This blog is published by Andy
Waldock. Andy Waldock is a trader, analyst, broker and asset manager.
Therefore, Andy Waldock may have positions for himself, his family, or, his
clients in any market discussed. The blog is meant for educational purposes and
to develop a dialogue among those with an interest in the commodity markets.
The commodity markets employ a high degree of leverage and may not be suitable
for all investors. There is substantial risk in investing in futures.
John Mauldin has this to say in his, "Thoughts from the Frontline Weekly Newsletter."
I think it's very fitting as everyone wants to know if it's "safe to get back in the water."
Are the Green Shoots Really Dandelion Weeds?
When
the employment numbers come out, my usual routine is to go the Bureau of Labor
Statistics website and peruse the actual tables (www.bls.gov). I was rather
surprised to see that the actual number of people employed in the US rose by
120,000. That has certainly not been the trend for a rather long time.
So,
are things back on track? Is the recession just about over? Is that a green
shoot? I don't think so.
First,
there are actually two surveys done by the BLS. One is the household survey,
where they call up a fixed number of homes each month and ask about the
employment situation in the household and then take that data and extrapolate
it for the economy as a whole. So, while the number of employed rose, the
number of unemployed rose a lot faster, by 563,000 to 13.7 million. In
addition, there are 2.1 million who are "marginally attached" to the
workforce. These individuals wanted and were available for work and had looked
for a job sometime in the prior 12 months. They were not counted as unemployed
because they had not searched for work in the 4 weeks preceding the survey.
According
to the survey, headline unemployment rose 0.4% to 8.9%, the highest level since
1983. But if you count those who are working part-time but want full-time work,
as well as the "marginally attached," the unemployment rate (called
the U-6 rate) is an ugly 15.8%.
For
whatever reason, the markets were happy that the headline number of the other
BLS survey, the establishment survey of lost jobs, was "only"
539,000, down from a negatively revised 699,000 in March. At least, the
thinking was, the numbers were not getting worse, though it is hard for me to
be encouraged by half a million lost jobs. That may not be the worst of it,
however, since 66,000 jobs were temporary workers hired for the 2010 census,
and the BLS estimated that the birth-death ratio added 226,000 jobs as a result
of new business creation. Really? This will mean that there will likely be a
major revision downward at some future point. The number will likely be well
over 600,000 in the final analysis.
Further,
it is likely that we will see at least another 1.0-1.5 million lost jobs over
the rest of the year, taking unemployment very close to 10%. As an aside, the
Treasury used an unemployment rate of 9.5% in their stress test of the banks,
which suggests the test was not all that stressful. And, showing further
weakness, there were 66,000 fewer temporary jobs. If there was really a nascent
recovery, you would see a rise in temporary workers.
Average
wages rose by a mere 3.2% on an annual basis, and by just 0.1% for the month,
and the average work week was at an all-time record low of 33.2 hours. In
nearly any inflation scenario, rising wages play an important part. This
suggests that inflation is not in our near future.
Is That a Leaky Bucket?
Let's
play a thought game. Picture the economy as a leaky bucket, maybe not as bad as
the one below, but leaking nevertheless.
We
have put holes in the bucket of our economy, and the "water," or GDP,
is leaking out. We are going to settle at some new lower level of GDP and
consumer spending. At some point, we can fix the holes and begin the process of
increasing the level of the water. Typically, this happens relatively quickly.
However,
a recent study showed that recessions that come as a result of or in
conjunction with a financial crisis take a lot longer to recover from. The
study looked at 122 recessions, of which 15 were associated with financial
crises.
The
research, published as Chapter 3
in the April 2009 World
Economic Outlook (WEO) of the International Monetary Fund, finds
that recessions that are either associated with financial crises or that are
highly synchronized worldwide have historically been longer and deeper, and
featured weak recoveries (see chart). The combination of these two features --
a rare phenomenon in the postwar period -- resulted in even costlier
recessions, which lasted almost two years.
"In
addition to the current global recessionary cycle, there were three other
episodes of highly synchronized recessions: 1975, 1980, and 1992. These
recessions were on average longer and deeper. Distinct from other episodes, the
recoveries from these recessions feature much weaker export growth, especially
if the United States is also in recession.
"A
perfect storm? Recessions that are associated with both financial crises and
global downturns have been unusually severe and long lasting. Since 1960, there
have been only six recessions out of the 122 in the sample that fit this
description: Finland (1990), France (1992), Germany (1980), Greece (1992),
Italy (1992), and Sweden (1990). On average, these recessions lasted some two
years, were unusually severe, and featured weaker-than-average
recoveries." (IMF)
In
addition, I would suggest that the current recession is unlike any in the
study, in that the habits of the American consumer are changing right before
our eyes. Instead of spending and borrowing with little or no savings, people
are now reducting their borrowing and increasing their savings. Savings are now
4% of income and are likely to rise to 7-8% or more in the next few years, as consumers
see the need to repair their balance sheets and retirement funds.
Frugality Is Back in Vogue
While
Wal-Mart and other low-cost retailer sales are up, Saks and other high-end
retailers are down by as much as 30%. There is a new frugality in vogue. That
new hole in the bucket? It is the damaged psyche of the American consumer.
Consumer spending is going to fall, and when it does find that new level it is
going to grow more slowly than in the past.
And
that, gentle reader, is why the recovery is going to be a long slow Muddle
Through. This recession will end, as all recessions eventually do. We will see
a positive number, maybe as early as the 4th quarter. Employment
should turn back up, albeit slowly, after that.
Typically,
in a recession jobs are lost because sales slow and production is not needed.
When sales recover, so do jobs.
But
we are permanently destroying jobs in this recession, all up and down the food
chain and in numerous industries. There will be fewer cars made, for a long
time. Less demand for financial service jobs. Housing construction will be a
long time recovering, well into 2011 or 2012.
And
commercial real estate? General Growth, the largest operator of malls, with
166, filed for bankruptcy protection and in a very controversial move took all
166 malls into bankruptcy as well. General Growth was the largest issuer of
Commercial Mortgage-Backed Securities (CMBS), which is how the great majority
of commercial mortgages are created. The lenders thought they had direct access
to the cash flow of the malls. Some of those malls are quite profitable. Cue
the lawyers.
If
this rather aggressive move is allowed to stand up in court, it could do
serious damage to the whole commercial real estate industry, which is already
in upheaval, and throw new construction projects into serious difficulty. And
less construction means fewer jobs.
Where Will the Jobs Come From?
As
the water in our bucket seeks a new economic level, there are simply going to
be fewer jobs to make "stuff," as we consume less. We can't rely on
many of the old jobs and industries to come back in short order, as has been
the case in the past. In order for new jobs to be created, we are going to have
to create new businesses and expand current ones.
The
vast majority of new job creation in the US is by small businesses and
entrepreneurs. Yet today small business faces a tough environment. Banks have
tighter lending policies. Venture capital is tough to find. Competition in a
shrinking economy is brutal.
And
the Obama administration wants to raise taxes on small businesses by raising
taxes on the "rich." 75% of those rich he targets are small
businesses who need capital in order to grow, but are having trouble getting it
from banks.
Sure,
entrepreneurs will do what they have to do, and higher marginal tax rates will
typically not keep them from working as hard as possible to make their
businesses successful. If the tax rates of the large majority of businessmen
and women go back to the pre-Bush level, it will not make us close our businesses,
but it will cut down on the capital we have available to expand. It will slow
down economic growth and hinder job creation. There is just no getting around
that fact.
There
is a reason that high-tax states have higher unemployment rates and lower job
growth. Taxes have consequences for economic growth.
The
sad reality is that it is going to take a long time to get back to acceptable
employment levels in the US. It now takes an average of over 21 weeks to find a
new job, a new record. Stories from friends in the financial services business
are particularly difficult, as there are many very highly qualified people for
every job that comes available. And it is not going to get better any time
soon.
How
could we add 120,000 new jobs while unemployment is going up? Because the
number of people looking for jobs is growing far faster, as more and more young
people come into the market place and couples now find they both must look for
a job. And that is a trend that is going to continue.
So
many bullish analysts talk about the second derivative of growth, by which they
mean that we are slowing our descent into recession. But it is not the second
derivative that is important. What is important is that the first derivative, actual
growth, return. Until that time, unemployment will continue to rise, which
is going to put pressure on incomes and consumer spending, and thus corporate
profits.
Profits
in the first quarter, with nearly 90% of companies reporting, are down over 50%
from last year and are 18% less than estimates. Yes, inventories are down, but
so is final demand from consumers and businesses. There is a reason that GM and
Chrysler are shutting down for two months this summer. That will percolate
throughout the economy.
As
the realization that the economy is not due for a robust recovery sinks in, I
think the chances for another serious bear market test of the stock market lows
will become increasingly high. As David Rosenberg said in his final memo from
Merrill Lynch (and good luck to him in his new position, where I hope we all
still get to read his very solid analysis!), if a few weeks ago someone had
said you could sell all your stocks 40% higher, most of you would have hit that
bid.
Now
that price has in fact been bid. Do you want to gamble on a renewed bull run in
the face of a continually shrinking economy? I suggest you give it some serious
thought, or at least put in some very real stop-loss protection.
