A New Employment Crisis, Cash for Clunkers, Buy This Commodity and More!

by Addison Wiggin & Ian Mathias

  • Yet another jobs dilemma… millions on the verge of exhausting unemployment benefits
  • Our macro-man’s take on the “cash for clunkers” program… and one detail we just can’t believe
  • Chris Mayer on one commodity that “still looks very good”
  • Dollar falls, but for the wrong reasons… Chuck Butler explains


  Hey look, a whole new crisis: By the end of the year, as many as 1.5 million jobless Americans will have exhausted their unemployment benefits.

The National Employment Law Project, a privately funded advocate for the unemployed, released a study over the weekend that’s caused quite a stir… a perfect storm brewing for nationwide joblessness. According to the group’s research, over 140,000 people have collected the maximum unemployment benefits the government allows. By December, there will be 1.4 million more.

So a swell of long-term-jobless folks suddenly stripped of government support, right as the unemployment rate blows past 10% and toward 11%? It’s already over 15% in Michigan… could get a little nasty.

Thus, Congress is under pressure to extend benefits again. Emergency legislation has already bumped unemployment programs to 79 weeks in half the states, about triple the norm and the longest since its 1930 inception (the rest of the states have programs ranging from 46-72 weeks). Word on the street is that Congress will tack on another 13 weeks for states with unemployment rates over 9%… at a cost of $70 billion.

  Speaking of congressional lifelines, the “cash for clunkers” program might live on, if the Senate sees fit. As we mentioned Friday, the program burned through a four-month budget in a week. $1 billion later, it rests in the Senate’s hands today. Legislators have just a few days to OK an additional $2 billion before the program is completely bankrupt. We’d be surprised if it didn’t go through… the people want their free lunches.

  “The “cash for clunkers” program provides a microcosm of the unimaginable macrocosm,” writes our macro-economic adviser, Rob Parenteau. “Funding for this trade-in program was originally expected to last until October, but the response has been so overwhelming that it’s already running out of money and Congress is rushing to add more cash.

“So here we have it. The government dangles a subsidy worth over $4,000 before the eyes of otherwise tapped-out households. The auto dealers tirelessly hype the offer. Pavlov’s dog hears the bell and starts drooling all over himself. Auto sales are shifted from future sales periods into the present, and voila, the can is kicked one more block down the road while the fiscal deficit winds higher. If we had to capture the policy steroid game in a nutshell, that pretty much sums it up. But it does work in the near term.”

And what of the long term? Click here for Rob’s year-end expectations.

  Just one more thing about cash for clunkers… have you heard what the dealers do with the “clunkers”? By government decree, every traded-in clunker has to have sodium-silicate poured in its engine and run until rendered completely and eternally useless. Doesn’t matter if the engine’s brand-new — less than 18 mpg and it’s destroyed. No resale, no charity, no exports to foreign nations… not even a moment’s consideration to whether the drivetrain could be used by anyone, for anything, anywhere.

All clunkers are then towed to the scrap yard, where some parts are stripped and the rest is smashed and shredded. (And you know that metal scrap will get shipped straight to China… at least someone will use it.)

  The American manufacturing sector is still contracting, but just barely. The ISM manufacturing index rose from 44.8 to 48.9 in July, says the ISM today. That’s the best score since September and just 1.1 points away from crossing the contraction/expansion threshold. Still, that’s after almost an entire year of manufacturing contraction.

  The Chinese manufacturing sector grew for the fifth month in a row in July, the Chinese government announced today. Their purchasing managers index rose to 53.3 last month, from 53.2 in June. Like the ISM, a score above 50 indicates expansion.

  Emerging stock markets are back to pre-credit crisis highs. Early this morning, the MSCI Emerging Markets Index hit 855, the highest level since Sept. 12, the Friday before Lehman bit the dust. That’s still well off its all-time high of 1,338, but the index’s 44% return so far this year puts the American bear market rally to shame.

  The S&P 500 opened up about 0.5% this morning. Stocks are on the rise thanks to momentum from July’s nearly 9% rise, the ISM, expectations for this afternoon’s auto sales numbers and some big earnings beats in Europe.

In particular, HSBC and Barclays both reported surprise second-quarter profits this morning. Of course those unexpected revenues came from the investment-banking units in both companies… but that’s the kind of fine-print detail they can worry about next quarter.

  With earnings season largely over, we suspect the market will start looking closer at economic data, and this will be a helluva week for that sort of thing. Auto sales should be out by the time you read today’s 5. Personal income and spending data plus pending home sales will be revealed tomorrow. ADP does their employment guess Wednesday, before the latest on factory orders and the ISM service sector reading. Thursday, we’ll see initial jobless claims for last week, and then Friday, the BLS will announce the official July jobs report. For the blow-by-blow, stick with The 5.

  Commodities are flying off the virtual shelves today. Another positive manufacturing report from China and the American stock rally offer strength to the “global rebound” argument. Thus, oil is up almost $2, to $71 a barrel. Copper’s up 10 cents (3.8%), to $2.70 a pound. Gold is getting a nice bump too, up $25 from Friday’s low, to roughly $960 an ounce.

  “All the factors that set the fertilizer bull market in motion in the first place are still here,” says Chris Mayer, fresh off PotashCorp’s quarterly conference call. “Populations are still growing. Diets are shifting toward more fruits, vegetables and meats — all fertilizer intensive. As Potash CEO Bill Doyle says, ‘This will continue to put pressure on global grain supplies, as farmers are being challenged to produce more with land and water resources that are shrinking on a per capita basis.’

“Fertilizers are a key part in meeting that challenge. And the farmers are financially in good shape to buy more. The debt-to-equity ratio for the U.S. farmer is only around 10-15%.

“Overseas, farmers are subsidized directly. In India, the government picks up the tab of higher fertilizer costs. As Doyle pointed out: ‘With low grain stocks and low yields and 1.2 billion people, they’re not going to drop the ball. They’ll continue to support the Indian farmer.’ China has also started to subsidize the Chinese farmer, helping out with seed, machinery and fertilizer.

“But since fertilizer application rates fell around the world this year, it is hard to imagine a strong harvest. We will see. As grain inventories are already low, I expect we’ll need a strong planting season in early 2010. That means a strong demand for fertilizers.

“At current pricing for potash, there is no incentive to boost production by investing in new capacity. The financial crisis also laid low any plans for more potash. A greenfield project — that is, one started from scratch — needs a higher price to make it work.

“As Doyle pointed out, the cost for a 2-million-tonne facility in Saskatchewan is approaching $3 billion. That doesn’t include the infrastructure you need around it. Plus, it would take nearly a decade to get that new project generating a return on investment.

“So from an investment point of view, potash still looks very good.”

For specific advice on this trend, you should check out Chris’ Capital & Crisis.

  The stock market rally has pushed the dollar index to a new 2009 low. Now at 77.9, you’ll have to go back to late September 2008 to find the index this beaten down.

While our hopes for the dollar are grim, this doesn’t seem to be the proper way to new lows… we wouldn’t be surprised at all if the dollar index pops back above 80 when the stock sucker’s rally runs out of steam.

But until then, the pound is the apple of the market’s eye (heh, further proof something ain’t right with the FX market). The U.K. currency is up 4 cents from Friday’s low, to $1.68, the highest it’s been since October. The euro is up as well, to $1.43. Commodity currencies are looking strong today as well… both the Canadian dollar and the Aussie are up about a penny, to 93 cents and 84 cents, respectively.

  “When you look at the proxy currency for commodities and global growth, the Aussie dollar,” writes Chuck Butler, “and it’s trading at the highest level we’ve seen this year, you’ve got to think that the traders and others are thinking that the worst of the global recession is in the rearview mirror. Now, I think that’s a little like putting the cart before the horse, as we just don’t have enough data that hasn’t been massaged and cooked to prove that we’re coming out of the global recession. But hey! If the traders, hedge fund dudes, and currency participants want to play Sly Stone and take currencies higher, then I suggest we not stand in front of that bus!

  Last, both Larry Summers and Tim Geithner refused to rule out a middle-class tax hike over the weekend. The two economists, both at the highest ranks of government, were pressed on various Sunday politics talk shows about solutions for the expanding deficit… roll the videotape:

"There’s a lot that could happen over time," Summers said, when asked about new taxes on Face the Nation. “It’s never a good idea to absolutely rule things out no matter what."

“If we want an economy that’s going to grow in the future,” Tim Geithner similarly sidestepped on This Week, “we have to bring those deficits down very dramatically… That’s going to require some very hard choices.” The Treasury secretary refused to rule out broad tax hikes as one of those “hard choices.”

Our take… how can anyone possibly be surprised? President Obama ardently promised the middle class “you will not see any of your taxes increase one single dime” during his campaign… the kind of political hubris that almost assures the opposite. And more importantly, with the size of our debt burden, it’s only a matter of time. The only surprise is that it’s being considered so soon.

  “My Cadillac DTS gets only about 18 mpg for my normal driving,” writes a reader in response to Friday’s inbox, “so I suppose I’m destroying the economy and the climate. Except for one thing: This ‘idiot’ doesn’t have a 30-mile per day commute — more like 7 miles per day. One tank of gas lasts me three or four weeks. I’m 6’5” tall, and when I purchased the car, I had two children and an elderly mom that I drove around (yes, to church on Sunday).

“I think the idiots are those who bought homes so far from where they work that they spend their lives sitting in tiny tin can cars in traffic for hours a day, listening to Books on Tape, watching their bedroom community housing investment lose 35% of its value, getting a sanctimonious 35 mpg …and insulting others whom they know not. But then, that’s just me.”



Ian Mathias

The 5 Min. Forecast

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