U.S. Unemployment 15.8%; Grade Inflation on Bank Stress Test

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

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While the headline number for the Employment Report this morning said that there was an unemployment rate of 8.9%, a more realistic number is 15.8%. The latter number includes discouraged workers and workers who can only find part-time work. Since the recession began in December 2007, the U.S. government admits to losses of 5.7 million jobs or 4.7% of the work force. This is the largest decline since the 1957-58 recession (please note that 1958 was one of the top 10 best years for the U.S. stock market in the 20th century and that the unemployment rate almost always peaks after a recession has ended). Yesterday, the long awaited and heavily leaked government stress test for banks was finally released. As one expert said the "apparent frankness" of the report should be a relief to the markets. 'Apparent' was the operative word in his remark, since this report has little to do with reality and is merely a feel good public relations ploy.

There was nothing good in today's unemployment report. There were 539,000 job losses overall and 611,000 losses in the private sector (the more important number that is never put in the headline). Lot's of part-time hiring of U.S. census workers (for 2010) by the federal government helped make the number look better. Even though there have been many recent announcements of state governments laying off workers because of budget difficulties, the report said state and local governments increased employment by 6,000. Other than government, only the health care sector added jobs (as is has every month since the recession began). There were massive job losses everywhere else. Job losses for February and March were increased by 66,000. Expect today's 539,000 number to be higher in the future as well, but no one will be paying attention when the worse number comes out - and the government is well aware of that.

To no one's surprise the Stress Test for U.S. banks showed they needed more capital, but not too much more capital that anyone should worry about it. The total given was $75 billion, not really that much considering these are the biggest financial institutions in the country. Bank America accounted for the largest chunk of this, with a need to raise $34 billion. Its government forced takeover of Merrill Lynch is what pushed it into a big capital deficit. Wells Fargo and GMAC were next on the list, with a need to raise $13.7 billion and $11.5 billion respectively. Citigroup only needs $5.5 billion. What happens if the banks can't raise the capital in the open markets? The U.S. government will provide it to them through TARP. All in all, you shouldn't pay much attention to this report . It was meant to be reassure the public and investing community that everything was actually fine with the financial system. And as long as the government is willing to continue to keep an unlimited supply of bailout money available, things with the banks will indeed be OK.

The stock market had a rather sharp sell off yesterday because it was too overextended on the upside. Some more selling will be needed to help relieve the pressure. This should be taking place in the near future. There is money to be made by buying into stocks which have had big gains followed by sharp drops and then trading out shortly thereafter. Watch for these opportunities. While a bigger sell off seems to be awaiting us in the summer, 2009 might turn out to be a decent year in the market. The best year for U.S. stocks in the last 100 was 1933, just off the bottom of the Great Depression. Other than a glimmer of hope that things would get better, the economic state of the U.S. was disastrous. Almost everyone avoided the stock market and missed the best money making opportunity of a life time.

NEXT:

Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

Bailout Cost: $8.5 Trillion so far ... and Counting

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

Our Video Related to this Blog:

One analysis has calculated that so far the bailout efforts of the U.S. government are up to $8.5 trillion. This is almost as much as the U.S. National Debt was when the bailout efforts began. So basically in a year the U.S. government has managed to double a debt level than took well over 200 years to accumulate. Don't expect to see all of these bailout costs included in the official National Debt figures however since the U.S. government engages in more off-balance sheet accounting than Enron ever dreamed of.

While these figures would seem alarming to even a casual observer, many mainstream economists don't find them troubling. Recent Nobel winner Paul Krugman claims the U.S. National Debt could be twice GDP (which would be around $28 trillion if you believe the official overstated GDP figures). How this could be a sustainable debt load for the U.S is hard to fathom, especially since we have a huge stream of social security and medicaid payments coming due in the next couple of decades because of retiring Baby Boomers (there is no money in either of these trust funds by the way, all the funds are used to support current government spending the moment they are received). Economists are also not worrying because over 50% of the bailout costs so far have been structured in the form of a loan. Much of those loans are backed by the truly worthless assets though - apparently the hope that sub-prime borrowers (this time companies) will by some magic pay back their loans still lives on and on in the fantasy land of modern economic belief. While up to now over 95% of bailout costs have been in the form of corporate welfare, expect this to change starting next year with a shift toward more support for individuals.

Although the inflation implications of U.S. government bailout profligacy should be ratcheting government bond yields to record levels, this has not happened yet. A flight to safety among desperate investors had kept U.S. bond yields unusually low (corporate bond yields are at a record spread to treasuries however). The drop in yields combined with the plunge in U.S. stocks has actually caused S&P 500 yields to be greater than 10-year U.S. Treasuries for the first time since 1958. Before that date this relationship was the norm. Don't assume that norm is returning however as some pundits are claiming. Stock yields are being kept artificially high by the bailout programs, which have allowed some companies to fund their dividends with U.S. taxpayer money. Stock dividends are going to come down and U.S. bond yields will eventually go up when they adjust to the inflationary realities of government spending.

Meanwhile, the bailout programs are not nearly at an end yet. As we have said in the New York Investing meetup since the credit crisis began, there is no such thing as one bailout for an insolvent financial firm. No firm has been better than Citigroup in proving this point. After five private bailouts earlier in the year, Citi got $25 billion from TARP and only weeks later had to have a much bigger government cash infusion to stay afloat. The auto makers are in Washington hat in hand at the moment with a low entry level bailout request - expect those costs to keep going up next year as well. And of course, their are more bailouts waiting in the wings.

NEXT: Economic Predictions for 2009

Daryl Montgomery
Organizer, New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.