2010Jun6 This Is Not Your Father's Recession!This is not your Father’s recession!
Economy:
Officially, the 2008 recession has been declared dead and buried. If true, where are the new jobs that come with expanding businesses, and where is economic growth occurring?
Numerically, Friday’s job report wasn’t so bad. However, like looking under the hood of a new car, there is a lot more to it than what first meets your eye. Census workers were estimated to be 390,000. It’s hard to classify those as real jobs. They will be gone long before the maple trees drops leaves.
Virtually every level of government across our country is either borrowing money for current obligations or struggling with expected deficits. Not all states are as broke as New York where officials have decided to not pay their bills. Ignoring real economics, the federal government hired 10,000 non-census persons while state government employment declined by 13,000. Construction employment declined by 35,000 which offset the prior two months of gains. Factoring in business closures, Friday’s announcement should have been a net loss of 50-60,000 jobs.
If the average annualized wage is $48,000 and if the effective income tax in the private sector is 20%, it takes five private sector jobs just to pay the wage of one government employee. We need even more to pay for benefits and the general operation of government. If government employment will solve our economic malaise, why won’t California, New York, New Jersey, Michigan and the Administration just hire the people on unemployment? Answer: The private sector tax revenues are shrinking, and there is not enough money in the government’s coffers. Private employment is caught in a whirlpool from which escape is difficult.
What is the real driver of our economy? Answer: consumer spending. Here the picture is less cheery.
Consumers need money and that comes from having secure employment. Second, consumers must have a need to spend money and that comes from supporting teenagers. The former is lacking, and the second has begun a multi-year decline that is controlled by demographics for which there is no possible Congressional resolution. The number of teenagers was determined, independently of Congress, a little more than a decade ago.
Consensus forecasts for positive GDP focus on US exports growing due to global expansion, excepting, of course, conditions in Europe and Japan and China’s commitment to slow its economy. Emerging markets are simply not large enough to keep the U.S. rolling along.
Official GDP tracks factory production which is a report of consumer demand that has already occurred. It is “downstream” activity. “Upstream” activity is current retail discretionary sales. It has been declining since mid-January. Keynesian economists would agree that successful government stimulus creates an increase in total demand for goods and services. For reasons listed above, several trillion dollars in stimulus and bail-outs has not worked. More government stimulus won’t, either.
This recession is a result of balance sheet changes. Businesses and consumers are getting out of debt. During deleveraging, the normal assumptions about macro-economics and monetary stimulus do not apply. Keynesian economics assumes that if government does “A” then “B” will follow. Not so much when free cash flow is used to reduce debt and increase savings. Even at nearly zero interest rates, businesses and consumers are more concerned with strengthening their financial condition than with acquiring more debt. We doubt that another stimulus package will change this before demographic demand ticks upward.
Stock Market:
Modern Portfolio Theory (MPT) and its assumptions for controlled “risk levels,” like the government’s GDP numbers, use backward looking “downstream” data to prepare for the unknowable future. It assumes action “A” elicits response “B.” As with the current economy, we believe application of the MPT process will likely end with unexpected and disappointing results in this decade.
Continually recalculating the relative strength of investments does not require any forecasting data. It is a trend following process that illuminates the changes occurring between buyers and sellers. When buyers are dominant, prices rise just as prices fall when sellers exist in greater numbers.
Our economic observations are intended to prepare you for what we believe lies ahead. We are not making “bets” in portfolios about future events. We are waiting for a turn around in broad negative market trends before committing cash back into the market. Friday’s market decline simply confirms that there are not a lot of buyers waiting on the sidelines for cheaper prices.
Europe:
So much for Greece. It has company. Hungary, France and the Netherlands have been added to the list “problems.” Friday, analysts at HSBC Global Research downgraded all of Europe except the UK. It is not news that insuring government debt for the P.I.I.G.S. has increased this year. Insuring French debt has almost tripled. Even Germany’s bunds have been subject to increasing doubts in the market.
Understanding the intertwined debt is not easy. Yet, we did find a humorous and short video explanation of sovereign debt. It is posted at the bottom of our radio website. Pretty much! That’s the problem. How soon will it visit the U.S.?
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