Justice Little, Editor of Taipan Daily, also out of the AF stable, says that 26 M jobs have been lost.

The Federal Government says that the unemployment rate is 9.8%.  Traditional methods of accounting make the answer right at twice that much, recognizing that people are still jobless even though they have exhausted (expanded) unemployment compensation or been on the rolls more than six months.

Another source claims one million jobs were lost last month, as opposed to the government reports which will fluctuate for a while and finally show up on the back pages as 475,000 again, at a good guess.

Rocket scientists used slipsticks and Cray computers which have been replaced by fancier models, while split second “trades” are executed algorithmically on the floor of the stock exchange to garner half a cent a share, but let’s get back to good old tried and true methods which don’t even require an abacus.

If there are 130 M jobs, net, in the USA (rounding slightly to keep the arithmetic simple), and 25,000,000 have been lost (again, rounding to keep matters simple) then we can either say that the job market has shrunk on the close order of twenty per cent. (a ploy the government should have thought of but didn’t, and if we go with 26 M that is precisely 20% of 130M), or we can say that the jobless rate is approximately twenty per cent., which is exactly the same result I got when I told you in the second paragraph what the true rate probably is.  Inconvenient truths do not really disappear just because someone mumbles mystical new accounting parameters.

It is possible that the wizards were trying to tell us that there are currently 131M jobs in the USA, down from a previous high of 157M.  In that case, the job loss is 26/157 which is an awkward number to reduce by division while typing, so let’s multiply, instead.  The figure is one-sixth, almost exactly.  (6 x 26 = 120 + 36 = 156.  That is definitely close enough for government work.)

By that view, 15% + 1.66% (a quick way to deduce 1/6, since multiplication is far simpler than its upside down view, division.  Perhaps no one ever told you that, or that addition is only backwards subtraction.)  = 15.66 % total destruction of the portion of the economy known as employment.  That is even worse news than that 20% of those who need jobs can’t get them.  It means that a sixth of our economy has disappeared to foreign lands or been destroyed by the fall of the stock market, banking instutions, and real estate.

Even a large factory starting up isn’t going to produce more than a few thousand jobs (and it is not guaranteed to succeed, particularly with such horrors as cap and tax, more regulation, and the guarantee of many other new taxes ahead of us), and who has the capital for such an undertaking, other than foreigners with a surfeit of falling dollars?  Do we really want an economy dependent upon the good will of those chortling over the demise of the dollar as the reserve currency?  I guess assorted governments in Washington this century shouldn’t have borrowed so much money from them.  They did, though, and in some ways the best thing that could happen is for the whole sleazy fraud of fiat currency and the Fed to crash around their deserving ears.

It is possible to jigger figures in any number of entertaining ways, but that won’t change the facts.  All it does is disguise them and lead to more palatable annual corporate reports and soothing statements from Bernanke, Geithner, and Obama.  If our measure of “recovery” is getting back to the slippery ground we were on five years ago–not a pleasant place to stand, as events have revealed–then it follows that 25,000,000 jobs must be created, one or a few at a time.  These cannot be temporary jobs, such as census workers or seasonal workers; that is the equivalent of putting a bandaid on a ruptured appendix and saying that time will heal it.  Time is going to cause us to bleed out and die of septicemia if we don’t do some surgery, here.

Mind, all creating twenty-five million real jobs in manufacturing, construction, agriculture, and education would do is restore the status quo ante.  As daunting a task as that would be, it would not solve the problem; it would merely stanch the bleeding.  Until we work our way through the devastation of all the bubbles there is no way to clear the decks for rebuilding.

I don’t think it can be done.  I’m feeling nautical, so let’s say that we have been hulled between wind and water.  Our masts are down in a tangle of rigging, the sheets are snapped and tangled, and our lower decks are awash in blood and loose cannons rolling over the wounded.  All the surgeon has in his chest is salt and rough canvas.  In this case, Geithner and Bernanke are terrified of using the bone saw.

Oh, occasionally the Captain and senior officers will throw a bank overboard, but pretty much the fix is in for those who are connected.  We are witnessing the greatest transfer of wealth in the last two hundred and 233 years, and it is all going to special interest groups.  Other than what they dole out on luxury goods and buying more power that money is not going back into the economy to create new businesses or expand old ones which is the only way that genuine, long-lasting, productive jobs come into being.

Can there be a recovery without jobs?  Of all the idiotic suppositions that only Keynesians would promulgate!  Of course not, any more than those who are not employed can pay bills, eat, and provide tax recovery.

Jobs are not an intangible, save in one increasingly dangerous sense.  Jobs must produce something.  By its very definition, a job is labor which produces something the employer wants more than he wants or needs his money.  It always seems to surprise Statists, but the purpose of business is to create profits, not to create products, and certainly not to create jobs; indeed, technology is reducing the need for human workers, to the understandable delight of entrepreneurs.  Creating profits involves risk, forethought, knowledge (or hired experience), and it isn’t something just anyone can do.  In particular, it is not something which can be done under shackling regulations, increased taxes and cost, insecurity over fuel availability, and capricious governments dedicated to non-science and paying off themselves and open-handed constituents.

The biggest problem I see is not fiat money (which is collapsing from its own lack of substance), or the purported “global” economy, which is composed of numerous countries none of whom are doing well.  (Prosperity in China?  Oh, my, tell me another one.)  The big problem, which is being exacerbated, is that something like 40% of all “jobs” are in government.  Yup.  Four out of every ten “workers” are paid lavishly (in general, twice what counterparts in business make for similar tasks) are engaged primarily in the business of making our lives more difficult, our businesses less profitable, and our ability to plan for the future almost impossible.  This country has grown bureaucracy and chased manufacturing jobs off shore.  It has increased regulation and deleterious “services” at the expense of freedom and capital to create real business which include real jobs and genuine products which can be sold instead of buying shoddy merchandise from China.  We’ve seen the cycle…from Taiwan to Japan to Sri Lanka, and now to China.  We have sent our money overseas for many decades rather than fight to reduce regulation, reduce taxes, and reduce costs.  A fork lift operator simply isn’t worth $86,000 a year, even if he works for the ci devant “Big Three.”  Not many of them do any more, and it serves them right.  Greed at all levels of the unions  made American products too expensive to buy.  Manufacturers–whom, I will remind you again, are not in business to employ “workers,” but to make profits–picked up their blueprints and went elsewhere.  We cannot blame them.  We would do the same if we were able.

No, friends, there will be no “jobless” recovery.  There will be no recovery at all until we are so much farther down that October of 2009 looks like “the good old days.”  The “green shoots” are the slime growing up the North wall of government, the bacteria of corruption, and of parasites such as governmental Spanish Moss and Pharma and Agribiz mistletoe.

What is to be done?  You’ve got your choice.  Destroy Carthage, or opt out.  Pull back into your own perimeter.  Produce nothing that can be taxed or regulated.

That’s what we have come to.  State revenues are down 17%, which looks like a pretty close correlation of 1:1 for enterprise destruction and joblessness both.  Every job destroyed is another blow at the Nanny State which cannot survive without continuous economic growth, because such as they never curtail their own spending and urge to shackle and harry those who produce the funds upon which Statists thrive.  Perhaps you are not in a position to do so, but if you are…just quit.  This isn’t new advice; Ayn Rand gave it to you sixty years ago.  Do not lend credence to your oppressors and do not support them…and do not look for any genuine green shoots representing real growth any time soon.

Regards,
Linda Brady Traynham

October 19, 2009

The Jobless Recovery, So Called was originally featured on Whiskey and Gunpowder

According to USA Today — I know, not the most hard-hitting rag out there — contestants on shows like America’s Got Talent and Deal or No Deal have undergone a dramatic change in the past year.

Instead of dreaming of building a mansion or retiring early, the poor saps that go on those shows are now just hoping to win some kind of money to keep afloat. On Deal or No Deal, the percentage of unemployed prospective players jumped from just 5% of its total applicants to 20%.

Who Wants to be a Millionaire’s host, Meredith Vieira, claims that her contestants no long play for big prizes. They’re there to collect a few mortgage payments or to help pay off credit cards.

Apparently, the market’s recent fake recovery hasn’t ended this game show contestant trend. Vieira notes, “There’s still a sense of need, as opposed to want.”

This could spell disaster for marketing these shows. No one wants to watch desperate people cashing out early so they don’t have to move.

“Mustn’t Watch TV” aside, you shouldn’t be surprised by the still-pathetic situation out there. After all, one of the favorite buzz phrases on CNBC is “lagging indicator.” Forget that the phrase is an oxymoron for a moment. It’s applied to – more than anything else – unemployment numbers.

We have seen a slow down in job losses, which is to say that we aren’t losing jobs in this country as fast as we were. July even saw a slight increase in employment. I suspect a portion of that tiny bump is due to people giving up. If you aren’t applying for jobs, you no longer count.

We like to think of unemployment as a percentage. But it’s important to put the actual number of would-be-workers into perspective.

We have about 14.5 million unemployed people in the U.S. — at least 14.5 million reported unemployed people. Of those, we have a significant amount that has been in that situation for more than half a year.

As this chart shows, that’s the most people on the dole since the Second World War:

This begs the question: if we do ever recover, where will these new jobs come from?

Where’s Our Next Bubble?

Speculating about which industries will provide future jobs is still damned near impossible. Could Obama’s “green tech” jobs ever come to fruition? Possibly, but it won’t be in the near future. Right now, no one can even afford those kinds of products.

Even with amazing developments in turbine technology over the past few years, it still costs about 67% more for wind power than it does for coal or nuclear power. So for electrical engineers, there might be jobs in the R&D stage of this “green revolution.” For the majority of the 14.5 million unemployed, however, that’s of no help.

It’s doubtful that we’ll see a real recovery in manufacturing jobs. That’s one segment in serious trouble. We didn’t even see it recover during the boom from its 2001 lows.

Technology is one area with some potential. Americans’ need for the latest digital toy hasn’t dissipated in this rough economy. Sure, no one can afford new plasma TVs, but just take a look at AT&T’s iPhone 3G sales this summer. Pretty impressive.

We aren’t going to stash our life savings into Apple, but we are keeping our eyes peeled to see what comes next.

The energy sector, of course, needs a recovering economy to be of importance. It’s certainly not going to lead us out of our recession. Once we do recover, however, drills will once again meet the dirt and create some jobs. But right now, we’re seeing a lot of abandoned wells across our country.

We could always just pile back into the financial services industry and pretend the past two years were a dream. Unfortunately, that’s quite possible knowing how forgetful that crew is.

Wherever new jobs come from – if they come at all – and no matter which industry leads the way, we need to keep a careful watch over every sector. As you can see in one of our favorite charts, if you know which sectors are heading in which direction, you stand to make a lot of money:

There’s no doubt we’ll replace the financial bubble with another one – just like we did with the tech bubble in the 90s. So…where’s our next bubble?

Regards,
Jim Nelson

September 7, 2009

Recovery and Jobs; Where’s the Next Bubble? was originally featured on Whiskey and Gunpowder

Busy airports may or may not be a sign of life in the larger economy.  Even unemployed people can buy a ticket and fly somewhere.  All you need is a credit card, if you can still get credit.  Meanwhile, airline profit margins are tight.  Fuel prices are creeping upwards.  The airlines are still nicking you for things like $15 baggage fees.  And as I flew over the heartland of the nation, I looked down and pondered our collective fate.

Federal Reserve:  “No Net New Jobs”

Recently, the Federal Reserve predicted that the U.S. unemployment rate would surpass 10% in the coming months.

That’s no big surprise.  The true U.S. unemployment rate is at least 15% already when you factor in the long-term unemployed who are not carried on the “official” books.

Then the Fed made a shocking prediction.  It forecasted that the U.S. economy would add NO NET NEW JOBS over the next five years!  Whoa!

No net new jobs?  That ought to scare you.  The Census Bureau predicts that the U.S population will grow over five years.  But the numbers of new jobs will remain static.  That is, for every job gain there will be a loss.

This job-stagnation is a recipe for all sorts of bad things at the local, state and national levels.  Government budgets won’t balance, so I guess we can plan on more “cost saving” measures such as releasing prisoners early and closing schools.  Yep, that’s how to build a great nation… More criminals and fewer well-educated citizens.

The Fed announcement is basically an admission of monetary and policy malpractice at the highest levels of the U.S. political class.  I witnessed it first-hand a couple weeks ago when I was in Washington, DC.  I met with some Congressional staffers who were just clueless.  But they sure were full of themselves.  They had all the answers, too.

The Good Old Days of the Great Depression

As my Delta flight flew over eastern Washington the other day, I looked down and saw a familiar sight.  It was a long, narrow body of water, with a stark, linear feature at the end of it.  It was Lake Roosevelt, impounded by the GRAND COULEE DAM, OF WHICH I WROTE LAST YEAR.

From 36,000 feet, Grand Coulee Dam sure looked small.  But it’s the largest manmade structure in North America.  It’s three times the height of Niagara Falls.  It’s larger than the Great Pyramid of Cheops, times a factor of three.  It has enough steel in it (9 million tons) to build about 225 World War II-era battleships, at 40,000 tons each.  Today it’s rated at about 6.8 gigawatts of electrical power, or the equivalent of about seven large nuclear power plants.

Grand Coulee was built in the 1930s as a government “stimulus” project.  This was back in the good old days when the government knew how to “do stimulus.”  Y’know, build big dams.  Kick-start the steel and cement industry.  Employ tens of thousands of skilled workers.  Do some heroic engineering and create an energy project that will benefit the nation for decades into the future.

No, Grand Coulee by itself didn’t solve the issues of the Great Depression.  But it sure did come in handy when it started spinning power in 1942, just as the U.S. entered into fighting World War II.  One lesson is that if you dream big dreams, you never know what will come out on the other side.

And today?  Congress’s idea of “stimulus” is to pass a $787 billion pork-bill.  But most of the money won’t get spent until 2010 and 2011.  Oh well, we’re going to have to borrow it all anyhow.

Yard Sale Nation – People Are Dropping

I drove across part of southeast Washington and northwest Oregon during my journey to Vancouver.  I haven’t been up in these parts in many years, so this was my chance.

As I motored around the two and three lane back roads, I sure saw a lot of stuff for sale.  It seemed that many households wanted to sell one item or another, often parked prominently along the highway.

I saw cars for sale – old, not-so-old, and nearly new.  There were vans, SUVs, trucks, campers and trailers.  There was farm and construction equipment.  There were boats and ATVs.  Then there were dozens of homes and lots with “for sale” signs.  Plus many yard sales, with all sorts of household, workplace and institutional goods waiting for buyers.

It was entirely clear that many people are trying to raise cash.  So everything’s for sale.

Remember that old expression, “Shop ‘Till You Drop?”  Well, people are dropping.  Where’s that Grand Coulee Dam project when you need it, right?

Following the Trail of Lewis and Clark

I drove along the Columbia River for quite a ways, following the trail of Lewis and Clark, from their expedition in 1805-1806.  Today the Columbia is a well-regulated, controlled body of water crossed with dams and dredged as necessary.  Large ocean-going ships float serenely in the water next to downtown Portland.

In their journals, Lewis and Clark described a wild Columbia River of raging rapids, filled with gigantic log snags.  Some of the logs floating down the Columbia of old were up to 7-feet in diameter and 200-feet long.  Big trees, huh?  It was a different world back then.

The Old Portland Customs House

Speaking of a different world, I was impressed by the old U.S. Customs House in Portland. Now THAT building also represents a different world, one where the federal government raised its revenues from duties and imposts.

In the olden days a ship captain would dock at Portland, or another locale on the Columbia.  Then he’d walk over to the U.S. Customs office to declare the cargo and pay the taxes due.  This was how the federal government funded its operations.  And when the funds were spent, the government had to observe its own fiscal limits.

In other words, the original U.S. government had to take an interest in growing and maintaining the economy.  Today, with the fiat dollar, the feds think that they can do anything.  Until, of course, the nation spends itself into national penury.

Until we meet again,
Byron King

July 29, 2009

The Good Old Days of Depression and Stimulus was originally featured on Whiskey and Gunpowder

But let’s put this into perspective. In December, the non-farm payroll (NFP) figure was 577,000 jobs lost. In January, the NFP figure was a worsening 598,000 jobs lost. Then in February, 651,000 jobs lost. But that incredible decline is not the whole story.

The December numbers were revised to 684,000 — an additional 107,000 jobs lost. January’s number was also revised, up to 655,00 — an additional 57,000 jobs lost. What are the odds that the brutal February numbers are going to stand pat or get better? As I have said many times, some people have a vested interest in controlling (manipulating) these report numbers. A certain amount of fear is useful among the populace in the midst of a crisis.

White House Chief of Staff Rahm Emmanuel said, “You never want a serious crisis go to waste. This crisis [the economic turndown] provides the opportunity for us to do things that you could not do before.”

Secretary of State Hillary Clinton echoed that thought by saying “never waste a good crisis” in Brussels as she droned on about climate change.

Just before his election, Barack Obama proclaimed, “We are five days away from fundamentally transforming the United States of America.” Sadly, the fundamental change has already begun.

A New York Times reporter asked the president if he was a socialist. Obama dismissed it as a joke, but just a few hours earlier, Hugo Chavez, socialist president of Venezuela, invited Obama to, “Come with us on the road to socialism. This is the only path. Imagine a socialist revolution in the United States.”

Disgusting. Unnerving. Scary.

While a certain amount of fear may be helpful, panic and pandemonium would be absolutely counterproductive. I think it is in the government’s best interest at this point not to release the full damage in the employment market. Frankly, I am taking bets that the next set of jobless numbers will include a revision for this month that will put the February numbers at 725,000 jobs lost. That would put the official unemployment rate at just over 9%.

Of course, as it stands, we need to understand that the unemployment rate in and of itself is an average. The average figure is mitigated by categories on the lower end of the spectrum. For February, the lower categories of unemployment were Managerial and Professional Positions at 4.5% and 3.5% respectively. Not too disturbing…

But when we look at the other pieces of the puzzle, we see double-digit unemployment among Hispanics (10.9%), and African Americans (13.4%).

By broad category, we see the following unemployment news:

• Construction workers — 22.0%
• Farm and Forestry — 22.0%
• Production — 13.7%
• Transportation — 12.5%

These sectors will only continue to worsen, and they may in fact be worse already.

“So why,” do you ask, “are you going to such lengths to describe the gloominess of the situation?”

Today, it serves as the springboard for the commentary, and the lesson of the week.

John Marshall, Supreme Court Justice from 1801-35, left us this memorable quote: “The power to tax is the power to destroy.” It is well worth memorizing. But we are watching it at work all around us. Here is what it has to do with you and me.

When governments levy taxes, and there is some need to do so, they act as a parasite. Their modus operandi is to take, but never to create. The State’s real role is to be a negative influence, not a positive one. They are to inhibit evil on a personal level by constricting crimes against citizens. They are to inhibit evil on a federal level by acting against powers that would attack us.

Beyond there, expansions become positivistic. They become world improvements. Better roads. Better schools. Better commerce. Better parks. Better art. Better money. Better housing. Better health. Ad infinitum. Ad nauseam.

The Biblical story of the Tower of Babel relates the efforts of the first State to improve its lot in life. “The people are one (of one mind—Ed.). And now nothing will be withheld from them which they have imagined to do.”

This is the State mantra: “Yes, we can!” And States imagine that they can do anything. All they need is a few more bucks and a few more taxpayers who think that what they want to do next is just the best idea since sliced bread. But what they (the taxpayers) forget is that the government is a net destroyer of wealth. In order to “create” anything, they must take wealth from whoever is currently holding it.

In our day we are seeing the net effects of taxing everything in sight…

When you tax a man’s income, his income goes down. The power to tax is the power to destroy.

When you tax a man’s income, you are taxing his employment. So unemployment rises and employment goes down. The power to tax is the power to destroy.

When you tax a man’s ability to work, he works less. True productivity goes down. The power to tax is the power to destroy.

When you tax a man’s work, you tax the chief source of his freedom. “Six days thou shalt labor…” The power to tax is the power to destroy.

You see, a government can tax all kinds of income for all kinds of reasons.

But not Liberty.

Freedom is beyond a government’s ability to control (although they will try!). Freedom comes from God. Our Creator endows men with certain unalienable rights. Among them is Liberty. When a government tries to tax Freedom, it moves to different shores. It packs up all its inestimable benefits and heads to lands where it will be treated better. Where it will get a better reception. Where people who have been enslaved too long hunger and yearn for its gifts. To citizens who are willing to lay down their lives to secure it and fight back the forces of bondage to keep it.

But we have forgotten such things. We are not the noble people we once were. Much of our citizenry is infected with indolence. Multitudes look to the State as the supplier of everything from soup to nuts, cradle to grave, and womb to tomb. You can see it in the faces of ordinary Joes when they light up at getting their “tax refund.” Forgetting the tremendous sum of money the state has already taken, they are just glad to “get something back.”

We have become a nation of slaves. Bound to the idea that the government will provide.

As we come up on the Easter season, it is customary in many homes to watch Cecil B DeMile’s, The Ten Commandments, his depiction of the freeing of God’s children from bondage and slavery. What he doesn’t show is how the people complained shortly after being freed that their lives were too hard. (Because living free isn’t easy.) They said to Moses that they would rather go back to Egypt. They’d rather be slaves.

Hunting for food. Finding water. All this was too much responsibility.

In Egypt, life was simple. Their taskmaster’s brought them food. Their slave-driver’s brought them water. Their lords told them how many bricks to make. (And they were happy to have 100% employment!)

But the rigors of living free were just too much for them.

So it has become in our own day. Men would rather live in servitude to an all-providing State, reveling in their own laziness, than to take up the mantle of responsibility and live free.

That is true of many. But it is not true of all.

It is not true of me. I hope it is not true of you. And I suspect it isn’t. Otherwise we would never have found each other here.

But for the long run, the excessive taxing of wealth and the attempted taxing of Liberty does not bode well for our Motherland. A man reaps what he sows. So does the country in which he lives.

Days to come will find wealth following in the wake of Liberty — shifting to other quarters. We will begin looking for other opportunities in places where freedom reigns supreme. But for now we will have to work with what we have. Money will continue to flow into and out of the major currencies for a while yet.

Regards,
Bill Jenkins

March 20, 2009

The Power to Tax Is the Power to Destroy was originally featured on Whiskey and Gunpowder

Who knows why stocks really rally? But it probably wasn’t the housing news. Prices continue to decline in the U.S. market. Inventories are high. And there is still the matter of millions of Option ARM loans that are still nestled deep in the bowels of the global financial system. We’ll get to them in a moment. Oh yes we will, precious.

First, a bit of polly [politician—Ed.] bashing. –”Every single job loss in Australia is a human tragedy,” Wayne Swan has said. “It impacts on families and local communities, as well as the economy.”

Has the Treasurer never been fired? Job losses are indeed a cause for personal distress. We’ve been through a few. You have to regroup, gather your wits, tighten your belt, round up other useful clichés, and do what you can to survive?

But a human tragedy? That is utter nonsense. There are plenty of human tragedies that happen every day. Children die of cancer. Orphans are hit by trucks. Supermodels go hungry.

Job losses are a normal part of the economy. Hopefully you have an economy where new jobs replace the ones lost. This happens if you have a tax and regulatory system that rewards initiative, hard-work, and risk taking. The trouble with the emotional response to job losses, as much as it displays your sympathy and compassion, is that it encourages you to try and build a system where no one ever loses their job.

If you do this, you end up with a system that creates fewer jobs and less wealth. We won’t go into it in more depth. But if you’re keen on the subject, we recommend this essay by Charles Murray.

What about the Aussie housing market, you say? Glad you asked…

“The Australian housing market is facing the prospect of a ‘perfect storm’ of financial pressures, including high mortgage debt, overvalued homes and rising unemployment, which could see prices eventually fall by as much as 30 per cent, investors have been warned,” reads a story in today’s Age. Read it and weep.

It’s true the market has shown surprising resilience. The Canadian research group that the Age report cites says it can’t last.”The housing market is looking particularly vulnerable, with over-inflated prices, deteriorating affordability and slowing household income growth…There is an increasing possibility of a major housing bust in Australia.”

It does feel a bit like the eye of a hurricane, although we’ve never been in one. The sky is blue. The sun is out. The wind is down. Let’s have a picnic. We’ll bring the cricket bat and stumps, you bring the food and beer.

On a more serious note, as we’ve written in the introductory article to the March Diggers and Drillers, the only good news in all of this is that you have a pretty good idea of where all of this is headed (huge inflation) and one way to prepare for it (metals and energy shares).

If more bank losses are ahead (see below) then monetary expansion is on the cards to try and counter it. Deleveraging leads to lower asset prices. The Fed wants to fight it. We’re not saying it will be successful. But there’s no doubt Big Ben will try.

“Bernanke May Need `Massive’ Asset Purchases to Counter Deeper Contraction,” reports Bloomberg. “The Federal Open Market Committee, gathering today and tomorrow in Washington, needs to redouble its efforts after the central bank’s balance sheet shrank 17 percent from a $2.3 trillion December peak.”

Here’s a thought though. The Fed may choose to expand its balance sheet by buying Treasuries. But it may not prop up markets at all. As Peter Schiff noted in a pod-cast last week, the Fed may end up being the only large buyer of Treasuries while everyone else sells. U.S. interest rates will rise and the U.S. dollar will…not rise.

Peter suggests a much more rapid dollar crisis than seems possible at the moment, given the casual way through which officials are waltzing through the crisis. But this G20 meeting in London next month should be interesting. We expect there to be social unrest and violence. We also expect that the world’s investors may realise the markets overseers have no freakin’ clue what they’re doing. After that?

Well, your guess is as good as ours. But we’re looking to gold and oil. More on that next week.

Now about those mortgages…You remember the good old Option ARM don’t you? That’s the loan that allows you to choose the size of the payment you make on your monthly mortgage. Typically the loan begins with a twelve month introductory rate. After that, you can choose the minimum payment option.

If you choose the minimum payment option, you actually pay less each month that the interest on your loan. That interest is deferred, but it’s added to your principal. That means your principal is growing all the time. This is why these loans were also referred to as negative amortisation (or neg am) loans. You weren’t paying it off. You were actually growing it.

We hope you’ll bear with us for a moment as we go through this. The reason? There’s a slight sense of relief in markets right now. Everyone is throwing stones at AIG. And with the market putting a few good up days, people are losing the sense that our financial system faces serious problems. But they are trillions of dollars serious. And no amount of pleading by the U.S. Treasury Secretary for bankers to lend will change that. More losses are head.

But what size will the losses be? Another trillion? Another two trillion? Well let’s exclude commercial property and loans securitised with credit card receivables or auto loans. Let’s just look at Option ARMs.

Remember, an Option ARM loan “recasts” after five years to a new principal. The interest rate might even stay the same. But if the loan has been negatively amortising (growing as deferred interest payment are added to the principal), then the size of the loan is going to be much larger (an average of 30%, by some estimates).

Even if you’re paying the same interest rate, households at the margin are going to have a much harder time making minimum payments on loans that are 30% larger. And we’re not talking a small amount here. The Washington Post reports that between 2004 and 2007, over US$750 billion in Option ARM loans were originated. The scary part is that, as of late December last year, 28% of those loans were either delinquent or already in foreclosure.

And that’s before the “recasts” have even hit the borrowers. Most “recasts” don’t happen until five years down the track. That means mortgage holders wouldn’t confront the prospect of a higher monthly payment until 2011 or 2012. The chart below from Credit Suisse shows the pig in the python problem.

Bernanke has solved the interest rate problem for home buyers with adjustable rate mortgages by slashing short-term rates to zero, effectively. What’s more, he’s conducted purchases of mortgage backed securities by Fannie Mae and Freddie Mac in an attempt to bring down mortgage rates directly.

The looming trouble, however, is that negative amortisation ads to principal. It does so at a time when home prices continue to fall and unemployment is rising. Making a much higher payment is pretty shocking to begin with. It’s near impossible when you’re out of a job.

The trouble will hit sooner than the Credit Suisse chart suggests. Option ARMs automatically recast at the higher principal level once a predetermined loan to value ratio (LTV) is reached. For example, say you take out an Option ARM at an 80% (LTV) and immediately begin making the minimum payment. Your loan automatically recasts at an 85% LTV ratio. In other words, your loan recasts sooner than the five years you expected because of negative amortisation.

This is why the Credit Suisse chart shows a swelling amount of recasts beginning in April of 2009 and peaking in December of this year. It turns out many of those who took out Option ARMs chose the minimum payment. This led to much faster growth in the loan principal, thanks to neg am. And now, it’s going to lead to a much sooner recast of the loan.

As you may know, the current mortgage relief plans in the States, as feeble as they are, do not allow you to refinance your home if you already have negative equity. This means that in the coming months-starting next month-you have millions of home owners who will face much higher monthly payments on their mortgage.

Do you think they’ll pay them? Can they afford to? What will happen to house prices as this wave of neg am Option ARMs goes into default and foreclosure? There could be some real bargains in the housing market.

But for the banks, there will be some real pain. The banks, the insurance companies, the usual suspects, these are the institutions that stand the most to lose from losses on that $750 billion wave of Option ARM recasts. We’re not saying all those loans will go into default. But at the very least, the losses are certain to be taken, even though no one knows how big they will be.

Now maybe all this is “priced in” to bank shares and financial stocks. It’s pretty hard to price in what you don’t know, though. What seems certain is that banks would want to hoard capital in the coming months, not lend it. They face hundreds of billions more in losses, and that’s just from residential real estate (not commercial real estate or corporate bonds).

How will credit recover under those conditions? We reckon it won’t. In fact, the second contraction of the credit crisis could be worse than the first. You should consider that as you ponder your decision to get in our out of the stock market. Think of the number of companies that are already locked out of access to capital and credit. Will that improve in the coming months?

There’s a very real chance it could get much worse. Of course we hope that’s not true. But if it is, it means all those clowns holding press conferences about bailouts and recoveries are just whistling past the grave yard.

If they were smart, they’d be storing up cash and keeping their monkey yaps shut, or better yet, setting up a warehouse to settle all the CDS AIG has underwritten so it doesn’t continue to be a giant conduit between the American tax payer and AIGs counterparties (investment banks and commercial banks that bought CDS from AIG).

Regards,
Dan Denning
www.dailyreckoning.com.au

March 19, 2009

Housing Markets Face Perfect Storm of Job Loss and Neg Am was originally featured on Whiskey and Gunpowder

“Every morning, when you look in the mirror, I want you to think, ‘What am I going to do today to increase the money supply?’”

— John Ehrlichman, assistant to President Richard Nixon,
apocryphally speaking to Charles Pardee,
a Federal Reserve governor,
sometime in the early 1970s

SO WE’RE ALL AGREED, THEN.

“This is clearly the worst financial problem we’ve had since the Great Depression,” as Joseph Stiglitz said on a radio show in New Zealand on Wednesday morning. (He’s there attending a conference.)

The Nobel-winning economist lined up behind Countrywide Financial (July ‘07), Wells Fargo (November ‘07), former Treasury adviser Nouriel Roubini (December ‘07), the National Association of Homebuilders (March ‘08), and pretty much everyone else in saying this is as bad as it gets.

As in, the worst ever — like finding nothing besides Of Mice and Men to order from Amazon and nothing but Seabiscuit to rent at Blockbuster.

The men now pulling the Fed’s monetary levers sure agree. And while Ben Bernanke might see the shadow of depression where the rest of us glimpse a shade, liquidating the malinvestments of 2002-2007 is certainly hurting.

Imagine the U.S. Treasury paid your wages each month; you’d jump to increase the money supply every chance you got, too. See, it’s the only way to stop the Nazis from taking over. Or the commies.

Or maybe even — oh, horror! — the Democrats…

“Involuntary unemployment,” as John F. Kennedy put it way back in 1962, “is the most dramatic sign and disheartening consequence of underutilization… We cannot afford to settle for any prescribed level of unemployment.”

Barely a generation after the worst recession in U.S. history, backing labor over capital like this — and thereby nabbing labor’s far weightier vote — meant JFK got to kick Richard Nixon around at the ballot box.

When his turn at the top finally came around at the end of the ‘60s, Tricky Dick didn’t forget the kicking. In fact, “I [already] knew from bitter experience how, in both 1954 and 1958, slumps which hit bottom early in October contributed to substantial Republican losses in the House and Senate,” as Nixon himself wrote in 1962.

So come December 1968, when Herbert Stein first met with Nixon as head of his Council of Economic Advisers — and Nixon asked Stein to name the biggest problem they faced — “I started with inflation,” said the economist.

“[Nixon] agreed, but immediately warned me that we must not raise unemployment,” Stein was to recall nearly 15 years later. “I didn’t at the time realize how deep this feeling was or how serious its implications would be…”

Fast-forward to the brink of Easter ‘08, and the “serious implication” of the Great Depression once again is the cost of not acting to prevent it. Or so everyone says.

And I mean everyone…

“[The liquidationists] turned the 1930 recession into a slump,” says Ambrose Evans-Pritchard for The Daily Telegraph here in London:

“They insisted with Puritan zeal — or malice — that speculators should be driven to the wall amid a cathartic purge of the Roaring ‘20s.

“Among them were top bureaucrats at the U.S. Federal Reserve and some of Europe’s central banks.

“The consequence was the Bruning deflation in Germany, ushering in the Nazis. Democracies snapped across half of Europe. If it had not been for the towering figure of Franklin Roosevelt, America might have splintered into a bedlam of prairie populists, Coughlin fascists and Huey Long extremism.”

Better anything — even a bailout of Wall Street’s hated bankers today — than jackboots and Benzedrine addicts with Chaplin moustaches, right? And where better to start in getting the voters onside than with Ben Bernanke’s complete collection of The Waltons, seasons 1-9, on DVD…?

“During the major contraction phase of the Depression, between 1929-1933,” as Bernanke said in a speech in 2004, “real output in the United States fell nearly 30 percent.

“During the same period, according to retrospective studies, the unemployment rate rose from about 3 percent to nearly 25 percent, and many of those lucky enough to have a job were able to work only part time.”

By comparison, the 1973-75 recession — “perhaps the most severe U.S. recession of the World War II era,” according to Ben “John-Boy” Bernanke — real output fell 3.4 percent and the unemployment rate merely doubled, from four percent to nine percent.

So never mind about the double-digit inflation. Never mind that by the end of the ‘70s, “every business decision [had become] a speculation on monetary policy,” as J. Bradford DeLong put it in a 1996 essay. Never mind that business can’t function if money becomes a flickering variable, making the trade-off between inflation and jobs…bailouts and growth…a loser both ways.

“Other features of the 1929-33 decline included a sharp deflation,” Bernanke went on in his speech, soup ladle in hand and a Baker Boy flat cap on his head, “prices fell at a rate of nearly 10 percent per year during the early 1930s — as well as a plummeting stock market, widespread bank failures, and a rash of defaults and bankruptcies by businesses and households.”

So no matter the cost, deflation must be defeated long before it arrives. Indeed, the higher the cost, the better!

“In 1938, Congress enacted the Fair Labor Standards Act,” writes David Hackett Fischer in The Great Wave — his sweeping review of history’s longest inflations — “which set the first national minimum wage. It also briefly considered a maximum wage, but that idea was quickly forgotten.”

Over the next 30 years, this upward bias in wages — all floor and no ceiling — was “built into the American economy,” Hackett Fisher goes on. “Floors under wages, pensions, and compensation for the unemployed; floors beneath farm prices, steel prices, liquor prices, and milk prices; floors for airline fares, trucking charges, doctors’ bills, and lawyers’ fees…”

Come Nixon’s first term, the high cost of living was mandated by government, corporations, unions, and householders alike. Falling prices could not be allowed (“You remember the ‘30s, don’t you?”) and — as yet — rising prices were no more than a puzzler at the grocery store every Saturday morning.

Convinced by economists of a trade-off between rising prices and jobs, governments everywhere watered and tended inflation, thinking they could always prune it if the foliage got out of control. And feeding its roots, deep below ground, was the rich, manure mulch of the Great Depression.

“At the surface level,” DeLong explains, the destruction of money during the ‘70s happened because no one in power “placed a high enough priority on stopping inflation.” Worse than that, Nixon and his successors — Gerald Ford and then Jimmy Carter — inherited “painful dilemmas with no attractive choices.” The ‘60s battle to grow jobs at the expense of sound money had already locked in that problem.

Look deeper again, and “no one had a mandate to do what was necessary,” our Berkeley professor goes on. “It took the entire decade for the Federal Reserve as an institution to gain the power and freedom of action necessary to control inflation.”

But at the very deepest level, “the truest cause of the 1970s inflation was the shadow cast by the Great Depression,” DeLong concludes. “It took the 1970s to persuade economists and policymakers that ‘frictional’ and ‘structural’ unemployment were far more than 1-2 percent of the labor force. It took the 1970s to convince [them] that the political costs of even high single-digit inflation were very high.”

In short, the developed world balked at the chance to “liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate” — as U.S. Treasury Secretary Andrew Mellon had urged in the ‘30s — when the liquidation wouldn’t have washed so deep or so hard at the start of the ‘70s.

Scared by the ghost of a Greater Depression instead, the West pushed ahead with big budget deficits, negative real interest rates, and a destruction of money that almost bankrupted Treasury bond holders. The runaway inflation that failed to back off when Richard Nixon nudged the Fed about defending jobs before the dollar (for what else is “inflation” if not a loss of purchasing power?) proved a hard-won lesson all told.

Reaching double digits across the developed world and causing a flight into commodities that in turn led to a huge bubble of malinvestments in the early 1980s, the “sustained spurt” of ‘70s inflation equaled the worst wartime price increases by the time double-digit interest rates could be used — with broad voter approval — to kill it off.

It all ended — guess what! — with a forced liquidation at the start of the ‘80s. And today?

“Ben Bernanke is smarter than I am and thinks about this 24/7, which I do not,” says Bradford DeLong on his blog this week. “He leads a superb committee. He is backed by the best monetary policy technical economic staff in the world. If I disagree with Ben’s FOMC on an issue of monetary policy, I am probably wrong.”

Either that, or Bernanke’s still stuck on Walton’s Mountain nostalgia…just as TV audiences were back in the ‘70s.

Regards,
Adrian Ash
BullionVault
March 21, 2008

The Dangers of Inflation was originally featured on Whiskey and Gunpowder

Goods-Producing Employment — Rate of Change

Even though this is supposedly a “service economy,” every recession since 1948 (including the one in 2001) was marked by a drop below the 0% line in rate of change in goods-producing jobs. This is a 10-for-13 recession indicator, with three false positives (one barely) and no misses. The indicator right now is sitting on the line:

Financial Activities Employment — Rate of Change

In stark contrast to goods-producing employment, it is hard to make heads or tails out of financial activities employment. Those monitoring financial employment in this service economy may as well stop. The data, especially recent data, appear meaningless:

Professional and Business Services Employment — Rate of Change

This is an interesting chart. All 10 recessions since 1948 had annual rates of change on professional and business service employment falling below 2.5%. Seven of 10 started from higher levels. Using 2.5% as the indication line, there has not been a false positive recession signal by this measure since about 1963. The indicator is currently sitting on the recession trend line.

Construction Employment — Rate of Change

Ten of 10 recessions since 1948 were marked by annual rate of change in construction employment falling below the 0% line. There was only one false signal by this measure, in 1967. Some recessions started from much higher levels, but a cross of the 0% line has no misses and only one false positive. The indicator is sitting right on the recession trend line right now.

Housing Starts

Every recession since 1960 with the exception of 2001 (and just barely) was marked by a decline in housing starts below 1,500,000. I am not sure what is magic about this number (given population growth and immigration), but there it is in purple and blue and green and red (as opposed to black and white). This indicator has had three false positives, but the stunning factor is the closeness to the 1,500,000 line that the recessions started. Note that the threshold just broke. If the pattern holds, housing starts are going to fall to the range of 1,000,000-1,200,000. Rest assured that 200,000 houses represent a lot of jobs everywhere, in every sector from construction to appliances to trucking and even grass seed.

Housing Starts — Rate of Change

On a rate of change basis, recessions seem to be baked into the cake at a trend line of about -25%. Note, however, that recessions may start from much higher levels. The chart shows we are well into recession territory already. This next chart seems to be confirming what we see in the above chart:

Aggregate Weekly Hours

The above chart is crystal clear. There has been a turn down in average weekly hours in every recession since 1968. This makes a perfect six for six. One interesting factoid is that there was a sharp rebound in aggregate hours at the end of every recession except the last one. The big question is, “Are we topping now?” I think we are. The next chart provides the clue:

Aggregate Weekly Hours — Rate of Change

Six of the last six recessions started with a break of the 1% line in rate of change in private industries aggregate weekly hours. We are slightly above that trend line, but are most assuredly heading in that direction. Perhaps more interesting is how far things have to fall before a bottom is reached. In a country with consumers up to their eyeballs in debt, fewer hours (and smaller paychecks) are not exactly what anyone needs.

Participation Rate

A high participation rate means that a large proportion of the working age population is either employed or actively looking for work. Thus, the participation rate can be used to reflect optimism toward the availability of jobs. The above chart clearly shows that the participation rate is not a good recession indicator. However, one can look at the low official unemployment rate and make observations. Had the participation rate continued along the previous channel, the unemployment rate would be much higher.

Have we reached a plateau in participation rate? Should the participation rate decline, it will mask what would otherwise be rising unemployment.

Employment-Population Ratio

The employment-population ratio is the percentage of the working age population that is employed. A high employment-population ratio can mean that an economy is creating jobs and employing a large percentage of its working-age population. Like the participation rate, the employment-population ratio has broken a decade-long uptrend.

Is this chart and the preceding one related to the baby boom? It’s hard to see how that cannot be the case. A disturbing fact, however, is the number of baby boomers that are nowhere near prepared for retirement and are ill prepared for either a turn down in housing or the stock market. In that regard, “working age” is likely to be rising in practice, whether or not it is rising by bureaucratic measures.

Total Nonfarm Payrolls — Rate of Change

No matter how one slices or dices nonfarm payrolls, and regardless of what the cheerleaders on CNBC have to say, the above chart shows just how anemic this last recovery was.

Civilian Employment — Rate of Change

Civilian employment is a somewhat noisy indicator. Recessions often start with rates of change falling below the 2% trend line (nine times), but that indicator would also lead to seven false positives. Nonetheless, the chart shows we are stalled right on the trend line.

Unemployment Rate

The above chart shows that the unemployment rate is another noisy indicator with no clear trend line as to when a recession may occur. Perhaps that is because of manipulation of the official definition of “unemployed” over the years. If we calculated the unemployment rate as we used to or as Europe does now, it would be much higher. That said, it is clear we are on the bottom end of the range in which recessions occur.

In addition, employment tends to be a lagging indicator, and housing, goods-producing employment, professional services, and the inverted yield curve are all strongly suggesting a looming recession. For baby boomers nearing retirement, a recession along with falling home prices and declining equity prices could not come at a worse time. Yet in aggregate, that is the most likely interpretation of the above data.

Regards,
Mike Shedlock ~ “Mish”

March 12, 2007

Employment Trends was originally featured on Whiskey and Gunpowder