart, this is the lowest ratio since the chart begins in 1948. It therefore indicates that the greatest percentage of the unemployed in essentially the post-War era consists of long-term unemployed rather than short-term unemployed.

300,000 census jobs won't do the trick of putting long-term unemployed workers back to work. Neither will fixing potholes and accelerating other "shovel-ready" heavy construction jobs. And neither will government-subsidized automobile sales, which are really just more loans.

Unless salaries of those with jobs go on a drastic uptick, what will stimulate the real economy is lower prices. The Fed, however, is on its usual inflationary jihad. Thus gold continues to outperform the NASDAQ. In turn, the NASDAQ, which consists for the most part of unleveraged companies, is up a bit on the year, where the S&P 500 is down a bit on the year and the Dow 30 is down over 5% already on the year, even accounting for dividends.

In keeping with what still may be negative surprises for those who believe that China will lead the world out of its depression, Bloomberg.com is out with a headline tonight that is downbeat, as all of the most informed news I have seen of China has been lately: China’s April Industrial Output Grows Less-Than-Forecast 7.3%.

Personally I doubt that 7.3% number, as regular readers of this blog know.

No doubt, some growth in output is coming. Governments and central banks are too powerful not to get some growth. But it seems to this observer that there has been far too much trickery, and far too much hiding the extent of this economic downturn (a la not publicizing wholesale sales down an astounding 20% or so year on year) from the public, for the stock market to have fully discounted how bad things have gotten. We should also recall that in the economic and stock market recovery in 1932-37, stock prices tracked the increase in dividend payments. No matter what happens to GDP, GNP etc. over the next few quarters, dividends on common stocks almost certainly will not rise in keeping with reported earnings.

Skepticism of news out the government and its enablers has been a profitable strategy the past 2 years. One always wants to open to a new theme, but right now one is not clearly visible. Dry powder is helpful in many such circumstances.

Copyright (C) Long Lake LLC 2009

Jim Rogers as the Lone Bloomberg Bear

Econblog Review's proprietary Bloomberg.com's video indicator has begun flashing yellow- not an outright contrarian bearish signal, but consistently promoting the bullish case. This was most assuredly not the situation 2-3 months ago or until recently, throughout the almost inexorable stock market rally of the past 2 months, during which this indicator has shown a good deal of skepticism.

Tonight, out of 6 videos highlighted, all are bullish and only one is bearish- and that is the same old bear Jim Rogers; either you are with him or you have already rejected or decided to ignore his views, so I consider him simply a de rigeur bear.

The bullish videos on the "front page" are, in addition to the Rogers video:

JPMorgan's Gong (a "strategist") likes certain China stocks;
Chairman Bernanke is "encouraged" by banks' plans and wants more self-tests (Ed.: ???);
Ackman says he can add a lot of value to Target;
John Calamos says credit markets are alive and well;
and
Eric Strutz said Commerzbank had a good April.

Also, the other 3 videos now in the archives but from today are all outright bullish. One sees China in the early stages of a bull cycle, the next says the recession is finally over and that economic strength will send oil prices back to $70/barrel; and one highlights a conservative who merely likes corporate bonds if they are guaranteed by the government.

The Establishment loves things the way they can be if governments, companies and individuals all want to continue to enrich the Merchants of Debt by playing the same old game. Sixty-five years ago, Rosie the Riveter was promoted as the hot thing. Now it's Rosie Scenario.

We shall see if this Rosie has as successful an outcome as the WW II gal.


Copyright (C) Long Lake LLC 2009

Yves Smith, "Animal Spirits", and the Big Lie Technique

One of the important moments in the financial blogosphere occurred at the end of a lengthy and impassioned post by Yves Smith at Naked Capitalism, where she opined:

The dishonesty of this crowd is just breathtaking. The Bushies were blatantly high handed, while Team Obama prefers the Big Lie and assumes we are all too dumb to see through it.

Unfortunately, the financial and business has become political. Yves is hardly a right-winger; for her to use that terminology for a candidate who she fervently hoped would do the correct things is sad and shocking. (And appropriate!)

In that context, please consider the points made in a supposedly important book by two noted economists: a Nobel Prize winner- George Akerlof- and the even more famous Robert Shiller- in the popular book "Animal Spirits".

The book's subtitle is "How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism". Allegedly this is an Important work (for a popular economic tome). Perhaps within academic economics, it is worth reminding one's colleagues that Adam Smith and other empirical economists such as Keynes, who all theorized in words (not that Keynes did not also reduce his theories to equations) that at the root of economic actions are humans with emotions and non-rational expectations etc. etc. To non-economics such as a physician, however, this "insight" is jejune. of course individuals make non-rational decisions. How could one think otherwise?

The point of this post is how political "Animal Spirits" is, how mainstream it is, and how misguided it is.

Let us get right to the point. The book praises Asian economies for emphasizing saving. It ascribes the amazing long-term growth of the Singaporean economy to forced, massive savings. Yet it discusses the current American economic difficulty with a complete disregard to this philosophy:

The overwhelming threat to the current economy is the credit crunch. It will be difficult and perhaps even impossible to achieve the goal of full employment if credit falls considerably below its normal levels. (P. 86)

DoctoRx here. It's not clear if the authors are referring to the absolute level of credit or the growth level of credit.

The authors then go on to ascribe the current alleged credit crunch- which as I have previously blogged (citing such sources as the New York Fed to prove my point), only exists in relation to the loosest, most irresponsible granting of credit in generations- to a loss of animal spirits:

The segment of the financial system that initiated loans, and then passed them on, was fragile. It fell. In terms of our animal spirits, confidence disappeared. People became suspicious of transactions that they had previously undertaken to the tune of trillions of dollars. (P. 90)

DoctoRx here. The context of this passage makes it clear that government must cure the populace of this decline in animal spirits, of loss of confidence. How? With a hair of the dog strategy:

On pages 90-92, the authors have effusive praise for the Fed/Treasury solution of the Term Asset-Backed Loan Facility (TALF). They say (P. 92):

More generally, TALF shows us that there are two sides to creative finance: It may have gotten us into this crisis. But its genius may also get us out of it. (Emph. added; P. 92)

What is the "genius" of TALF? Basically, banks get to make a great deal of money with minor downside, with the Fed and Treasury taking substantial risk for limited upside. This is "genius"?

Now we get back to the beginning of this post. The entire set of actions of the government, which has really included the formerly-independent Fed ever since the Bear, Stearns/JPMorgan Chase bailout of March 2008, has been based on the combination of "high handed" and "Big Lie" tactics.

Why do I pick on Shiller and Akerlof? Well, consider that Dr. Akerlof is the husband of Fed Governor and Democratic stalwart Janet Yellen, and the authors have a classic 1960's Tobin-type liberal bias:

This had been the vision in prev ious generations of those who established central banks: the role of central banks is to insure the credit conditions that enable full employment. (P. 90)

Having recently finished reading Niall Ferguson's "The Ascent of Money", I would have to call that statement a Big Lie as well. The evolution of the Bank of England into a central bank was most assuredly not to insure full employment for the subjects of the Crown. It was much more to help finance wars, imperialistic expansion, and other matters. Similarly, while the origins of the U. S. Federal Reserve are a bit controversial, full employment in the U. S. was for the most part a given before the Great Depression (though the level of wages was another matter). The country in those days was much to busy growing and much too rural not to use more workers somewhere to do something. From the New York Fed itself on the creation of the Federal Reserve in 1913:

The Federal Reserve Act presented by Congressman Carter Glass and Senator Robert L. Owen incorporated modifications by Woodrow Wilson and allowed for a regional Federal Reserve System, operating under a supervisory board in Washington, D.C. Congress approved the Act, and President Wilson signed it into law on December 23, 1913. The Act, "Provided for the establishment of Federal Reserve Banks, to furnish an elastic currency, to afford means of rediscounting commercial paper, to establish a more effective supervision of banking in the United States, and for other purposes. (Ed: This post from the NY Fed lacks a close to the quote mark; alert readers who noticed the missing "end quote" should complain to the Fed!)

Akerlof-Shiller's "full employment"? Think Humphrey-Hawkins, doctors, not Nelson Aldrich and buddies.

From bogus "stress tests" and overvalued "legacy" securities, extending to the noted academics Robert Shiller and George Akerlof, we are besieged by lies large and small and political agendas everywhere.

The good government types found on the blogosphere, such as Yves Smith and many other such as Mish, Barry Ritholtz, Jesse and Simon Johnson, are powerless voices in the wilderness. Even the President who they by and large supported as a candidate has dissed them, saying that his administration pays no attention to (mere) bloggers.

And so Big Finance continues its primacy, and the culture of Serfing USA, with a government insistent on more and more debt even as the citizenry tries to escape its own personal debt, uses every tool of modern persuasive communications up to and including the Big Lie technique to continue to enrich the Merchants of Debt even as those companies such as auto manufacturers that actually make useful physical products are left to die and ordinary people who believed the Big Lie that house prices never decline and were therefore placed in overpriced homes by the Merchants of Debt are sent to tent cities to rot with no help from the Party of Franklin Delano Roosevelt and while the financiers of this disaster not only keep their estates and fine art purchased with the proceeds of these nefarious transactions but continue to receive all the fruits of this productive nation that Washington, D.C. can provide.

Can all this really be occurring for some paltry campaign contributions?


Copyright (C) Long Lake LLC 2009

Economic Update: Much Afoot

Readers may want to understand what's happening in the economy by reviewing the following.

1. Picking Nits. This blog is related to the very valuable and influential Institutional Risk Analytics. In brief, it argues based on FDIC data that local banks are dragging the economy down/being dragged down by the economy, while Big Finance is being bailed out in innumerable ways.

2. Bureau of Labor Statistics April employment report, including supplemental info 1, 2, and 3 here and here and here.

The overall BLS data was cheered on the Street. Job losses dropped to an alleged 539,000 in April. However . . .

A. Job losses were revised upwards for Feb. and March to the tune of 66,000.
B. Somehow the BLS assumed that 226,000 uncounted more jobs were created by the birth of new businesses than were destroyed by the death of existing businesses. In the teeth of this economic depression, this assumes only a slightly worse performance than the BLS assumed for the same month of 2007, when the economy was gaining jobs.
C. Private sector employment was much lower than 539,000, due to about 60,000 new government hires for the 2010 census and an unknown net overadjustment due to the "birth/death" adjustment suggests a continued massive loss of jobs.

I suggest you read at least the first page of the BLS main report. Trusting the media for filtered news is unwise.

For supplement 1, which is brief, all listings are interesting. U-6 is a broad measure of underemployment. U-1 is the narrowest measure and is valuable, often measuring breadwinners. Its rate has gone up the most in the past year to a horrifying 4.5% and will likely rise further.

For supplement 2, the whole array is interesting. Slide 5 is interesting. It shows that total private hours worked are unchanged in 10 years, despite a larger workforce. This is tres bad.
Slide 12 shows that finance is one of the few industries with a larger workforce than 10 years ago. This is bad as well and reflects government meddling to favor Big Finance, inter alia. Slide 13 shows the disastrous situation in temporary employment. The temp industry is a marvelous predictor of permanent hiring. When it improved for real in 2003, it marked the beginning of that economic expansion (and the true intermediate bottom of the stock market).

Supplement 3 explains the birth/death adjustment. Read it and wonder who is creating all these unmeasured jobs. Not you or I or anyone we know, most likely. Anecdotally it is all in the opposite direction.

3. The Census Department (why this department?) released today the widely ignored manufacturing wholesale trade report for March 2009, which showed sales down 18% year on year, to a massive total of $311 B, or almost $4 T annualized, and therefore a large minority of the entire economy.

Sales down 18% is Depression-level data. Period.

The inventory/sales ratio has soared year on year, from 1.12 then to 1.32 in March 2009. There needs to be further rationalization of this ratio, meaning less production relative to sales (and therefore less cash flow).

4. Courtesy of Mish and yesterday's post California Continues to Implode, California's finances are shocking. Year on year, sales tax receipts in April were 51% lower, and personal income tax receipts were 44% lower. These numbers are beyond belief. They should be headline news in the WSJ and New York Times. You can access this and related data in May 2009 Summary Analysis, out of the State Controller's Office. (It is readable and non-technical.)

5. The ECRI (Economic Cycle Research Institute) could hardly be more bullish. The recession is almost over, according to this highly accurate predictive organization.

So what gives?

The U. S. has outsourced much of its manufacturing to Asia. Year on year production declines in the exporting countries such as South Korea and Japan have been massive, in line with the California sales tax declines described in #4 above. Thus there has been a Depression ongoing in the U. S.; Paul Volcker euphemistically calls it the Great Recession. It basically is an old-fashioned garden variety business depression; the ECRI writeup discusses this. This old-fashioned economic downturn has led to the bankruptcy of GM (impending) and Chrysler; of major financial institutions; an unprecedented loss of jobs; record low interest rates in the Western world and globally; unprecedented intervention in the economy by the Bushbama administration(s) (e.g. the Establishment).

The reluctance of the media and government to tell the people the truth about the severity of this downturn; the sugarcoating of the economic data; the massive stock market manipulation that was overt last year and more veiled this year; the "business as usual" mindset of and governmentally toward Big Finance; and other considerations suggest that while the ECRI is going to be more or less correct, economic growth will begin from an amazingly low level. We will just have to see how frugal individuals and business are as matters unfold. Arguing against a 1920's-type massive boom is the absence of exciting new consumer "must-have" products.

In thinking of a resumption of economic growth, remember that for example since California's sales tax receipts drop by half, then they have to double simply to get back to where they were, and they have to rise more than that to keep up with inflation.

In a prior era of unbridled capitalism and dominance of financial interests, the Dow Jones Industrial Average first hit 100 in 1906. It left that number for good 36 years later, in 1942. A buy-and-hold investor had many thrills and spills, but only got to keep the dividend payments that flowed year after year. This sort of mindset has not taken hold yet and could work against a stock market recovery.

One could foresee almost any scenario for stock prices for now. Working against stock prices is that following old-fashioned financial panics and economic downturns, stock prices tracked dividend increases or decreases; and dividend yields were generally higher than corporate bond yields; and were always higher than Treasury yields. This is nowhere near the case now. I would NOT equate economic growth mechanically either to a rise in stock averages or to a rise in Treasury interest rates.

The same is true over the short term for gold, if anxiety decreases and inflation trends below expectations. If there is to be an economic upturn of uncertain duration, then short term medium quality corporate bonds might be sensible total return vehicles. 5-10 year Treasuries and muni bonds

More broadly, economic power follows creditors. The U. S. Government is a debtor; most states are major debtors; too many companies have too much debt; too many individuals have too much debt; etc. Thus, internationally-focused investing has to be the intermediate to long term focus of serious investors. Future posts will examine this theme in more detail.


Copyright (C) Long Lake LLC 2009

ECRI BULLISH ON ECONOMY

In a perhaps unprecedented action, the Economic Cycle Research Institute has a long, detailed free writeup today here on why it is forecasting the end of the recession soon.

It is a "must read".

Copyright (C) Long Lake LLC 2009

Blog Update

Posting may be spotty due to local fire and possible evacuation.

Employment Report Better Than Expected?

Barry Ritholtz at The Big Picture dissects the "better than expected" employment report today.

Hint: It's not so good.


Copyright (C) Long Lake LLC 2009

Many Roads Lead to Gold

Yesterday's post critiquing Cisco's earnings may have resonated on the Street. CSCO opened up but then turned tail the rest of the day. Unlike Big Finance, at least CSCO makes products that help people and businesses, that work as advertised, and that have allowed the company to amass a large cash position without selling stock. Unfortunately, CSCO is big, is losing market share, promotes its stock too much, etc., so EBR is not in love with it as an investment, either; but at least it is not a fraud.

Re the whole bubble, there is a nice summary of free-market, Austrian economics thinking re where we have been and where the current President wants to take us. It's not groundbreaking research, but it's worth a read as a review of a coherent position to which EBR is sympathetic.
See "Beware of Obamanomics" (which is not partisan, despite its title; it skewers many).

TrimTabs continues to report almost nil insider buying. If stocks were cheap at Dow 8400, there should be lots of insider buying. EBR likes this trend not at all.

Courtesy of Zero Hedge, the Fed has released statistical report G.19, which demonstrates steady declines this year in the quantity of consumer credit. People simply don't want/can't afford debt. In this regard the people are wiser than their overlords.

Also in Zero Hedge, "The Reverse Engineering of Greenspan Continues" demonstrates some extraordinary overpricing of mortgage-backed debt vs. Treasuries, as well as providing an interesting long term look at that relationship.

The combination of heavily bearish sentiment on Treasuries, falling consumer credit, overcapacity in goods and services everywhere the eye can see, the Big Lie that Big Finance is healthy (thank you, PPIP!), and the undervaluation of Treasuries vs. mortgage-backed securities would appear to make long Treasuries an interesting speculation. Anywhere from 10-30 year yields are interesting, as they are at or within support ranging from the Bear, Stearns fiasco (the 10 year) to the prior cycle (the 30 year).

Nonetheless, despite an uninspiring chart, of Treasuries, the S&P 500, and gold, guess which asset that Econblog Review continually speaks well of is up on the year. Only gold, which is also outperforming cash. Gold was up in price 8 years in a row before 2009. Will it end with a blowoff upside peak, a la 1979 or the NASDAQ in 1999? Treasuries may be a good trade, but gold can be forever.

Copyright (C) Long Lake LLC 2009

Cisco Reports a Miserable Quarter: Stock Therefore Expected to Soar

Because my sister has twice worked for Cisco Systems ("CSCO") and twice quit, this former growth darling has elicited a special interest. CSCO reported earnings today. The best way to see the trend of business is to click on this link, which in the modern fashion, the company (a master of the Net) makes it difficult for interested parties to find.

A little context: Year on year, the global economy has grown in nominal terms. As a leading company in a secular growth industry, and allegedly one with best of breed products and marketing, one would therefore expect CSCO to have at least grown sales equal to the nominal growth in global GDP.

CSCO in fact reported sales down 17% yoy and earnings down 21%, whether GAAP or its preferred non-GAAP metric.

Orders from emerging countries were down over 30% yoy. India, which is not even in recession, had orders down about 40%.

In about the last 7 years, CSCO has spent $56 B on share repurchases. Average cost: $20.43 per share. The stock closed at $19.61, up strongly on the year. Dividends to shareholders have never been paid. The CEO and top management have been very well paid.

The $56 B spent/wasted on share repurchases is 50% of the current market value. If instead of repurchasing stock, which of course allowed optionees the best chance of cashing out at a profit, CSCO had paid dividends and repurchased no stock, loyal shareholders would have had a 50% return of their capital. Yet despite drastically underperforming the global economy recently, CSCO persists in treating itself as a dynamic growth company, rather than the lumbering behemoth (sales $8.2 B this quarter) it has become.

As with GE, Wall Street loves Cisco, and for the same reason. These companies do lots of deals, so they make Wall Street rich. Please click on the Wikipedia link to see the number of acquisitions CSCO has made over the years.

9-10 years ago, when Cisco stuffed its employees full of its wildly overvalued stock, I advised my sister to sell all she could. I first advised this when it was at $40 and dropping from its peak level, then at $18-22 as it was collapsing. My advice was that you never know what the shape of the curve of overvalued growth companies grown to be large companies would be, but history teaches (I said then) that in retrospect, valuation matters and everything tends toward fair value eventually.

Now, Cisco Systems is a tired company that has made John Chambers and other insiders fabulously wealthy. Investment bankers and stockbrokers have generated large fees year after year brokering deals and stock trades, respectively.

Even though it is a "public" company, CSCO exists for the benefit of the above groups. Why anyone else would want to be an owner of a company that is losing share of the global economy and that has treated its legal owners shabbily is a question that perhaps your financial adviser can answer.

I can however guarantee you that if CSCO were private, it would have been paying out large dividends to its owners year after year. The board and management would have howled with laughter if anyone had proposed buying in stock from its owners to "create shareholder value".


Coyright (C) Long Lake LLC 2009

Pangloss at the Times: There Are Plenty of Jobs, But They Are Just Not Plentiful Enough!

The mainstream media has outdone itself with lipsticking the pig with the NY Times article, Bright Spot in Downturn: New Hiring Is Robust. Sounds promising, eh? Let's see what the Times actually reports:

So, while 4.8 million workers were laid off or chose to leave their jobs in February, employers across the country hired 4.3 million workers that month, according to the Bureau of Labor Statistics.

DoctoRx here: Simply astounding. News you can use. Or something.

“The best thing you can say about these numbers is it speaks to the dynamism of the U.S. economy, and the net negative number that we all traffic in masks that,” said Robert J. Barbera, chief economist at ITG, a research and trading firm. “Ninety out of 100 people who know the number — 650,000 were lost in February — think that means no one was hired and 650,000 were fired.”

DoctoRx here. Did Dr. Barbera actually use the term "dynamism" to describe the U.S. economy??? I would think that "dynamiting" is more appropriate. Back to the whitewash of the greatest economic banana in quite some time:

Zachary Schaefer has hired 72 people since February for the Culver’s hamburger and frozen custard restaurant that he and several partners just opened in Surprise, Ariz.

“The amount of applicants who are qualified is definitely up,” he said. “Whereas before we were counting on a lot of high school applicants, now there are a lot more middle-age people applying.”

Eddie Hamm, a former construction worker, was unemployed for five months when he drove by the site where the Culver’s was under construction. Mr. Hamm, 29, applied for a job there, and now he’s a “fry guy.”

“I’m just happy I got hired — I didn’t want to stay home, not doing anything,” he said, hardly complaining that he is earning half the $15 an hour he made in construction. “I don’t look at it like I’m making $7.50. I look at it — I’m having a job in a down time, and it’s a job where I can move up.”

Economists and job counselors advise the unemployed that there are definitely jobs to be had, even if there aren’t nearly enough to go around. With 13.2 million people out of work, there are 4 1/3 unemployed Americans for every job opening.

DoctoRx here. Please reread that last paragraph: there are definitely jobs to be had, it's just that there aren't enough of them! I ask you: how can the Times possibly say that hiring is currently "robust"? Either they have gone insane over there, or they are spinning so furiously to put people in a good mood, especially those who glance at the headline without bothering to read the article, that they have gone way over the top. (I favor the latter option.)

In the meantime, if you want to get an opinion from one of the truly leading, sane, calm experts on financial crises, read the Bloomberg.com article on Dr. Ken Rogoff's views. He predicts that the economy will be so weak that another round of "stimulus", AKA deficit spending, AKA printing money, will be undertaken.


Copyright (C) Long Lake LLC 2009

Better than Expected Hurricanes

Getting back to normal life after traveling involves reading snail mail and E-mail.
In the E-mail box from a scheduled travel day was a missive from our government. Because the stock market rose the day it was released, this data was likely "better than expected". It was, however, ugly. A Category 4 hurricane that was expected to be a Cat 5 one is still a bad one.

On May 1, the Commerce Department reported that manufacturers' shipments in March 2009 were $360 B. This was an astounding 18% below the level of one year earlier.

Worse, orders were down an even worse 22.5% year on year.

These numbers are not preliminary or advance numbers. Pending some final revisions, these are the numbers. These are Depression-type numbers. Every industry group and subgroup except defense and some medical and food sectors were down.

If you read the report, the text completely ignores the year on year declines, focusing only on the almost irrelevant sequential month to month declines (or advances). This innovation in economic reporting is of a piece with the fraudulent Big Finance "earnings" and with the Street focus on "operating" earnings rather than earnings provided under Generally Accepted Accounting Principles.

Personal income is being kept up by all sorts of government stratagems such as tax cuts, large cost of living increases and a $25o giveaway to Social Security recipients, and immense subsidies on mortgage rates to encourage refis.

In the meantime, John Mauldin published a newsletter from Jim Welsh of "The Financial Commentator". Mr. Welsh made the interesting point that between 2000 and 2008, credit card companies increased the number of cards issued to small businesses from 5 million to 29 million, and credit card debt of small businesses increased from $70 B to $290 B. Further astounding numbers. For those of us who have felt bad that some small businesses have been suddenly cut off from credit though they have been sound, this is sobering news. It would seem that if you are running a business and need money periodically, it would be safer to pay a bank for an irrevocable line of credit rather than rely on the kindness of a credit card company.

In other bearish news, TrimTabs continues to pound the table that any green shoots are largely withering based on its analysis of income tax receipts and employment trends, and it also passes on very high ratios of insider stock sales to buys, with very little insider buying.

EBR continues to believe that, understanding that the U. S. is the military hyperpower of the world that prints the world's reserve currency, the approach taken to the depredations of Big Finance is exactly that of Japan, and so it takes seriously the deflationary, long-term stock market decline possibility that Japan has gone through for 20 years. EBR mused on this in an early post, "Land of the Setting Sun", and events since then have largely been consistent with the views expressed therein.

Long term, because the creditor countries of Asia trust gold, and economic power flows over time to creditor countries (previously Britain and then the U. S.!), EBR likes the gold story. Short term, this blog has been consistently cautious on gold as a trade, and remains so. Gold likely won't make anyone rich, but if Government does not confiscate it, it probably deserves a significant place in many portfolios. At some point, so may investment quality tangibles such as art, given the place of money-printing going on in the developed countries, but objectively, prices are in a downtrend; catching falling knives is risky.

And so it goes . . . how hard to believe it is 10 years plus 2 months since the NASDAQ peaked over 5000. Adjusted for inflation and essentially no dividends, the 10-year negative return on the NASDAQ vastly exceeds any 10-year return on the general stock market any time in the 20th Century. In other words, the long-term magnitude of that bubble far exceeded that of the stock market bubble in 1929, especially when one recalls the cataclysm of 1931-33.

We are living in completely unprecedented financial times. Humility regarding any particular future outcome would appear to be a virtue now more than ever.

Copyright (C) Long Lake LLC 2009

Has Wall Street Lost Its Mind?

In good times such as the post-Cold War victory and rise of the Internet and bad times (collapse of the Internet bubble, accelerating financial and economic crisis H2 2008), things usually make some sense on Wall Street. From the micro to the macro, there is real discordance here.

Micro: DoctoRx recently has been traveling from one non-industrial glamorous area to another.
In Miami Beach, FL, the major street into town from the mainland is littered with closed storefronts. Armed break-ins of ground-level businesses have begun. The major remaining offices are medical and legal, 2 chain drug stores, a few fast food restaurants, and a bunch of banks of varied financial health. Hotel occupancy stinks. A friend in the business of providing entertainment for weddings, bar mitvahs and the like is experiencing Depression-like conditions. There is virtually no backlog, though presumably next year there will be weddings and mitzvahs.

Having arrived in Santa Barbara, where there has been no overbuilding and the city is the seat of county government and contains a mega-university and a large city college, along with the most beautiful real estate almost anywhere, DoctoRx embarked on a shopping spree at Macy's and Sears. The latter was virtually empty, representing a change from 6 months earlier.
Macy's had some service and some customers. Having purchased a bed, he enquired of the sales clerk whether the store was seeing any green shoots. The expectation was of some improvement or at least stabilization. The response was swift and negative. Business was said to be down the past two months, especially for big ticket items. Compared to six months, no doubt about it. Down.

On the macro level, consider the Fed's Feb.-April survey of loan conditions. Essentially no improvement was seen from an extraordinarily bad scene the prior quarter (Nov.-Jan.). This is terrible, considering all the money thrown at the credit system in that period. No green shoots there, as you can see:

In the April survey, the net percentages of respondents that reported having tightened their business lending policies over the previous three months, although continuing to be very elevated, edged down for the second consecutive survey. In contrast, somewhat larger net percentages of domestic banks than in the January survey reported having tightened credit standards on residential mortgages. The net percentage of domestic respondents that reported having tightened their lending policies on credit card loans remained about unchanged from the January survey, whereas the net percentage that reported having tightened their policies on other consumer loans fell. Respondents indicated that demand for loans from both businesses and households continued to weaken for nearly all types of loans over the survey period, an exception being demand for prime mortgages, a category of loans that registered an increase in demand for the first time since the survey began to track prime mortgages separately in April 2007.

In response to the special questions on the outlook for loan quality, a significant majority of banks reported that credit quality for all types of loans is likely to deteriorate over the year if the economy progresses according to consensus forecasts. In response to the special questions on international trade finance, the majority of domestic institutions that provide such credit and a substantial fraction of foreign institutions reported having tightened standards over the previous six months.

Next, Dr. Krugman gets into the "bad deflation" and "ell-shaped recession is hell" point of view in Falling Wage Syndrome. It's worth a read. The Economic Cycle Research Institute and other forecasters of the turn in the economy they foresee have to contend with the Krugman-Roubini point of view that the absence of a continued descent into a Great Depression 2 does not mean that this economic banana is soon turning into true good times.

Domestically, just as Mr. Obama has channeled Mr. Bush with his unending bailouts of the financial industry, Congress continues to appropriate "emergency" funds for the wars in Iraq and Pak-ghanistan. Give us a break! This was supposed to end when the White House changed hands . . . but, no. Unfortunately, Econblog Review foreshadowed much of this on a Dec. 31, 2008 post titled: "Ring in the Old".

Geopolitically, Iran has now bombed in Iraq and Pakistan continues to look fragile. For a good look at Pakistan, please see http://www.dawn.com/, a leading Pakistani English-language daily newspaper. Please see: Pakistan Is Facing Galloping Talibanisation: Ahmed Rashid.

Meanwhile, from a deeply oversold condition, the stock market is soaring, led by the bank stocks. Yet, there remains no leadership with fundamental strength. Gold is down but not out, and the same is true for Treasuries. MCD and WMT remain becalmed; AmEx is now trading at over 20X estimated 2010 earnings and about 4X tangible book value. The NASDAQ has gone up a near-record 8 straight weeks.

May you live in interesting times.


Copyright (C) Long Lake LLC 2009

Haiku of the Day

Helped by Bushbama
Big Finance is the new
Standard Oil

Break it up


Copyright (C) Long Lake LLC 2009