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 www.globaleconomicanalysis.blogspot.com, 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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CPI Understates Deflation; or, Requiem for a Heavyweight?

The Bureau of Labor Statistics has released the CPI data today.

The annualized rate of prices for the last three months is a negative 12.7%. This is Great Depression-level deflation.

This report understates current deflation because of the following:

"Continuing decreases in the indexes for lodging away from home, airline fare, and new and used motor vehicles, along with downturns in the indexes for apparel and recreation, offset increases in other indexes including rent and owners' equivalent rent, medical care, and education." (emphasis added)

Housing is NOT making a positive contribution to the cost of living. It is making an important negative contribution. Even if we understand and agree that the Government goes out of its way to make matters look less inflationary than they really are, I think that we can agree that currently there is no price increase almost anywhere that can "stick" except whatever is imposed by law or regulation.

The markets "get it" and are taking stock prices down, especially the financials, the latest rally of which has vanished. I suspect that a lot of Governmental and Fed officials have been talking to the Swedes about their nationalization of their banking system in the early 1990s following a real estate bubble. We appear to remain in the teeth of the economic storm.

While what is happening in economics and finance is disastrous, the continuity vibes coming out of the incoming Administration do not encourage me. In my opinion, Mr. Obama needs to bring into his Administration and amongst his advisers those who foresaw that the TARP bailout was hastily and wrongly designed. The complaints about its implementation ring hollow when the complaints come from those who crafted and fought for the legislation. Mr. Obama and his people need to come out hard in favor of equity and not debt. This is not an issue du jour but rather the key to long-term economic recovery. If he does not embrace this issue, the Republicans might do so and unexpectedly gain the edge in what could the most important economic theme of the next supercycle (though it takes time to build such a movement). The productive capacity of the U.S. is unimpaired; the cost of imported goods is plummeting; the people are eager to work; there are no major state enemies; Al Qaeda is on the run and its financial backers are going broke.

Therefore these can be the best of times, and soon. However if the new Administration persists on the failed long-term path of a debt-based economy rather than a true ownership society, not the Bush version that was based on debt (we know Obama will fight for a "fair" society as well), Econblog Review predicts that the best it is going to do is patch the aging fighter up to survive to fight another round or two.

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