U.S. Employment in Long-Term Downtrend

 

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.

The August employment report released on September 7th was not particularly good by any measure. While the month to month changes seem lackluster, the longer term picture is truly dismal.

The headline numbers indicated that 96,000 jobs were created in August and that the unemployment rate declined from 8.3% to 8.1%. The previous two months were revised down by 41,000 however. Manufacturing employment was down 15,000 from July. "Food Services and Drinking Places" was the category with the biggest gains, adding 28,000 jobs last month.

Underneath the surface, the picture wasn't mediocre, it was negative. Looking at the total number of people listed as Employed in Table A indicated that 119,000 fewer Americans had jobs in August than in July. This comes from the Household survey and receives little attention from the mainstream media. This number was negative in the July release as well. Why isn't this reported?  Well perhaps the media doesn't trust people to know whether or not they actually have a job.

What happened to employment between July and August though was minor compared to the weakening jobs picture over the last five years. It was in August 2007 that the Fed cut the discount rate, which was the beginning of its attempts to stimulate the economy. By the end of 2008, the Fed's Fund rate was at zero and a number of special programs had been implemented to handle the Credit Crisis. The first quantitative easing program had begun and a second round took place after that. In respect to jobs, the figures indicate that the Fed's efforts have been an utter failure.

In August 2007, 145,794,000 people were employed in the U.S. Last month, five years later, 142,101,000 people had jobs. So after all of the Fed's efforts and all the stimulus programs implemented by the Obama administration, there were 3,693,000 less jobs in the United States.   In his Jackson Hole Speech in August, Fed Chair Ben Bernanke stated the Fed's efforts "increased private payroll employment by more than 2 million jobs". Oh really?  Why don't those jobs show up in the government's own statistics Mr. Bernanke?

What caused the unemployment rate to be reported as lower in August than in July was a decline in the labor force. It shrank by 368,000. This is only a continuation of a multi-year trend though. In August 2007 there were 79,319,000 people not in the U.S. labor force. By last month, 88,921,000 didn't have jobs. That's an increase of 9,602,000 in five years. Yet, at the same time the employable population has grown substantially.

What about during just the Obama administration? His employment record is a big issue in the current presidential election after all. The labor force population has increased from 234,552,000 to 243,555,000 or by 9,003,000 so far during Obama's term. The current participation rate of 63.5% (low for the last few decades) would indicate that approximately 5,717,000 jobs should have been created to keep employment at a steady state. When Obama took office in January 2009, 142,099,000 Americans were employed. As of August 2012, 142,101,000 Americans were employed. There was a net increase of only 2,000 jobs. This represents a huge relative loss since the U.S. needed 5.7 million jobs just to maintain the same level of employment. More jobs would have been needed to make things better.

At his Jackson Hole speech Bernanke stated how concerned he was at the unemployment problem in the United States and that the Fed was willing to do more. Considering how little impact the Fed's high risk money-printing policies have had and how little seems to have resulted from the numerous stimulus programs that have been implemented, there is no reason to believe either will be improving the economy in the future. They are good for juicing stock prices however — at least in the short term. In the long run the gains will prove to be illusory.

Sources for the above from Table A of the August 2007,  January 2009 and August 2012 Employment Situation report from the BLS. The URLs for the websites are:
http://www.bls.gov/news.release/history/empsit_09072007.txt
http://www.bls.gov/news.release/archives/empsit_02062009.htm
http://www.bls.gov/news.release/empsit.a.htm


Disclosure: None


Daryl Montgomery
Author: "Inflation Investing - A Guide for the 2010s"
Organizer, New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. There is no intention to endorse the purchase or sale of any security.

How Much Stimulus Will Be Done by China, the EU and UK?

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.

Much weaker than expected trade data out of China on Friday indicates more economic stimulus will be forthcoming there soon.  Even bigger stimulus is expected from the ECB as it revs up the printing presses to bail out Spain and Italy (unless Germany stops it of course). According to a recent released report, the recessionary economy in the UK may need massive doses of quantitative easing to recover.

Exports in China rose by only 1% year over year in July and this was well below forecasts of an increase of 8.6%. Imports were up 4.7%. For a country that has an export-based economy like China does, this is a serious problem. Like the U.S., Europe and Japan, China engaged in a massive amount of stimulus during the Credit Crisis in 2008/2009, spending $586 billion or 14 percent of its GDP in addition to cutting interest rates and lowering banking reserves.  This led to a big expansion of local government debt, a major housing bubble that has yet to burst and consumer inflation. Apparently, there are unfortunate side effects when governments apply a lot of economic stimulus (notice you rarely read about them in the mainstream media).
This time around, China has already cut interest rates twice and reserve requirement ratios for banks three times since November. Its economy has slowed for the last six quarters and probably by much more than official figures indicate (China's economic numbers should be taken with a grain of salt).
China is still in spectacular shape though compared to Japan, which had a massive trade deficit in the first half of 2012. Japan has been economically troubled for 22 years and despite zero percent interest rates and an unending number of stimulus measures its economy remains in the doldrums. While all the stimulus hasn't solved Japan's economic problems, it has led to a debt to GDP ratio of over 200% (worse than Greece's).
One reason China's exports are doing so poorly is the weakening economy in Europe. On Thursday, the ECB cut its growth forecasts and is now predicting the eurozone economy will contract by 0.3% in 2012.  They are still hopeful of slight growth in 2013 however. Maybe they think it will come from all the money they plan on printing to bail out Spain and Italy. The Eurozone is basically tapped out from all the bailouts it has already done in Greece, Portugal, and Ireland (Cyprus and banks in Spain are now on the list as well). Greece needs a third bailout and is struggling to make it through the month until it receives its next welfare payment in September. The situation there is potentially explosive. The IMF has stated Ireland will need another bailout by next spring.
When ECB President Draghi said on July 9th that the central bank will take any measures within its mandate to save the euro, the inevitable conclusion was that he was willing to engage in massive money printing. The amount of money needed for the huge bailouts that Spain and Italy would require simply doesn't exist so it has to be created out of thin air. The Draghi proposal is for the ECB to buy bonds, but the ECB has already tried buying bonds under the SMP program.  The moment the buying stopped, interest rates shot right back up. This approach is costly and only effective in the very short term — a typical government program. It won't prevent the Eurozone's failure, it will merely delay it and make it worse when it happens.
The UK is not part of the Eurozone, but its economy is also contracting. Citigroup economists have stated that the UK will need to print an additional £500 billion and lower interest rates to 0.25% to prevent continued stagnation. Apparently, they don't think there are serious risks if this approach is taken. Neither did the Weimar Germans in the early 1920s, the Zimbabweans in the 2000s, the Chinese in the 1940s, the Brazilians for most of the 20th century, the Yugoslavians in the 1990s or the Hungarians in 1946. In fact, countries that create hyperinflation always claim the risks of money printing are minimal before it takes place. And there are usually a large number of top economists that support this view.  

There are serious structural problems in the major economies today. The usual Keynesian quick fixes that have been applied since World War II no longer seem to work, nor will they. These have led to a world drowning in debt and all debtors eventually reach their borrowing limit. When this happens with countries, they then try to print their way to prosperity. History makes it quite clear that this doesn't work either. 

Disclosure: None

Daryl Montgomery
Author: "Inflation Investing - A Guide for the 2010s"
Organizer, New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. There is no intention to endorse the purchase or sale of any security.

Central Banks Sucker the Market

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.

Three major central banks met on August 1st and 2nd and none of them took any decisive action. Markets in the U.S. and Europe have been rallying since late June on expected policy easing they've been promised by reports in the mainstream media. So far, empty talk is all the central banks have delivered.

Traders had high expectations for the Fed's monthly meeting on July 31st and August 1st. A week previously, news hit the wires (only a few moments before Apple's disastrous earnings were announced) that the Fed was definitely going to do some easing at this week's meeting. The source was the Wall Street Journal and they followed up with a front page article the next day. And what did the Fed do?  Nothing, zilch, nada. So much for the Wall Street Journal being a reliable source of investing information.

For the previous meeting in June, Goldman Sachs claimed the Fed was going to be doing quantitative easing (or maybe some other form of easing, but you would have to have read the entire coverage to find that out). What happened when QE wasn't forthcoming? The market hypsters came out of the woodwork with assurances that QE3 would be announced at the July/August meeting. Now that that hasn't happened either, we are hearing "just wait until September". You might as well wait for Godot. The only way the Fed will be doing QE before the election is if the financial crisis in the Europe gets out of hand. This will not stimulate the economy, but prevent a total collapse of the stock market (not a drop, but a total collapse).

The Bank of England and the ECB also met today. No rate changes from either of them (unlike the U.S. and Japan both have rates slightly above zero and they could lower them). The Bank of England is already doing QE2 and has been doing so since the fall of 2011. The UK is in a recession and QE has not stopped its economic decline.

Mario Draghi, the ECB chair and one of the biggest windbags to ever run a central bank, held a press conference after his meeting. He said that the ECB would undertake "outright" open market operations and would be using non-standard policy measures. Bonds rallied on the news. Unfortunately, only minutes later, Draghi was forced to backtrack on his boisterous pronouncements. He admitted that he was only providing "guidance" of what was going to occur in the future and details wouldn't be available for weeks. Draghi continued that even if the ECB was ready to act now, it would not have the grounds to do so. Someone should give that man a bagpipe.

How long the markets will continue to fall for promises of stimulus that never comes remains to be seen. Whatever happens, there is no reason be confident that things will be getting better. If the Fed could fix the U.S. economy, it would already have done so. If the ECB could solve Europe's debt crisis, it also would have already done so. Doing more of the same is not going to work, so it's not worth waiting for cental bank action as is. Eventually, the markets will figure this out.

Disclosure: None

Daryl Montgomery
Author: "Inflation Investing - A Guide for the 2010s"
Organizer, New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. There is no intention to endorse the purchase or sale of any security.

Retail Sales Drop in May Shouldn't Be a Surprise

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.


The U.S. government released its Retails Sales report for May this morning. Analysts expected an increase, but sales dropped 1.2%. The markets were surprised that American consumers were spending less even though the unemployment rate is stuck around 10% and credit card debt has dropped for 19 months in a row.

The expectations for higher retail sales came from the massive amounts of federal government stimulus being pumped into the economy. There is a $1.6 trillion dollar budget deficit projected for fiscal year 2010 (the deficit for 2009 was $1.42 trillion) and this money is making all the economic numbers look much better than they would otherwise. The deficit alone is approximately 11% of the official U.S. GDP number (which is grossly overstated), but still represents less than half of all federal government spending.  Investors should ask themselves: Given all of this support, how weak is the U.S. consumer?

This is an important question because the U.S. has built an economy based on consumer spending, which reached 72% of GDP before the Credit Crisis. The consumer also became very over indebted in the 2000s and the saving's rate hovered around zero mid-decade.  To spend more, consumers need more income and credit (the amount available from savings is limited). A jobs recovery is needed to increase consumer income and even Washington admits that that is not happening in the foreseeable future. As for credit, the big banks are borrowing from the Federal Reserve at zero percent, but are not passing the savings on to the consumer. They are also decreasing credit card lines, not increasing them. Autos are one of the only areas where cheap credit has filtered down to the consumer level.

Auto sales have also directly benefited from government programs like Cash for Clunkers. There were no special government programs active in May and auto sales fell 1.7%. The drop in retail sales was essentially across the board though. Department stores were down 1.8% and general merchandise sales decreased 1.1%. Hardware stores were really hit hard with sales falling 9.3%. The only bright spot was a 3.3% drop in gasoline sales. This took place because gas prices dropped, not because less gas was purchased. The Retail Sales numbers are not adjusted for inflation.

For some time now, the message coming out of Washington has been one of economic recovery. This has been based on economic numbers pumped up by incredible levels of stimulus. The retail sales report today and the employment numbers in general show that stimulus is not working so well this time around. The basic idea for excess government spending is that it jumpstarts the economy just as an electric jolt jumpstarts a battery. If the battery is really dead however, no amount of electricity brings it back to life. The same is true for stimulus in a dead economy.

Disclosure: None

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.

G8 Hot Air Inflates Dollar

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:

The G8 finance ministers met in Tokyo this weekend. Media headlines were blaring, 'Dollar Rises as G8 Looks to End Stimulus'. As usual media headlines have little to do with what actually happened. The ministers discussed a need to prepare strategies for winding down policy measures taken in response to the economic crisis. Note that it's just talk and the talk is about coming up with strategies (they don't exist yet). There is no 'doing' involved here, nor did the G8 come up with a timetable for implementing the strategies once they are created. It's not even clear that they have a timetable for coming up with the strategies. Not only is stimulus not being ended, but there is more than enough reason to believe it will be increased. The IMF managing director commenting on the meeting stated bluntly that the worst is not over yet.

The real goal of this meeting was to jawbone the U.S. dollar up. As reported in this blog the trade-weighted dollar has been hoovering around a breakdown level of 78.33. So far this morning it has been as high a s 80.89 in pre-market trading. At the meeting, the Russian finance minister backtracked on Russia's statement last week that it was cutting its U.S. bond holdings. He stated at the meeting that over the next year or more (the media did not quote this time period, but somehow gathered it from context) he "does not see any significant changes in our policy with regards to dollar denominated paper". He also said he didn't see the dollar losing its reserve currency status in the near future. The media did not report if the pained look on his face was the result of having both arms twisted behind his back.

The effect of the G8 comments was to sink Asian and European stocks markets. Most were down around 2%. Dollar denominated assets such as commodities were hit the hardest. Oil fell to around 70, but then went back up above 71. All this on the hint that maybe sort of kinda perhaps something will done at some unstated point in the future. In past major inflations, governments have always tried to tone down the money printing, but are forced to quickly reverse course because there is an immediate negative reaction when they do so. Looks like we're already falling into this pattern.

In a side note on 'money printing' is a bizarre story coming out of Italy that the U.S. media is ignoring. Italian authorities have seized $135 billion in U.S. treasury bonds from two individuals entering the country from Switzerland and carrying Japanese passports. Among the cache were 249 bonds with $500 million denominations. While this may seem absurd, the U.S. treasury did indeed issue bonds with $500 million denominations between 1955 and 1969. Even more amazing the authorities couldn't tell immediately whether or not the bonds were counterfeit! While it seems likely the bonds are phony, why would anyone bother counterfeiting bonds with denominations so high that only a central bank could buy them? This would also be the biggest counterfeiting operation in history. Whatever is going on, there is definitely more to this story.

NEXT: Market Rally at Key Juncture; Russians at it Again

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.

Government Thinks It Knows Best, Market Disagrees

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:

If the Obama administration is trying to crash the U.S. stock market they are doing an excellent job. If not, they should all take a class in PR 101. The U.S. government announced that it is displeased with the progress the automakers have made with their restructuring plans (like somehow the government knows how to run an auto company), got the CEO of GM to resign, and is threatening to withhold bailout money from them and force them into bankruptcy. This would be devastating to the economies of the politically important swing states of Michigan and Ohio and for this reason it is not likely to happen. Nevertheless, all investors are paying this morning for this political cat and mouse game, with both the Dow and Nasdaq selling off around 4% as I write this. A crash level drop of 5% is a real possibility at the moment.

When the automakers received their first bailout in the fall, this blog stated it was only a stopgap measure to tide them over until after the election and a new bailout would be needed then. This has indeed happened right on schedule. While we constantly say, there is no such thing as a single bailout for an insolvent financial institution, the same is obviously true in many other industries as well. There is also no question that the automakers have been some of the worse run companies in the U.S. for decades, at least until the banks and brokers took the lead in this respect in the 2000s. Bailouts almost always have long term negative consequences, but this has not stopped the U.S. from establishing a de facto 'too big to fail policy' and it now seems to be moving toward state directed corporate socialism. Government management is an oxymoron if ever there was one. This is out of the frying pan into the fire economics.

Also weighing on the market is the upcoming G20 summit. Other countries, being led by Germany, are not interested in printing an endless stream of new money for economic stimulus plans and the BRIC countries want an alternative reserve currency. A coordinated policy for global stimulus is not likely to result from the meeting later this week as was hoped for by the Obama administration. This leaves the U.S. and Britain, the big money printers, holding the bag. Consequently, both are likely to have to print more money in the future. The BRIC (Brazil, Russia, India and China) countries want to establish a new reserve currency, at first consisting of a blend of dollars, euros, yen and pounds. No immediate policy shift will officially take place at the summit, but this likely represents a sea change in international currency policy. Both pieces of news are devastating for the U.S. dollar, which somehow ignored reality this morning and rallied strongly.

While it would be nice to do so, investors can't ignore politics. Deep down, there is really very little difference in a number of respects from the current administration and the last administration. Spending huge amounts of taxpayer money on bailouts was and is part of the agenda. If the spending can't fully be funded with taxpayer money (and this was a reality from the beginning), any amount of money necessary will be printed to cover the costs. The dollar will eventually lose a lot of its value because of this and there will be a lot of inflation. The Bush administration though was at least aware of the sensitivities of the stock market, while the Obama administration seems oblivious at best. The drop this morning, taking place during a nascent rally, is not the first time the current administration has stuck its foot in it and it probably won't be the last.

NEXT: Next Few Trading Days Are Important

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.