The Big Stall
Regular readers of The Big Picture will recognize the sentiment presented below. Its a simple 3 part analysis: 1) The economy is soft; 2) Job creation is weak, and getting weaker; and 3) most of the shills you see on TV are idiots.
The following is via Alan Abelson's Barron's column, titled The Big Stall:
"For reasons that have invariably eluded us -- except that's what their paymasters tell them to do -- the incorrigible cheerleaders on Wall Street and in Washington have been insisting that the economy was strong, a sentiment, we regret to say, with few exceptions, mindlessly echoed by our colleagues in the press and in the electronic media. And by way of confirmation they cited the particular "strength" in employment.
Comes now Friday's employment report for August, and guess what? It's a bummer. Compared with the recently scaled-down consensus estimates of 90,000-100,000 additions, the Bureau of Labor Statistics reports that, in fact, last month saw a loss of 4,000 jobs. It looks like a long goodbye to Goldilocks. What's more, in another poke in the eye to the received wisdom, the job picture was much worse in both June and July than originally reported: Revisions slashed June by a whopping 57,000 slots and July by 24,000.
Nor is that the whole sad story. For were it not for the enhancement of August's sickly totals by a formidable 120,000 jobs mythically created by the BLS's "birth/death" contraption, the final tally would have been downright ugly. And the so-called household data, which bulls used to eagerly parade because it consistently outdid the establishment count, continued this year's dismal -- or, should we say, accurate -- performance, shedding 316,000 jobs last month.
What last month's dismal employment showing does is pretty much cinch the case for a cut in the federal-funds rate. It also, we think, pretty much cinches the case for recession, late this year or early next."
Hard to argue with most of that . . . and as mentioned recently, we think the odds of a recession are about 65%.
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Source:
The Big Stall
UP AND DOWN WALL STREET
Alan Abelson
Barron's September 10, 2007
http://online.barrons.com/article/SB118920647821821156.html
Saturday, September 08, 2007 | 07:44 AM | Permalink
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Comments
The question is will a rate cut help? It might cause temporary euphoria in the stock markets, but it will not restore confidence in assets.
There is more than one issue with which to deal. There is a liquidity problem in the CP markets - but more than that - there is a crisis of confidence both in the CP and ABCP markets - not only in the assets held for collateral but in the ratings agencies that issued the ratings.
It is like borrowing money to make a bet on a game of Russian Roulette. If there is one bullet in a sixshooter, everyone can calculate his risk and borrow accordingly; however, the problem with the game today is that nobody knows for sure how many bullets are in the gun - it could be zero or it could be six.
Lowering the Federal Funds target rate does not add transparency to the Russian Roulette game - if risk cannot be guaged accurately, a slight lowering of the rate of borrowing will not help. All it will do is add fuel to existing speculative bubbles, setting up a bigger collapse.
Posted by: Winston Munn | Sep 8, 2007 8:37:39 AM
I have been wondering for a long time why the highly qualified and highly paid Wall Street analysts and economists have been 'blind' to the gathering storm. At the same time many of the financial blogs and untrained armchair economists have been fully aware of the impending issues. It seem perverse that the Wall Street 'experts' should be so wrong and the small guys so right.
Posted by: Anthony | Sep 8, 2007 9:02:33 AM
Anthony,
The armchair economists are not paid 6+ figure incomes to support stock prices.
Paid hucksters don't point out the flaws in the vacuum cleaner they are selling.
Posted by: Winston Munn | Sep 8, 2007 9:07:18 AM
On the topic of interest rate cuts, the old pushing on a string metaphor seems more appropriate than ever. Folks out of work do not qualify for prime mortgages no matter how low interest rates go or house prices drop. If a negative consumer pychology starts to take hold...oh wait...I think I hear the sound of helicopters so no worries mate.
sardonic laughter soundtrack here...
Posted by: lurker | Sep 8, 2007 9:28:12 AM
Barry-be careful about biting the media hand that feeds your fame. you appear on TV plenty and you are no idiot...Kudblow however clearly qualifies.
Posted by: lurker | Sep 8, 2007 9:30:18 AM
Kudlow had his "they know nothing" on his show yesterday, then slobbered all over Barney Frank. Appalling.
Posted by: John F. | Sep 8, 2007 9:39:06 AM
But how can they cut with real inflation so high? Won't they just start another "Bubble"? What was the expression being used not so long ago? "Zung... ? from chess.
Posted by: Old Ari | Sep 8, 2007 9:42:41 AM
Ponder this. IF Government inflation stastics are being manipulated for political gain and IF as I suspect inflation for Ma and Pa is runnung closer to 5%, then we are by defination already in a recession. One need only look at food inflation to see why Wally World beat their own deminished same store sales gains. My black cows eat grass, hat and corn. It takes diesel, fertilizer and depreciation on my Jonny Jump to produce the same. Expect $10/lb T bones in the near future. My Pop has never owned a computer. He gets broadcast T.V. and drives an 89 ford Tempo. Clearly hedonics does not work for him. His pathetic cost of living increases in Social Security are annually offset by the increases he pays for Medicare. But he is still a proud American, one who was on the beaches in WWII. I fear that we baby boomers will not be so forgiving of Government largress.
Posted by: Ross | Sep 8, 2007 9:56:39 AM
From my perch, seems the "recession" is here. Only question is whose gonna be the first to call it.
Posted by: coveredwagon | Sep 8, 2007 9:59:18 AM
Barry, it will be great if you can write on the effect of interest rate.
Since now we are near a done deal that rates will be cut (my guess .25 on sept 18 to boost morale, and then continue till the world collapses).
I have a belief that rate cut is not going to tank the dollar much due to the below reasons:
1. Europe will not let euro apprecaiate a lot anymore, they are already suffering since their exports are very expensive compared to yen,yuan,rupee etc (pegged or depreciating currencies).
if you notice,USDEUR is pretty much hanging in the range of .75-.72 since Dec 06, even though the doom and gloom has grown multiple times.
http://finance.yahoo.com/q/bc?s=USDEUR=X&t=1y
2. emerging economies will not let their currency appreciate.
i am not saying dollar will not lose another 5-8%, but nothing like 15-30% which should happen since FED will be fanning inflation with rate cuts.
US is like the only consumer for many products from the world, and they will support his debt so that he can continue buying.
Posted by: techy | Sep 8, 2007 10:04:01 AM
How exactly will the FED lower rates with the dollar already below 80 and the YEN below 115? The United States DOLLAR just fell through the McMansion floor, and it can't get back up.
Forget about everything else. This is the central issue moving forward. We are about to see a debacle like the 1930's only worse.
Posted by: SPECTRE of Deflation | Sep 8, 2007 10:08:12 AM
"3) most of the shills you see on TV are idiots."
Yes, I remember summer '06 one of the guests on Fox Saturday Business Block said "the market is going up because it wants the U.S. to attack North Korea." Well I didn't know that was coming. I went to the Fox News website to look for video of the show and/or find out the name of the nut. No such info existed. I guess I'd try to keep something like that under wraps too.
And this I believe will be Fox Business Channel's undoing. Supposedly they're going to be "more business friendly". I think just about everyone here would say CNBC is already pretty business friendly, most recently evidenced by the their Dow record close cheering. How can Fox be more friendly? I guess load their telecasts with permabulls who never advise to sell. But if a bear market comes, Fox Business Channel watchers will get hurt. Bad. And the viewing public will abandon ship.
Posted by: Chief Tomahawk | Sep 8, 2007 10:16:27 AM
Well, where do i park my money? under the bed?
Posted by: Fred | Sep 8, 2007 10:18:55 AM
Fred,
It may be time to adopt the Will Rogers credo: "I'm not concerned about the return on my money but the return OF my money."
Posted by: Winston Munn | Sep 8, 2007 10:36:05 AM
about a year back i used to hear that investors will flee the falling dollar.......it did not happen and i dont see it happening (i dont know why).
i forgot to mention that only group which will not like the falling dollar is the Oil producing nations, well they will raise the price of oil as they have done since last 2-3 years.
right now US debt is a problem of world economy, if they inflate it will get reduced and that will buy time for them to take correction instead of outright depression.
Posted by: techy | Sep 8, 2007 10:39:45 AM
Unless I missed it, you haven't said much about commercial paper. This from Minyanville:
"Total commercial paper outstanding has fallen 13.4% in one month. During the 2001 downturn, commercial paper peaked in November 2000 and slid through to December 2003. Over that three-year period it declined by only 22%."
Isn't this a big deal?
Posted by: Aaron | Sep 8, 2007 10:43:43 AM
Spectre if i remember right....yen jumps around in the range of 122-113 since a year.
and it has more to do with carry trade flowing out of japan than people investing from US to japan (my understanding, correct me if i am wrong)
and i dont understand the significance of the dollar index...its been moving around 80+-2, since 2005. does that means dollar has been up and down only by around 5% since 2 years?
Posted by: techy | Sep 8, 2007 10:53:38 AM
BR
You left out the funniest line, the first sentence, "Like father, like son."
Posted by: me | Sep 8, 2007 10:54:27 AM
Aaron,
CP could in fact become a big deal if the crunch lasts a few months. CP is akin to business credit cards, used for short term financing - if short term financing is not available, assets must be sold to provide needed cash - but if you don't hold assets that can be sold or if selling will cause a loss on those assets - you are pretty well screwed without access to the CP market.
Posted by: Winston Munn | Sep 8, 2007 10:57:39 AM
It is amazing how most of you are so myopic and rear view minded (looking at old inflation data) and see only one side of the coin, inflation and weak dollar.
There are astronomical deflationary pressures building up. The Fed is behind the curve by at least three months. The Fed needs to slash down rates ASAP to boost the economy.
Rome is burning but the Fed is watching and doing nothing due to their arrogance and incompetence.
“They know nothing” –Jim Cramer-
Posted by: “They know nothing” –Jim Cramer- | Sep 8, 2007 11:05:58 AM
soon everyone will be shopping at IKEA AND putting it all together by themselves..... ;)
Posted by: Jdesmond | Sep 8, 2007 11:09:11 AM
Old Ari:
"Zung... ? from chess."
I think you are trying to think of the word "zugzwang" which means essentially: "every move you make loses, but you must move."
It's a good analogy, I think.
Posted by: OkieLawyer | Sep 8, 2007 11:19:31 AM
Barry-
You, like all of us on Wall Street, feel the desperate need for the rate cut cycle to begin. We are all so convinced that one is needed, that we have talked ourselves into its eventuality on Sept. 18. But the fact of the matter is that we are a long way off from that foregone conclusion.
First, the Fed has a history of acting too late and while you and I would probably argue that it is already too late, the Fed does not think that. Just read thier speeches carefully. Second, all of us on Wall Street are singly focused on a financial liquidity crunch that may or may not actually spread into the real economy. No matter what we think may happen, there is really only one concrete piece of evidence in the employment report. But, as you know, there are problems with that measure. You know as well as I do that next month, August's numbers will be revised upwards when they count the pupblic school jobs they missed this month. The Fed will look at this as one piece of the puzzle. To make the change, they historically need more evidence.
Now, we know that Ben said he was looking at more evidnece than just statisitcs in Wy. In fact, he said he would be talking to people. And indeed, he and his venerable district presidents are doing exactly that. But the evidence we see from this effort is also far from conclusive. The Beige book survey (heavily relied upon at the Fed) suggested that growth outside of housing was not slowing as much as is being presumed. Look at Fisher's remarks on Thursday. What we have building at best (assuming that the Board of Governors favor a cut) is a divided house between governors and the district presidents about where growth is headed. And, while the Chairman controls the agenda at any FOMC meeting, he still only has one vote. The Fed runs monetary policy by concensus and if there is a significant and beligerent group of presidents that don't want to cut, then the meeting's result will only be a change in the stated bias, not a cut.
Basically, outside of NY, the real economy is only moderately slowing. And while that picture may change by spring, it is still too early (in the Fed's eyes) for a cut. If, as I suspect, economic data continues to disappoint between now and year end, we will see Fed cuts starting in the new year.
The final evidence I would put forth is that the Fed (and economists in general) are not good at analyzing credit markets. The Fed is set up (literally) to understand the real economy. They have local boards and beige book contact lists made up of small, medium and large companies. But they don't allocate that many resources understanding credit markets (outside of the NY Fed). Secondly, the Fed is not terribly well equipped to handle the current type of crisis. Why? Because they work through the FF market at primary dealers and we all know that the real problem today is with European banks. That is the epicenter of this earthquake. And while the ECB has provided tremendous liquidity to their banks, it is all in euros and banks the world over borrow and lend in dollars. Thus the spike in the dollar on August 9.
I would posit that the best chance of a rate cut by or before Sept. 18 will only come from a true financial crisis, a significant interruption in financial markets. We have not seen that yet and while the various commercial paper desks are experiencing significant lock up, they are for the most part still able to issue overnight paper. Only when that stops, will the Fed enter the picture.
Posted by: Tex | Sep 8, 2007 11:27:56 AM
What still amazes me is how greedy people are...so afraid that they'll miss something by getting into cash & finding the various reasonably secure and liquid places in which to keep it. I've been doing that since January and I can't believe how much I've learned about areas I previously considered to be as complex as a hotdog. If the economy is just taking a breather and will continue its long run, what's the big deal about sitting out for a segment or two and then getting back in? (Especially if you are gainfully employed, since that is in itself a form of economic investment.) And if everything goes to hell in a handbasket while you're in safe forms of cash-- expecially if it turns out to be a deflationary instead of inflationary or stagflationary environment--you're still looking decent. Maybe the fear just comes down to something akin to that no-savings-at-all friend of mine who can't stop buying lotto tickets for fear of missing out on the big win. Pathetic.
Posted by: dukeb | Sep 8, 2007 11:29:38 AM
Unless I missed it, you haven't said much about commercial paper. This from Minyanville:
"Total commercial paper outstanding has fallen 13.4% in one month. During the 2001 downturn, commercial paper peaked in November 2000 and slid through to December 2003. Over that three-year period it declined by only 22%."
Isn't this a big deal?
Posted by: Aaron | Sep 8, 2007 10:43:43 AM
Aaron, it's a big deal. It means ABCP isn't being rolled over because interest in ABCP has dried up due to uncertainty that the counterparty will be around to actually pay you back.
Posted by: SPECTRE of Deflation | Sep 8, 2007 11:40:41 AM
