WORK, UNEMPLOYMENT AND DEPRESSION
Last week the Bureau of Labor Statistics (BLS) released its jobs report for March. While the numbers were not out of line with expectations, we do need to repeat some well-worn caveats. Those who have been trading for a while are well aware of these, some may not be.
Government numbers are rarely what they seem. As my brother always says about the news, we know they're lying to us, we're just not always sure when or how much!
The expected number of job losses was 660,000. The headline number came in at 663,000. So far -- so good. Right? Right. But that's where the good news ends.
You see, 663,000 was just, in typical government fashion, the optimistic, sugar-coated version of the truth. It is a number commonly referred to as U-3. And it leaves a lot of stuff out.
For instance, imagine you’ve been unemployed for nearly a year now — and believe me, a lot of people have been. Imagine applying for job after job and being turned away. You’d get pretty tired of it, wouldn’t you? Maybe you’d even give up hope and stop looking.
Well, when you do, the magicians at the BLS declare that you’re no longer unemployed. But not because they step in to give you a cushy new job… but because you’re now considered a “discouraged worker.”
The BLS doesn’t include discouraged workers in its main unemployment numbers. Yet they don't just disappear. Even if they let their house go into default, they still need a place to live. Even if they are dining at a local soup kitchen or food pantry, they still have to eat.
U-3 also does not include the number of job seekers who have lost full time employment in a career position and have been forced to settle for part time work. So suppose you lost a six-figure job and are now working get a low hourly wage from Wal-mart a few hours a week. As far the BLS is concerned, you’re not unemployed — even if your earnings may make you feel like it.
Having fun yet? Because we’re still not done…
U-3 also does not include the monstrous revisions that the BLS has been making for prior months numbers. January’s revisions mark SIX STRAIGHT MONTHS of upwardly revised figures — done in such a manner that only those looking for them would see. Since it's not the "headline" figure, it gets little to no press. Additionally, five of the last six monthly revisions have been larger than the "acceptable margin of error" that the BLS maintains for itself of 5%!
The government has a less popularized figure of unemployment called U-6. It includes the discouraged workers, and those who have setled for part time work.
Now get this...the latest figure on U-6-- a mind blowing 15.6%! That is a full 80% more unemployment than what is fed to us by way of the headline number.
John Williams of ShadowStats, has estimated that number at 19.8%. This is critical, folks.
That’s because March marks 52 weeks from the time that the real downturn began last April. Unemployment benefits extend for up to 59 weeks. So in just over a month, these people are out of luck.
No one is sure how many people are in this boat. But even the most optimistic math reveals a grim picture.
Last April, there were officially 7.6 million people looking for work. Let's say 90% of them found jobs (although that is hardly likely). That leaves a staggering 700,000 people without a source of income next month. Nothing to spend in our consumer economy. And what little they had has now dried up.
Now multiply that over every month. So 700,000 more in May, then June, then July. Raise that to 950,000 in August. The numbers just keep climbing from there. Last month we reached 13.2 million people out of work. Of those, 25% (3.2 million) have been unemployed for six months or more.
When all of these people who have been aided along by their unemployment benefits come to the end of their rainbow and find no pot of gold, you better watch out. Things could turn really ugly in a hurry.
I point all this out for two reasons. One, so that you have a decent idea of what is really happening. And two, so that all of the misinformation out there can be put through some sensible filters and found to be nothing more than the Pollyanna-style foolishness it really is.
For instance, I recently read an economist who essentially believe all of the people running around shouting that the "sky is falling" are just absolutely uninformed. He said that the current job loss figures mean nothing, unless they are compared to the concurrent rise in the work force. Even now, he said, we are not approaching anywhere near the unemployment damage done in the 70s and 80s.
But here's the rub: with a nearly 90% rise in the work force since the 70s, we would need a 90% increase in the headline numbers from last month to make them parallel. Unless my math is wrong, the U-6 number is 85% of the U-3. The truth is, these numbers ARE bad, no matter how you slice and dice them. We are facing tidal wave of people with very little income.
PRICE DISCOVERY AND THE FUTURE OF CAPITALISM
On another note from last week, the Financial Accounting Standards Board (FASB), an "independent" agency that governs accounting, bowed to pressure from Washington to "reform" (read: corrupt) its accounting practices. (So much for independence...)
You have probably heard something about the abandoning of the "mark-to-market" practice of accounting, in favor of a new and improved "mark-to-model" means of accounting.
What's the difference... and why did Wall Street respond with glee? Well here it is.
With mark-to-market accounting, portfolio mangers had to list the value of their assets as what they could be sold at on the open market. This was a problem in the current environment. Since banks and fund mangers were holding assets that were falling in value, they were having trouble collaterizing these assets for loans or to list them for a profitable resale.
Their argument was that these bonds and mortgages were just as valuable as before. The only problem is that nobody wants them, so now they have to drop their price in order to make them saleable or to use them for collateral.
After all, most mortgages are not in arrears or in default. Therefore, we assume they will be paid in full. There is no need to mark them down as toxic assets or to market them with fire sale and distressed prices. If a man had a $750,000 mortgage, he still pays that to keep his house. So even if the "market value" fell to $400,000, he would still be paying off the old mortgage.
At first glance, it may sound like a reasonable assumption. But these days, it just doesn’t reflect reality. For instance, what if the man loses his job? Fifteen months ago, that was no real concern to anyone. Now there's a 1 in 5 chance it could be you. Or what if he just gets tired of paying $750,000 for a $400,000 house. Maybe he would just walk away and think about renting for awhile. After all, it's happening all over the country.
Thanks to the new rules, none of that matters. It takes a $400,000 house and says it is worth $750,000. And with that change, risk assessment goes right out the window.
To see what I mean, consider the bond market. Today a ten-year bond on GM can be purchased for 10 cents on the dollar, or at a 90% discount. Why? Because GM is on the brink of bankruptcy, and most investors realize that the risk of GM defaulting on its bonds in the next 10 years is almost 100%. So the bonds are price accordingly.
But if mark-to-model were in effect, things would be a different story. GE is still in business, and they have not yet defaulted on a debt payment. With this kind of thinking, the bond would be priced around 90 cents on the dollar.
This is the problem with the mark-to-model accounting plan.. It takes a 10-cent bond and says it is worth 90 cents. There is no risk or reality to the pricing mechanism. But since it appears that the collateral is worth far more than it was this time two weeks ago, the bank is worth more, its status is greater and its ability to borrow is greater. Welcome to Mr. Roger's "Land of Make-believe."
All these things will continue to weaken the foundation of an already crumbling dollar. It cannot stand like this forever, or even very long. It is true, we still serve as the world's reserve currency. But the dollar's days are numbered. Before very long we will know what that number is...
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Has God been surprised? Has he been blindsided? Does this make him drop his jaw in shock? Nothing is beyond his knowledge or out of his control so have no fear.
“Do not be anxious about anything, but in everything, by prayer and petition, with thanksgiving, present your requests to God. And the peace of God, which transcends all understanding, will guard your hearts and your minds in Christ Jesus.”- Philippians 4:6-7
Today's passage is from the New International Version.
Listen to this chapter Audio is taken from the Listener's Audio Bible narrated by Max McLean.
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