Saturday, August 7, 2010
When it comes to pointless (and bullish) reversion to the mean exercises,it seems nobody has a problem with saying stocks have to go back to 1,500 just because that's where they were, and the unemployment rate has to go back to 5% cause that's how we know the Fed is the immaculate and flawless piece of art it is, and always gets things under control to near-peak efficiency. Well, here at Zero Hedge we (again) decided to take the reversion to the mean approach and flip it, instead applying it to a deteriorating indicator, the labor force participation rate. The first chart below demonstrates the LFP rate, which a derivative of the chart we presented earlier, has now plunged to the lowest level in over 25 years, or 64.6% (gotta go back to December 1984 for the first time this was passed). So we decided to "normalize" the LFP by keeping it at the peak achieved at the turn of millennium, or December 1999, when it hit a peak of 67.1%. Now as everyone knows the US population has been soaring since then, and with the cost of living increasing ever more with each day, and as more and more family members are forced to join the work pool, it makes sense that in a normal economy, the LFP should continue rising instead of declining. We thus kept it constant at the 67.1% level (instead of doing the conservative thing and pushing it higher along the trendline), and ran the unemployment numbers through, assuming this part of the jobless equation was constant. To our surprise, we found that the U-3 rate (not the U-6), which today was supposed to be 9.5%, in fact turns out to be 13.0% as of July: an all time record save for the 13.6% recorded in December 2009. And if instead we use the trendline number of a 68.5% LFP rate, the unemployment rate today would be 14.7%. In retrospect we sympathize with Christina Romer's decision to get the hell out of Dodge.
Reported and adjusted labor force participation rate:
Running these numbers through the actual unemplyment calculation, reveals the following: while assuming a declining LFP rate we obviously get the 9.5% unemployment rate, assuming a peak 67.1% LFP results in a 13.0% unemployment rate. And if the labor force participation rate were to grow according to trendline, the jobless rate in the US today would have been reported at 14.7%, just about where the U-6 was reported, but based on an entirely different methodology.
(Reuters) - Friday's employment report provided an odd mix of unpleasant surprises that add another question mark to the pace of economic recovery.
Companies cut back on temporary hires, a segment normally considered a harbinger of future hiring. Government jobs dried up much faster than anticipated and not just because it saw the end of short-term census jobs.
The jobless rate held steady at 9.5 percent, defying expectations for a slight increase, but that was only because thousands more people dropped out of the labor force.
* Temporary jobs dropped by 5,600, reversing a streak of strong gains that economists had viewed as a hopeful sign that hiring would pick up.
* Normally, companies load up on temps at the beginning of a recovery when they are waiting for confirmation that growth is gaining momentum. This recovery has been unusual in that temporary hiring did not herald a jump in private hiring.
* Private hiring totaled a lackluster 71,000 in July, below expectations for 90,000 in a Reuters poll. June's tally was revised down to just 31,000 from an initially reported 83,000.
* Government hiring was another worrisome sign. The loss of 202,000 positions reflected the loss of 143,000 temporary Census jobs.
* The total also included 38,000 jobs lost in local government. For most municipalities, the fiscal year began on July 1, and government associations have been warning that huge budget gaps would force aggressive job and spending cuts. July's report suggests local governments got a quick start.
Note that temp jobs, which are a leading indicator, are also slowing appreciably!
One worrisome sign from Friday's report: Temporary-help jobs, typically a leading indicator for the rest of the labor market, fell in July. Temporary employment declined 5,600 after nine straight months of growth.
Public reports from the largest staffing firms still show growth in the temporary sector.
The government's figures would suggest "momentum has slowed dramatically," says Adecco's Mr. Gilliam. "If that's the case and that's where we're going for the next couple of months, it suggests a step back in the job-market recovery."
A weak labor market will keep incomes—and consumer spending, which accounts for 70% of U.S. economic output—under pressure. The Fed said Friday that consumer credit declined at a 0.7% annual rate in June as consumers continued to pay down debt. Revolving credit, which is mostly credit-card borrowing, fell at a 6.5% rate, the Fed said.
About 6.6 million people were jobless for more than 27 weeks in July, accounting for 44.9% of all unemployed. Workers who are finding positions after long searches are taking pay cuts to make ends meet.
Friday, August 6, 2010
SAN FRANCISCO (MarketWatch) -- Goldman Sachs Group Inc. /quotes/comstock/13*!gs/quotes/nls/gs (GS 155.20, +0.02, +0.01%) economists on Friday cut their forecasts for U.S. economic growth in 2011 and said they expect the Fed to respond to high unemployment with "another round of unconventional monetary easing," including more asset purchases. Economists led by Jan Hatzius and Ed McKelvey said they still expect growth in real gross domestic product to average 1.5% at an annual rate in the second half of this year. But they now see a more gradual pick-up by the end of next year. GDP is likely to average 1.9% in 2011 vs. a previous forecast of 2.5%, largely due to Congressional resistance to extending fiscal stimulus. The economists expect the Fed next week to announce a "baby step" to renewed unconventional easing next week.
Beans are still up for the day! (beans went negative after I posted this)
I remember one other occasion when soybean prices hit limit up, then limit down, the limit up a second time the same day!
Zero Hedge is my favorite finance blog. It's is the BEST!
July Non Farm Payrolls miss expectations, coming in at -131,000, way below the consensus of -65,000, yet the unemployment rate drops once again to 9.5% as even more people drop out of the labor force. Total Private Payrolls rise only 71k, on consensus estimates of +90k. The June Jobs report is revised majorly downward to -221K, from -125K, as the double dip gets yet another validation. The 2 Year Treasury just hit another fresh all time low of 0.5136%. And the stunner: those working actually declined by 159,000 to 138.960 million, even as another 381 thousand left the labor force between June and July, resulting in an actual drop in the unemployment rate from 9.6% to 9.5%. Another NFP debacle which will certainly cause stocks to sure by at least 5% as QE 2 is now absolutely inevitable.
- U-6, or real unemployment, is flat at 16.5%
- The average duration of unemployment is now 34.2 weeks, Median 22.2
- 44.9% have been out of a job for longer than 27 weeks.
- Birth/death adjustment just 7k, compared to 147k in June
- The only silver lining: average hourly earnings up 0.2% to $22.59, even as total private hours increased from 34.1 to 34.2, as those employed have to do triple-duty
Again, U.S. nonfarm payrolls came in weaker than expected, and while some of the components offered up some good news, like a 36,000 rise in manufacturing employment and an uptick in the workweek, the report overall was quite soft. If this were summer school, I’d be tempted to give it a C-minus, and only because after a terrific week vacationing in Chicago, I’m in a generous mood.
The headline came in at -131,000 versus the consensus estimate of -65,000 (private payrolls did rise 71,000 but this was below the 90,000 increase that was widely expected). And, the net revisions to the prior two months was -97,000, so in effect the “level” of employment was 153,000 lower than what the economics community was penning in the for the month. So, the shortfall was even greater than the headline “miss” would suggest, counting in the revisions.
The Establishment survey tends to understate what is happening at the small business level, which is why it is imperative to keep a close eye on the household survey — and employment here contracted 159,000 in July after sliding 301,000 in June and 35,000 in May. Historically, the odds of seeing three whiffs in a row in this survey without the economy either being in a recession or quickly heading into one is 50 to one.
There was palpable relief in some circles that the unemployment rate managed to stabilize at 9.5% in July. The problem here is that the labour force continues to shrink as discouraged workers drop out an alarming rate for an alleged economic recovery — down 181,000 in July and down 1.2 million in the past three months. If the labour force merely stayed the same in the past three months — keeping in mind that in “normal” recoveries the labour force swells as job opportunities expand — the unemployment rate would be sitting at 10½% today. What investors should really be keying on — no doubt the Fed is — is the “employment rate” or the employment-to-population ratio, which fell to 58.4% from 58.5% and is back to where it was at the turn of the year.
While it was encouraging to see the work week rebound, two other leading indicators of job trends — the direction of revisions and temp agency hiring — point to lingering malaise. In fact, the 5,600 drop in temps was the first decline since last August. And, we already know that 479,000 on jobless claims (a three-month high) is the starting point; therefore, we are likely on our way for another poor August reading on the employment backdrop.
To put it all in context, by this stage of the cycle, fully 31 months after the onset of recession, the U.S. economy has not only recouped all of the losses induced by the prior downturns but employment is already at a new high by now (having smashed the previous pre-recession peak by 1.1 million jobs or 2.3%). And, here we are today, sadly, still 7.7mln (or 5.6%) below the December 2007 peak. It will probably take at least five years to climb out of this hole.
As I said, there were some bright spots in the report. Incomes edged up. The workweek did likewise, though is still at depressed levels. The manufacturing sector is in revival mode, though part of this has reflected the powerful inventory cycle that seems to have run its course. The overspending culprits in the prior bubble phase, notably construction, financials and state/local government continue to shed jobs and these sectors comprise 25% of the overall employment pie. To put the math into perspective, for every 1% decline in jobs in these three shrinking areas of the economy, the manufacturing sector has to post a 3% increase. Daunting to say the least.
We need a little perspective on the economic backdrop because I am becoming increasingly concerned. The fact that some at the Fed are beginning to warm towards the idea of more quantitative easing, vocal support from a growing number of Democrats to extend the once-reviled Bush tax cuts, and now chatter of another government-led bailout of “upside-down” homeowners, suggests that I am not alone in this concern.
Even before the release of the nonfarm payroll data, we received the ADP number for July, and while fractionally surpassing market expectations, the results were simply awful. To put it into some perspective, when the economy was coming out of its lull in 2003 and 2004 we were already north of 100k on ADP, on a monthly basis, and by 2005-06 we were printing 200k-250k numbers consistently. A 42k print is actually horrible and is telling you that the economy is either fundamentally weak or that companies are still rationalizing on labour.
Again, to put a 42k print into context, it printed 78k in December 2007 when everyone thought a recession was being averted (it started that month). That same month, the ISM non-manufacturing index came in at 52.3 and if I recall, the widespread sentiment at that time was that we were seeing a pause that refreshes. To sum it all up, the data points don’t tell you a whole lot right now that is very good. They certainly don’t give anyone a green light for cyclical exposure any more than the December 2007 data-flow managed to do. And, as for the non-manufacturing ISM, like its manufacturing counterpart, showed that the number of industries reporting “growth” is on the decline — down to 13 in July from 15 in June and 16 in May, and at a five-month low.
What we know is that we are heading into the third quarter knowing that there was minimal growth coming from that key 70% of the economy otherwise known as the U.S. consumer. July’s data on chain store and auto sales were both below expectations. Personal bankruptcies jumped 9% in June (138,000 personal filings during the month) and 2010 is now on track to be the highest in five years, with respect to consumer insolvencies (908,000 thus far or just under 1% of the total number of households). If capital spending is going to do the heavy lifting, keep in mind that just to keep the economy steady, it has to accelerate by nearly 10 percentage points for every percentage point slowing in household spending. Now that is a daunting task.
Treasury yields continue to reach new all-time record lows literally every day. This is a sign of very deep concerns that something very ominously dark is coming. Since the treasury and currency markets are the most liquid in the world, I tend to give them more credence than the stock market.
- It could be a top and exhaustion.
- It might me liquidation of trades before the weekend. There is often a liquidation before a weekend, since many traders don't want to hold positions over a two-day period when the weather may change dramatically.
- It could be longs taking profits.
- It might be just sell stops being hit.
Bad for Obama because it suggests the rats are jumping the sinking economic ship. Whisper rumors are that Obama refuses to listen to her worries about deficits. Same with Orszag! Trouble afoot!
Thursday, August 5, 2010
by Gonzalo Lira:
Currently, the United States is conducting one of the most remarkable experiments in fiscal finances in world history.
I couldn't help noticing his mention of the bad economics results this week.
This blog post originally appeared on RealMoney Silver on Aug. 5 at 7:36 a.m. EDT.
Most, probably, of our decisions to do something positive, the full consequences of which will be drawn out over many days to come, can only be taken as the result of animal spirits -- a spontaneous urge to action rather than inaction -- and not as the outcome of a weighted average of quantitative benefits multiplied by quantitative probabilities. -- John Maynard KeynesA critical aspect of animal spirits is trust, an emotional state that dismisses doubts about others. And the move from about 1,020 to 1,130 in the S&P 500 over the past five weeks has reignited investors' animal spirits. Indeed, many of the skeptics of early July have been transformed into raging bulls, as it usually is among those who worship at the altar of price momentum.
"When the facts change, I change my mind. What do you do, sir?" -- John Maynard KeynesBut, have the facts really changed? While I continue to believe that the July 1 lows will not be revisited in the months ahead, as the hyperbole surrounding a double-dip in the domestic economy has abated, along with steady improvement in certain risk markets (e.g., junk bond yields down, euro up, industrial commodities higher, two-year swaps down), the facts (i.e., the fundamentals) have not changed much.
The sharp ramp up in the indices has been surrounded by the continued ambiguity of the economic soft patch, which grows daily and was reinforced with this week's sluggish data -- factory orders, pending home sales, personal income and spending were all weak. Moreover, recent economic releases now point to a revision of second-quarter GDP to under 2% later this month.
And with the structural increase in unemployment, the economic outlook for the second half of 2010 still looks less than certain, especially relative to the magnitude of the market's rise and to the rise in animal spirits that has accompanied it.
"The man who is a pessimist before 48 knows too much; if he is an optimist after it, he knows too little." -- Mark TwainI am 61 years old! My baseline expectations for a subpar economic expansion and a range-bound market remain unchanged. I continue to look for a relatively narrow range in the S&P 500 of between 1,025 and 1,150 over the balance of the year. As we are now moving toward the higher end of the projected range, I plan to de-risk, and, should the domestic economy deteriorate further, I can see moving back into a net short position.
Intermediate term, I continue to expect a period of inconsistent and uneven economic growth that will be difficult for corporate managers (who do not have pricing power and face tepid top-line growth) and investment managers to navigate. With an elevated unemployment rate, the economy will feel worse than it is. In the quarters ahead, there will be times when it will appear as though we are reentering a recession; at other times, it will appear that we are reentering an expansionary phase.
From my perch, lumpy growth and the emergence of nontraditional headwinds (fiscal imbalances at the federal, state and local levels, higher marginal tax rates, a costly and burdensome regulatory backdrop, etc.) will serve to cap the market's upside valuations and target level within a few percentage points from the current level.
To conclude, on stocks and bonds, consider me at the polar opposite of Mae West, who once exclaimed, "I only like two types of men, domestic and imported."
Doug Kass writes daily for RealMoney Silver, a premium bundle service from TheStreet.com. For a free trial to RealMoney Silver and exclusive access to Mr. Kass's daily trading diary, please click here.
from Peter Morici at the Street.com:
Forecasters expect the Labor Department Friday to report the economy shed 70,000 jobs in July and unemployment rose to 9.6%.
Economists expect the private sector created about 100,000 jobs but government employment fell 170,000 as more temporary census jobs disappeared.
Thirteen months into recovery from a deep recession, this is disappointing. The economy must add 13 million private sector jobs by the end of 2013 to bring unemployment down to 6%. President Obama's policies are not creating conditions for businesses to hire those 320,000 workers each month, net of layoffs.
Net of inventory adjustments, the economy demand for goods and services is growing at only 1.3% a year.
In the second quarter, consumer spending, investment in new structures, equipment and software, and government purchases added 4.1% to demand. But as imports grew much more rapidly than exports, the trade deficit tapped off 2.8%. The difference -- 1.3 % -- is annual growth in demand for U.S.-made goods and services. That has been the pace since recovery began in July 2009.
Businesses can accommodate up to 2% growth in demand by improving productivity and not adding workers. Unless the rapid growth in imports can be curbed, the U.S. economy is headed for very slow growth and rising unemployment.
Washington isn't helping.
The massive permanent expansion in federal spending and regulatory oversight built into the president's budget is discouraging private hiring by raising fears of higher taxes and regulation. Simply, higher taxes discourage purchases of non-essentials and high-line durable goods, like better appliances, more appointed automobiles and higher-quality homes, while higher taxes and tougher regulation increase incentives to offshore production to locations where those burdens are less.
Prior to the crisis in 2007, President Bush spent 19.6% of gross domestic product and the deficit was $161 billion in 2007; two years into the economic recovery in 2011, Obama's budget projects outlays at 25.1% of GDP and a $1.3 trillion deficit in 2011.
All that spending will require higher taxes, and raising taxes on families earning $250,000 simply won't be enough finance it. Higher rates for those families will raise taxes on half the income earned by proprietorships -- those small- and medium-sized businesses will invest less to create jobs.
Much of the $787 billion stimulus money was squandered on pet projects that created few jobs. For example, grants to build green buildings displace other planned construction and didn't increase the amount of commercial space rented or built over the next several years.
The biggest banks received more than $2 trillion in assistance from the Troubled Assets Relief Program and the Federal Reserve to clean up their balance sheets and recapitalize securities trading, while the 8,000 regional banks got little assistance and remain burdened by toxic real estate loans. Consequently, more than 230 regional banks have failed, and small- and medium-sized businesses cannot get credit to expand.
In addition to credit, businesses need more customers to create jobs, and the trade deficit -- in particular, imports of oil and the imbalance with China -- cut a huge hole in demand for U.S. goods and services. Without addressing oil and China, other efforts to create jobs are futile.
The president's moratorium on deepwater drilling, though popular with environmental fundamentalists, kills jobs two ways: directly, by laying off workers in the oil and gas industry; and indirectly, by sending too many consumer dollars abroad that could be spent here.
Detroit has the technology to build much more efficient gasoline-powered vehicles now, and a shift in national policy to rapidly build these would reduce oil imports and create many jobs.
China's undervalued currency makes its products artificially cheap and deceivingly competitive on U.S. store shelves, but its promise of new flexibility on the yuan hasn't translated into meaningful revaluation.
If President Obama wants to fix the federal deficit and create jobs, perhaps he should dust off George Bush's 2007 budget and spend a lot less, get serious about better using and developing more conventional fossil fuels, and finally fixing trade with China.
In a reminder of how weak the job market is, the government said Thursday that first-time claims for unemployment benefits rose last week to their highest level in four months.
Claims rose by 19,000 to a seasonally adjusted 479,000. Analysts had expected a small drop. Claims have now risen twice in the past three weeks.
Economists closely watch initial jobless claims because they are considered a gauge of the pace of layoffs and an indication of employers' willingness to hire. And even at a time when profits are coming back, businesses aren't very willing.
Pierre Ellis, an economist at Decision Economics, wrote in a note to clients that an "unyielding flow of layoffs" suggests employers are still not comfortable with the size of their staffs.
And with the job market still looking shaky, Americans are in no mood to spend freely.
Wednesday, August 4, 2010
The United Nations warned over the world's dependence on "erratic" Black Sea wheat as it cut its forecast for the world crop by 15m tonnes, injecting extra zest into the grain's renewed rally.
Wheat for November delivery closed at two-year highs in both Paris, where it finished up 2.3% at E209.00 a tonne, and London, where it ended 2.3% higher at £151.50 a tonne.
Chicago wheat for September hit $7.30 a bushel, a fresh 22-month high for a spot contract.
The rises reflected continuing concerns about Russian wheat exports, and followed a cut to 651m tonnes in the UN Food and Agriculture Organisation's forecast for the global crop.
The FAO attributed the revision to the "devastating drought" in Russia, and lower harvest forecasts expected for its Black Sea neighbours Kazakhstan and Ukraine, adding that the shortfalls "raise the likelihood of higher wheat prices compared to the previous season".
Furthermore, the drought threatened problems for winter grain plantings, "with potentially serious implications for world wheat supplies in 2011-12". Russian farmers usually begin sowings for next year's harvest in the last half of August.Indeed, the "turmoil" in wheat markets caused by the woes of the former Soviet Union trio illustrated the perils to importers of depending so heavily on the region.
"The turmoil… is evidence of the growing dependence on the Black Sea region, an area renowned for erratic yields, as a major supplier of wheat to world markets," the FAO said.
The US Department of Agriculture describes Kazakhstan and Russia's Volga Valley, which has been particularly badly hit by drought, as zones of "risky agriculture". Kazakhstan is prone to droughts two out of every five years.
The UN's warning came as Russia won its second tender in a week to supply wheat to Egypt, the world's biggest importer of the grain, and is set to supply 180,000 tonnes at prices of $252-270 a tonne, excluding freight.
Indeed, in yesterday's opening missive, I argued to further reduce long exposure as we traveled toward the higher end of my expected second-half trading range in the S&P.
I continue to believe that the July 1 lows will not be revisited in the months ahead as the hyperbole surrounding a double-dip in the domestic economy has abated, along with steady improvement in certain risk metrics and risk markets (e.g., junk bond yields down, euro up, industrial commodities higher, two-year swaps down).
Nevertheless, the ambiguity of the economic soft patch grows daily and was reinforced by Tuesday's sluggish data (factory orders, pending home sales, personal income and spending were all weak). Moreover, a reduction in inventories and some other influences now point to a revision of second-quarter GDP to under 2% later this month.
Since the generational low, I have argued that we are in a period of inconsistent and uneven economic growth that will be difficult for corporate managers (who do not have pricing power and face tepid top-line growth) and investment managers to navigate. In this anticipated sloppy setting, it will sometimes appear, in the quarters ahead, that we are reentering a recession. At other times, it will appear that we are reentering an expansionary phase.
Lumpy growth and the emergence of nontraditional headwinds (fiscal imbalances at the federal, state and local levels, higher marginal tax rates, a costly and burdensome regulatory backdrop, etc.) will serve to cap the market's upside.
Supporting the market (among other factors) will be low interest rates and reasonable P/E multiples (especially when viewed vs. generational low interest rates and quiescent inflation).
As well, the risk premium (S&P earnings yield less the risk-free rate of return in fixed-income) is at the highest level since 1980, when the bull market started. This means that stocks are cheap relative to bonds and/or bonds are way overpriced and possibly in bubble territory.
As I wrote yesterday, I tip in favor of shorting bonds over being long stocks. I believe that my downside in a bond short is limited and, if stocks rally, the reasons behind that rally (economic clarity) could produce a larger drop in fixed-income than a gain in equities.
How expensive are bonds? Consider, that at a 2.89% yield on the U.S. 10-year note fixed-income is priced at a P/E multiple of 34.5x (the inverse of 2.89%) against the S&P's P/E multiple of only 12.0x.
Regardless of one's views, erring on the side of conservatism seems to be the preferable course of action, especially after the sharp rise in the U.S. stock market.
Doug Kass writes daily for RealMoney Silver, a premium bundle service from TheStreet.com. For a free trial to RealMoney Silver and exclusive access to Mr. Kass's daily trading diary, please click here.
WASHINGTON(MarketWatch) -- U.S. private-sector firm employment rose 42,000 in July, according to the ADP employment report released Wednesday. "July's rise in private employment was the sixth consecutive monthly gain," said Joel Prakken, chairman of Macroeconomic Advisers, which produces the report from anonymous payroll data supplied by ADP. "However, over those six months increases have averaged a modest 37,000, with no evidence of acceleration." On Friday, the government is scheduled to report nonfarm payrolls for July, and economists polled by MarketWatch are looking for a decline of 60,000. That payrolls estimate includes an expected increase of 96,000 jobs in the private sector, and layoffs of about 145,000 temporary Census workers.
Contracts for pending sales of previously owned U.S. homes fell to a record low in June as buyers sat on the sidelines, a survey from the National Association of Realtors showed on Tuesday.
The Realtors said its Pending Home Sales Index, based on contracts signed in June, fell to a record low 75.7 from a revised 77.7 in May. Economists polled by Reuters had expected a rise of 0.6 percent.
Tuesday, August 3, 2010
Or you heard it from Dallas Federal Reserve President Richard Fisher, who recently said companies were "hoarding cash" but were afraid to start investing. Or on CNBC, where experts have been debating what these corporations are going to do with all their surplus loot. Will they raise dividends? Buy back shares? Launch a new wave of mergers and acquisitions?
It all sounds wonderful for investors and the U.S. economy. There's just one problem: It's a crock.
Investors hear July echoesThis July resembled the previous July in several key respects. What does this suggest for the markets for the rest of 2010?
You'd think someone might have noticed something amiss. After all, we were simultaneously being told that companies (a) had more money than they know what to do with; (b) had even more money coming in due to a surge in profits; yet (c) they have been out in the bond market borrowing as fast as they can.
Does that sound a little odd to you?
A look at the facts shows that companies only have "record amounts of cash" in the way that Subprime Suzy was flush with cash after that big refi back in 2005. So long as you don't look at the liabilities, the picture looks great. Hey, why not buy a Jacuzzi?
According to the Federal Reserve, nonfinancial firms borrowed another $289 billion in the first quarter, taking their total domestic debts to $7.2 trillion, the highest level ever. That's up by $1.1 trillion since the first quarter of 2007; it's twice the level seen in the late 1990s.
The debt repayments made during the financial crisis were brief and minimal: tiny amounts, totaling about $100 billion, in the second and fourth quarters of 2009.
Remember that these are the debts for the nonfinancials -- the part of the economy that's supposed to be in better shape. The banks? Everybody knows half of them are the walking dead.
The Fed data "underline the poor state of the U.S. private sector's balance sheets," reports financial analyst Andrew Smithers, who's also the author of "Wall Street Revalued: Imperfect Markets and Inept Central Bankers," and chairman of Smithers & Co. in London.
"While this is generally recognized for households," he said, "it is often denied with regard to corporations. These denials are without merit and depend on looking at cash assets and ignoring liabilities. Cash assets have risen recently, in response to the fall in inventories, but nonfinancials' corporate debt, whether measured gross or after netting off bank deposits and other interest-bearing assets, is at peak levels."
By Smithers' analysis, net leverage is nearly 50% of corporate net worth, a modern record.
There is one caveat to this, he noted: It focuses on assets and liabilities of companies within the United States. Some U.S. companies are holding net cash overseas. That may brighten the picture a little, but the overall effect is not enormous, and mostly just affects the biggest companies.
That U.S. companies are in worse financial shape than we're being told is clearly bad news for those thinking of investing in U.S. stocks or bonds, as leverage makes investments riskier. Clearly it's bad news for jobs and the economy.
But why is this line being spun about healthy balance sheets? For the same reason we're told other lies, myths and half-truths: Too many people have a vested interest in spinning, and too few have an interest in the actual picture.
Journalists, for example, seek safety in numbers; there's a herd mentality. Once a line starts to get repeated, others just assume it's correct and join in.
Wall Street? It's a hustle. This healthy balance-sheet myth helps sell stocks and bonds. How many bonuses do you think get paid for telling customers the stark facts, and how many get paid for making the sale?
You can also blame our partisan age too. Right now, people on the right have a vested interest in claiming businesses are in healthy shape. That makes the saintly private sector look good, and demonizes President Barack Obama and Big Government for scaring away investment. Vote Republican! Meanwhile, people on the left have an interest in making businesses sound really healthy too: If greedy companies are hoarding cash instead of hiring people, they can cry "Shame on them! Vote Democratic!"
As ever, the truth is someone else's problem and no one's responsibility.
When it comes to the economy, let's just hope the public is too hopped up on painkillers and antidepressants to notice. If they knew what was really going on, there'd be trouble.
A sign of desperation. It has never worked, but they still have plans to try!
Federal Reserve officials will consider a modest but symbolically important change in the management of their massive securities portfolio when they meet next week to ponder an economy that seems to be losing momentum.
The issue: Whether to use cash the Fed receives when its mortgage-bond holdings mature to buy new mortgage or Treasury bonds, instead of allowing its portfolio to shrink gradually, as it is expected to do in the months ahead. Any change—only four months after the Fed ended its massive bond-buying program—would signal deepening concern about the economic outlook.