The Big Picture - Macro Perspective on the Capital Markets, Economy, Technology, and Digital Media

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The Friday afternoon equity rally occurred on hope that the EU might figure out a way to bailout Greece and anticipation of another Manic Monday rally.

No Greece bailout has appeared, only the hollow G7 vow to continue applying whatever stimulus that still exists…Today – Only the hope of a Monday Mania rally remains for bulls. But the Nikkei is down 1%; so in Sunday night trading SPHs are down 0.20. 1050 on the S&P remains a key level.

There is little if anything for governments and central banks to do at this point. So solons are trying to euchre the markets with verbal intervention.

Bailing out PIGS is not the major issue. If the EU does a bailout, it will only be a temporary aid because socialism is collapsing on a global basis due to the enormous, unserviceable debt.

Countries accustomed to the undeserved goodies that socialism promised but delivered on borrowed money do not have the political will to cut the unaffordable spending. So in the near future, the market will force the requisite changes.

At some point the borrowed money train will halt and the goodies will disappear, just like in the USSR.

Reuters: Greece sticks to austerity plan: finance minister Greece will stick to its deficit-cutting plan and the first three months of the year will be crucial for regaining investors and EU confidence, the country’s finance minister said in an interview on Sunday.

http://www.reuters.com/article/idUSTRE6160KH20100207

Reuters: The euro zone’s top finance officials sought on Saturday to ease concerns about a deep budget crisis that has roiled financial markets and raised questions about the future of the single currency group. After a two-day meeting of finance ministers and central bankers from the G7 industrialized nations, European Central Bank President Jean-Claude Trichet said he was confident that Greece, which has been hit by the budget deficit crisis, would meet tough new belt-tightening targets.

http://www.reuters.com/article/idUSTRE6151OG20100206

Reuters: G7 focuses on Europe debt “We talked about Greece, Portugal and Spain and we told our partners we had to solve the problem ourselves without the help of the IMF,” Eurogroup chair Jean-Claude Juncker told Reuters on Saturday, the second day of a meeting of finance leaders from the Group
of Seven rich industrialized nations. Euro zone countries like Greece, Spain and Portugal are under increasing pressure to bring spending under control.

http://www.reuters.com/article/idUSTRE6144XX20100206?loomia_ow=t0:s0:a49:g43:r2:c0.500000:b30291690:z0

The Telegraph: Gordon Brown to attend crisis talks over Greece Gordon Brown will attend crisis talks in Brussels this week as the eurozone faces a crisis over the spiraling debt Greece and other countries have built up. The Prime Minister will preach a “tough love” message for Greece and along
with the other major leaders will urge the country to slash its spending over the next three years.

They will be presented with an agreed plan which will demand that the deficit has to be cut from 13 per cent to 2 per cent by 2013… http://www.telegraph.co.uk/finance/7183524/Gordon-Brown-to-attend-crisis-talks-over-Greece.html

Over the past year we have recounted numerous times that there has been no restructuring of the US economy or Europe for that matter. All that has been done is that sovereigns have absorbed trillions of dollars in private sector debt and crappy paper and issued trillions of dollars of debt to support more
stimuli and crappy paper absorption.

If we have entered a new crisis phase in which sovereign nations have to bailout out other sovereign by issuing more debt, the final crisis stage will occur when the market revolts against the debt of the nations that bailed out other sovereigns. This is checkmate.

The usual suspects trumpeted the better than expected House Survey in the January Employment Report. However, we found an anomaly in the survey that suggests a sloppy book-cooking gambit.

The Household Survey shows an increase of 541k jobs and a gain of 111k in the pool of available workers. This produced the decline to 9.7% in the politically sensitive unemployment rate…Part-time workers increased 252k, which is more than half of the 541k gain. http://www.bls.gov/news.release/empsit.t09.htm

Here’s what makes the Household Survey job gain very suspicious. The entire gain is attributed to one category, ‘Women, 20 years and over’, which increased 529k…’Men, 20+’ declined 1k!

HOUSEHOLD DATA

http://www.bls.gov/news.release/empsit.t01.htm

How is it possible that so many women were hired and men lost 1k jobs?!?! This is highly improbable! Moreover, NSA Women, 20+ only increased 7k. NSA Men, 20+ declined 914k! [Table below]. And the civilian noninstitutional population of ‘Women, 20 years and over’, declined by 36k!

‘Self-employed’ declined 128k; so women weren’t starting businesses. http://www.bls.gov/news.release/empsit.t08.htm

Teenage male jobs (16+) increased 18k. Teenage women jobs declined 5k…“White Women” accounted for 495k of the 529k gain. White men are +31k. http://www.bls.gov/news.release/empsit.t02.htm

The Household Survey increase in jobs is NOT supported by withheld taxes, which show a 7.2% decline for January. Tax data measure real money going into workers’ hands.

From our Wednesday, February 3, 2010 report: The US Treasury reports withheld taxes of $140.381B for Jan 2010; FYTD is $547.710B. For January 2009 withheld taxes are $151.285B; FYTD is $597.593B. Jan 2010 withheld taxes are down 7.2% y/y; FYTD is down 8.35%…January NFP should continue to
show job losses. But it could be crafted to show unrealistic strength like the ridiculous Q4 GDP of 5.7%, or seasonally adjusted employment surveys. http://fms.treas.gov/webservices/show/?ciURL=/dts/10012900.txt

The Household Survey’s highly improbable increase in only female employment suggests faulty methodology (malfeasance), some unqualified adjustment or a clumsy attempt to craft a better employment report for political expediency (fraud). The reasonable conclusion is the Household Survey job gain in January is bogus.

It’s a good time to review what constitutes a ‘job’ in the BLS’s Household Survey. The BLS: Household survey. The sample is selected to reflect the entire
civilian noninstitutional population. Based on responses to a series of questions on work and job search activities, each person 16 years and over in a sample household is classified as employed, unemployed, or not in the labor force.

People are classified as employed if they did any work at all as paid employees during the reference week; worked in their own business, profession, or on their own farm; or worked without pay at least 15 hours in a family business or farm. People are also counted as employed if they were temporarily absent from their jobs because of illness, bad weather, vacation, labor-management disputes, or personal reasons.

http://www.bls.gov/news.release/empsit.tn.htm

Please note the in the Household Survey people are counted as employed even if they received no income or had sustained absences from work. You can imagine what ‘personal reasons’ does to the data.

One last concern about the Household Survey in January Employment Report, from the lips of the BLS: Also, household survey data for January 2010 reflect updated population estimates…The change in population reflected in the new estimates results primarily from adjustments for net international
migration, updated vital statistics and other information, and some methodological changes in the estimation process.

http://www.bls.gov/news.release/empsit.nr0.htm

The BLS claims that the ‘population control’ adjustment reduced the Household Survey by 243k. This means that without the new adjustment 784k jobs would’ve appeared. If 529k job growth is dubious by tax data, January job growth of 784k would be side-splitting.

But if you take the BLS at its word on the new ‘population control’ adjustment, which is due to new Census Bureau data, then Household job growth is substantial small in previous months.

The BLS admits that December 2009 Household jobs have to be lowered by 243k…Ya think the BLS is doing this to confuse or frustrate people?

Carl Bialik in a WSJ blog gives another reason to question the Household Survey: My print column this week examines a quirk in U.S. Census Bureau data that may have led to research errors. A National Bureau of Economic Research working paper this week demonstrated that so-called microdata — a
subset of all Census responses, released to researchers who want to dig deeper into demographic trends — for several surveys contained flaws…

But other polling researchers expressed concern. “In at least some cases, the conclusions that have been drawn from the surveys that were incorrectly adjusted will have been wrong,” said Paul Lavrakas, a survey consultant and former chief research methodologist for Nielsen Media Research. “Thus, it is critical for surveys researchers that the U.S. Census Bureau generate and release data that is beyond reproach.”

Several researchers saw the revelations as a reminder that all survey data are flawed in one way or another, representing as they do an imperfect window into shifting public opinion and behavior. “All demographic and economic data are error-ridden,” said Gary V. Engelhardt, an economist at Syracuse
University. “… You can’t get around that, and that shouldn’t be surprising. And anyone who has thought an ounce about how the data they are using are collected shouldn’t be surprised that sometimes those
errors are large.”… http://blogs.wsj.com/numbersguy/census-bureaus-balancing-act-891/

Here are 10 of the most informative charts I’ve seen regarding Friday’s NFP:

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Click for bigger (and in some cases, ginormous) charts

No Job Gains for a Decade

Bianco Research

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Percentage Job Loss form Recession Start

Chart of the Day

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Cumulative Job Losses

Bianco Research

Read the rest of this entry »

Today’s NFP data was surprising — both to the upside and the downside. 20,000 jobs were lost in January, below the consensus. But everywhere else, there were surprising improvements.

Is it possible that those people expecting a mediocre recovery and weak employment picture — including me — might be pleasantly surprised? A closer look suggests that many people may be underestimating the recovery.

Consider the cyclical progress that occurs as a recovery takes hold: Revenues improve, followed eventually by greater Profits. Companies have been doing capital expenditure spending first . . . and only hiring when they have to. Greater hiring leads to greater spending.

So far, we have seen the revenue improvements, and the beginnings of better profits. Various tech firms (Cisco in particular) are seeing improving CapEx orders. Temp Help has improved, and some firms are actually hiring.

Ask yourself what outcome would surprise the most people — the economy sliding in a double dip recession – or a stronger than anticipated recovery?

Here are some other data points beneath the headlines:

Positives

1. BLS reported that in January, persons unemployed “due to job loss” decreased by 378,000 to 9.3 million. That is a decent number.  And, “nearly all of this decline” came from the “permanent job losers.” (See table A-11.)

2. The Underemployed – Persons who want full time jobs but working part time instead — fell from 9.2 to 8.3 million in January. That is an enormous improvement. (See table A-8.)

3. Temporary help services added 52,000 jobs — that is a leading indicator of future hiring. (See table B-1.) Since the temp help lows in September 2009, temporary help services employment has risen by 247,000.

4. The Household survey showed growth of 541,000 workers. In a recovery, this tends to pick up new employees (especially at smaller firms) faster than other measures. The Household Survey isn’t “large firm ” biased the way the Establishment Survey is.

5. After experiencing steep job losses earlier in the recession, job losses in manufacturing has moderated considerably.

6. Retail trade employment rose by 42,000 in January, after showing little
change in the prior 2 months.

Negatives

1. 2009 benchmark revision reveal employment in 2009 was far worse than originally believed — revised data showed nearly 600,000 more jobs lost than previously reported.

2. The number of long-term unemployed — jobless for 27 weeks or longer — is still rising. Since the December 2007 start of the recession, long-term unemployed has risen by 5.0 million. (See table A-12.)

3. NiLFS — Not in Labor Force — rose 409,000 to ~2.5 million persons. They are also called “marginally attached to the labor force” — not in the labor force, want and available for work, and had looked for a job sometime in the prior 12 months.  (See table A-16.)

4. The average workweek for all employees on private nonfarm payrolls are still near record lows — 33.9 hours in January.5.  1.1 million discouraged workers in January is a huge increase of 734,000 from a year earlier. (Discouraged workers are not currently looking for work because they believe no jobs are available for them)

6. Revisions continue to be negative. December 2009 was revised downwards to 150k loss from 85k.

Of course, I am out of pocket when the 8:30 am data release hits. Use comments to report the data — I’ll update later

The most recent Employment Situation Summary gets updated at 8:30 precisely.

With the NFP payroll report out tomorrow morning, Bloomberg.com put together a timely infographic on one of our favorite pet peeves: the Birth Death Adjustment.

Overall, the piece is good (see charts below). One small quibble: They should have mentioned that int he beginning of the cycle, the B/D catches job creation that the usual methods miss; problem is that at the end of the business cycle, it misses job losses the usual methods catches.

Click for interactive charting:

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As in so much of life, improvements in one part of the model cause problems in another . . .

As the countdown to Friday’s jobs number begins, it might be instructive to get yet another perspective on the amount of slack in the labor market and its effect on wages.

Here’s a chart built at the St. Louis Fed website that clearly drives home the point — it perfectly captures the inverse relationship between the Unemployment Rate and Average Hourly Earnings:

Unemployment and Average Hourly Wages: Mind the Gap
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I’d postulate that only when this gap starts to close meaningfully will we have to consider the possibility that the Fed will tighten and/or that inflation might be somewhere out there on the horizon.  Until then, it’s very hard to envision they’ll consider moving off their ZIRP.

Additionally, there was much fanfare when ISM printed at an above-consensus 58.4.  And certainly it’s good to have expansion in the manufacturing sector, to be sure.  But we’re starting to get data points (like ISM) that are really more late-cycle than they are early-cycle. And the jobs market — admittedly a lagging indicator — is simply taking too long to play catch up.  Here’s the ISM (Index, LHS) and Nonfarm Payrolls (YoY Pct. Change, RHS).  I’ve adjusted payrolls by three months to clearly show the correlation and account for the lag.  Is it too late to see a jobs recovery that’s going to even put a dent in the damage that’s been done over the past 25 months?  That is the question.

ISM: How much better will it get?

For over a year now, I have been advocating a Swedish rather than Japanese approach to crisis. The Swedes decided to protect their banking system at all costs; the Japanese protected their banks at all costs.

That subtle distinction is the difference between a rapid recovery and a slow, agonizing one.

Some people think this is an academic debate — a distinction without a difference. However, when you see who bears where the actual costs of this fall, it is apparent that the it is an enormous difference.

Unfortunately, the US  (mostly) went the Japanese route. Exceptions are the automakers and a handful of FDIC closed banks. Instead of waxing philosophical, let’s look at who pays the costs of this – and who does not.

Shareholders:  In the Swedish approach, the Shareholders get wiped out. In the US/Japanese model, they take a big hit — a loss of 90%+ of their value — but they got to keep there stock shares. Hope springs eternal for an eventual recovery.

On Wall Street, other than Lehman Brothers (LEH), all other shareholders were saved. Bear Stearns (BSC), Citigroup (C), Fannie Mae (FNM), AIG, BofA, (BAC) Goldie (GS), Morgan Stanley (MS) — all were kept afloat.

Ironically, the insolvent firms that were forced into a reorganization – GM & Chrysler, Washingon Mutual, etc. –  actually are the ones following (at least partially) the Swedish style model: Restructure, Wipe Out Debt, Recapitalize, Relaunch as a new, clean firm.

Bondholders:  There are 3 parties that undeservedly were bailed out, and the head of the class are the bondholders.

Except for Lehman and FDIC closures, most bondholders were rescued: Bear Stearns Bondholders received 100 cents on the dollar — that was their reward for exercising terrible judgment when lending money to a reckless irresponsible insolvent investment house (so much for Moral Hazard). Same for Citi, Fannie Mae,  Bank of America. We still don’t know what the final impact will be for AIG Bondholders, but expectations are for the full monty.

When future historians discuss the bailouts of 2008-09, and discuss who were the greatest financial recipients of taxpayer largesse, they will be referring to the bondholders.

Counter-parties:  For reasons not yet explained, Paulson, Bernake and Geithner essentially gifted to speculators and hedge fund traders a guarantee that all their back alley bets would be made good. This is truly perplexing, as they are probably the least deserving group receiving taxpayer money.

Management:  Several senior execs have lost their jobs, but they have been the exception. A recent study found that 92% of TARP firm senior execs, boards of directors, and C-level management were still running the firms they had been. It is perplexing to those of us are trying to figure out the penalties for driving your firm over a cliff . . .

Taxpayers: So far, the US taxpayer has laid out all of the costs of the bailouts. TARP appears to be mostly repaid, and the new TBTF tax should recover the rest. But the question the FCIC should be asking is why are taxpayers a backstop fro traders and speculators?

Borrowers:  Banks are lending dramatically less, as they slowly recapitalize their balance sheets, borrowing from the Fed at 0% and lending back to the Treasury at 3%. Best guesses are that this year and last will see a $1 trillion less dollars than normally would be loaned to credit worthy borrowers. This is directly due to the Japanese approach that allows bad balance sheets and enormous bank under-capitalization to continue.

Workers:  Are going to suffer for a long period of slow job recovery due to the above. If banks were forced into the normal FDIC insolvency  process, the economy and employment would likely recover must faster.

Savers:  Zero % interest rate. Estimates are this costs depositors $250Billion per year.  ’nuff said

Bank Customers:  All banks customers are now buying services from frims in a sector with much less competition.

First Time Home Buyers: Although they get a minor tax credit, various government policies are maintaining home prices at levels far in excess of where the market would take them. Outside of the big foreclosure zones, they are feeling the impact of the subsidies and bad policies.

The bottom line: Bailouts have specific winners and losers . . .

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Previously:
Attack of the Zombies ! February 26th, 2009
http://www.ritholtz.com/blog/2009/02/attack-of-the-zombies/

92% of TARP Firm Sr Management is Unchanged (January 4th, 2010)
http://www.ritholtz.com/blog/2010/01/banking-sector-remains-literally-unchanged/

See also:
What we can learn from Japan’s decades of trouble
Martin Wolf
FT, January 12 2010
http://www.ft.com/cms/s/0/3c5b388e-ffb2-11de-921f-00144feabdc0.html

Roll over the circles for each industry below to compare 2008 employment levels with those projected for 2018. The largest circles represent major employment sectors.

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click for interactive graphic

Source: U.S. Bureau of Labor Statistics
Credit: Nelson Hsu and Robert Benincasa/NPR
(Employment numbers are in thousands.)

A few new charts hit my inbox since yesterday’s NFP data was released. These put the current state of the job market into greater perspective. (Click on charts to enlarge)

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Monthly Changes in Non Farm Payroll, 2004-09:

This is a simple chart, showing the gains or losses each month over the past 5 years:

Chart courtesy of NYT

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THE EMPLOYMENT RATE IS NOW AT 58.2% —  LOWEST RATE SINCE AUGUST 1983

This to me is a devastating picture of the workforce in the US — at its lowest level in nearly 3 decades:

chart courtesy of Gluskin Sheff

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Temp Help is Improving

Its not all glum — Temp help is improving, and tends to be a good early indicator of more hiring to come:

chart courtesy of Bruce Steinberg.net

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The 2000s were a bust:  Nonfarm payrolls gains by decade (data to 1939).

Straight forward chart showing the lost decade of the 2000s in terms of US job creation:

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THE PERCENT OF THOSE UNEMPLOYED  27 WEEKS AND OVER IS NOW AT 40%

Another ugly chart: The unemployed are not easily finding new jobs:

chart courtesy of Gluskin Sheff

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Percent Job Losses in Post WWII Recessions

Here is what the 2007-2010 Recession looks like in terms of recovery of jobs lost:

courtesy Calculated Risk

Employment Situation Summary:

Establishment Survey Data: Nonfarm payroll employment edged down (-85,000) in December, and the unemployment rate was unchanged at 10.0 percent, the U.S. Bureau of Labor Statistics reported today. Employment fell in construction, manufacturing, and wholesale trade, while temporary help services and health care added jobs.

Household Survey Data: In December, both the number of unemployed persons, at 15.3 million, and the unemployment rate, at 10.0 percent, were unchanged. At the start of the recession in December 2007, the number of unemployed persons was 7.7 million, and the unemployment rate was 5.0 percent. (See table A-1.)

Those making forecasts of +100k 200k 300k plus must be surprised and disappointed.

The details:

• November 2009 Payrolls were revised to a gain of 4,000 from a loss of 11,000; October was revised downwards by 15k;

• U3 Unemployment rate held steady at 10%;

• U6 Unemployment ticked up 0.1% to 17.3%;

• Q4 2009 employment losses averaged 69,000 per month; this compares with Q1 job losses of 691,000 a month;

• Temp workers increased 46,500 — the 5th straight monthly gain;

• Total lost jobs lost since the recession began in December 2007  is 7.2 million.

• This is the worst recession in terms of employment and jobs lost, both in actual numbers, and as a percentage of all jobs, of any cycle since World War II was ending in 1944-45.

Gainers and Losers:

Factory payrolls down 27,000
Auto manufacturing and parts industries down 4,900
Construction jobs fell 53,000;
Retail payrolls decreased by 10,200
Service industries (banks, insurance companies, restaurants) subtracted 4,000 workers

Health care employment increased by 22,000.
Financial firms increased payrolls by 4,000