Employment Perspective, Fall Forecast, A Bright Idea, Cash for Clunkers and More!

by Addison Wiggin & Ian Mathias

  • Mainstream gushes over improved jobs report… our reaction — guided by history — below
  • Risk aversion retreats? Rob Parenteau’s macro forecast for the fall
  • Whose debt is safer, California’s or Russia’s? Turkey’s or NYC’s?
  • Bright idea: Major bank pays traders with mortgage-backed securities
  • Plus, “cash for clunkers” lives on… readers, The 5’s editors rant


  In this economy, this is as close as it gets to “good news.”

  America lost 247,000 jobs in July, the Labor Department announced today. That blows all popular expectations out of the water: ADP’s guess on Wednesday of 371,000 lost jobs didn’t come close, and even the Street’s expectations of 325,000 was beaten handily. At an official 247,000 jobs, it’s the best monthly report since August 2008.

According to the government, the unemployment rate actually fell, from 9.5% to 9.4%. The Labor Department revised June and May job losses for the better, taking out roughly 43,000 job losses previously reported. The average hourly workweek inched up from a record low 33 hours in June to 33.1 hours. The number of workers seeking full-time employment but regretfully working part-time fell 2%. And thank heavens: The government is adding new jobs at a slower pace.

  But of course, it’s all a matter of perspective:

· July was the 19th month in a row of net job losses

· Since the start of 2008, 6.7 million jobs have been lost

· A record 5 million people have been unemployed for more than 6 months

· The unemployed have been jobless for an average 25.1 weeks, a 61-year high

· And at the risk of belaboring the obvious, a quarter of a million lost jobs in one month is hardly worth celebrating.

Still, looking back, there’s a clear trend over the last six months — the job market has stopped plunging into the abyss. “The recovery is on!” we heard a CNBC anchor rejoice.

  But we want to look WAY back today. Since everything in this Great Rescission is so akin to the Great Depression, how do the unemployment rates compare?

Of course, this argument has a million more layers that we couldn’t possibly cover in our humble 5 Min.… like the method unemployment rates are calculated by now and then, the differences between the two downturns, etc. But you get the idea — the same way this is no garden-variety recession, we don’t expect a quick-and-easy recovery.

  “Our base case is that the U.S. economy is exiting recession and entering a shallow, tentative recovery that is primarily government led,” writes the steward of The Richebacher Letter, Rob Parenteau. “That is not the kind of sound growth that Dr. Richebächer favored, but if private investment is not quite ready to ramp up, we will take public infrastructure investment in the interim, with the hope that will have spillover effects on private businesses. It will take time to repair private-sector balance sheets, and this will weigh on growth prospects well into 2011.

“In the meantime, as with the March-June relief rally, when investors recognized the end of the free-fall phase, we anticipate the perception that the U.S. recession is over will spread across investors over the next two-three months, and another run-up in risky assets and inflation hedges (no doubt at the expense of less-risky asset classes like Treasuries) lies ahead.

“Ultimately, though, the world needs to find a new global growth model, and only the barest of outlines remains visible at this point. Our hope is that the next global growth model will be based on the principles that guided Dr. Richebächer’s understanding of sound growth, real wealth, profitability and sound credit.”

So what should you expect for the rest of 2009 and 2010? Click here for Rob’s forecast.

  Regardless, the American stock market is off to the races today. As we write, the better-than-expected jobs report has bumped major indexes to a 1.6% gain.

  Here’s today’s real oddity: The dollar is on the rise too. The jobs report has reversed the dollar’s role, at least for the day. Once a flight to safety when the going got tough, today the dollar is actually being traded on the merits of the U.S. economy. What a novel idea! The dollar index jumped almost a full point on the news, from 78 to 78.8. We’ll be keeping an eye on this one.

  That dollar strength has put a little pressure on oil and gold. Oil gave up the $72 mark and now goes for $71 a barrel. Gold is down about $5, to $958 an ounce.

  Good news for gold: European central banks have signed a pact to sell less gold. The ECB and 18 other banks agreed to sell no more than 400 metric tons of the stuff from now till 2014. Their former agreement was capped at 500 tons.

The agreement gives “the market some stability and knowledge that central bank sales would occur in a regulated framework, instead of unexpected ad hoc sales that would be destabilizing to the gold price,” said the World Gold Council. Though we hasten to add… it wouldn’t be hard for these banks to break or alter the agreement.

  The debt market now deems it safer to buy emerging-market debt than bonds from troubled U.S. states. The average cost of sovereign debt swaps in the 45 emerging nations tracked by Bloomberg is now 314 basis points. That’s a 60% drop from just five months ago. Russian default swaps run around 255 basis points these days, about 20 points less than the same debt insurance for California. You know — Russia, that country that defaulted on $40 billion in debt just 11 years ago.

Bloomie provided some other eye-opening examples: Insurance on Turkey bonds are now cheaper than New York City default swaps. Indonesian debt — in the eyes of this market — is a safer investment than similar paper from the state of Michigan.

If you’re looking for the kind of geographic diversification that would benefit from this trend, visit our friends and business partners at EverBank. They just unveiled the MarketSafe BRIC CD — a principal-guaranteed CD that places bets on the real, ruble, rupee and renminbi.

  The state of Arizona STILL hasn’t closed its 2010 fiscal year budget gap. Due at the end of June, the state budget is still in shambles… Arizona legislators face a $3.4 billion gap, roughly a third of the state’s operating budget. They’re considering a sales tax hike, cutting more state spending and even mortgaging the Capitol building. Oy…

  The Canadian economy unveiled a way-worse-than-expected jobs report today. Canada shed 44,500 jobs last month, about triple economists’ expectations. Canadian unemployment remains at an 11-year high of 8.6%.

  Here’s a good idea: Credit Suisse has been paying its hotshot bankers with mortgage-backed securities. Since the end of 2008, the Swiss bank has been paying out most of its bonuses with stock — not shares or options of CS, but shares of a fund the bank created that’s composed of its own distressed mortgages and toxic assets.

As the WSJ put it, “This means the performance of bets these bankers were originally involved in structuring will help determine whether their 2008 compensation turns into big money or big losses.” It’s actually a double win for Credit Suisse: Not only does the move insentivise accountablity among its ranks, but the bank is able to jettison these bad assets off its balance sheet and into a separate bonus pool.

And surprise, surprise… when you’re forced to “eat your own cooking,” the food ends up tasting just fine. The fund is up 17% this year, well ahead of the Dow and S&P 500.

  Last today, another 5 Min. Forecast come true: The Senate OK’d a $2 billion extension for “cash for clunkers” this morning. All that’s left is the president’s John Hancock… look for this program to be alive and kicking for the next few weeks, at least.

  “The environmental benefit,” a reader writes, “of running a vehicle at 18 mpg instead of 14 mpg or less for the remaining lifetime of that old clunker pales into insignificance compared with the environmental cost of producing a new vehicle that may not be needed for another five-10 years, not to mention the forwarded cost of early disposal of the clunker. It is also insignificant compared with the $4,500 plus interest that my son’s generation will have to cough up in some form. It is clearly another version of TARP, with the interests of Government Motors and votes thrown in.

“As an environmentalist, I originally I felt guilty buying a ‘third-world’ 2001 Isuzu crew cab truck in 2004 for $9,000. Five years later, still doing 27 mpg of diesel on phenomenally bad roads in Belize, I would not be tempted with $4,500 credit on a new one.”

  “I agree with your reader who classifies a clunker as an asset,” writes another, responding to yesterday’s inbox. “I have a 2001 Ford F-150 with over 297,000 miles on it. It has been serviced properly from the start and gets the job done. Even if I had to put hundreds or a few thousand into it for repairs, that beats having to clunk down $400 or $500 or more every single month for plus or minus five years just to drive a new vehicle. Mine has now become a personal challenge to see how many miles I can squeeze out of my pickup.

“The fact that my daughter is starting college in a few weeks and I have a son who will be there in two more years has something to do with the decision, as well. Frugality, and prioritizing what is most important in our lives, is a lost art that hasn’t been in vogue since our parents were in the last world war. Bless their hearts for instilling in me some of those virtues. We all need to take our elected representatives out behind the woodshed and teach them some values!”

The 5: We need to take ourselves “out back” too. For this editor, "cash for clunkers" has been proof that our legislators are still accurate representations of the average American.

We all piss and moan over bank bailouts and Big Three handouts — but not because it’s unjust or because it defies capitalist logic — but because most people just want a free lunch of their own. Now that the government is throwing Joe Six-pack a bone, we’re leaving the pickets at home, lining up outside dealerships and drooling all over ourselves at the prospect of a shiny new consumable. We spent a billion dollars of the next generation’s money — traded in over 200,000 working cars for new ones — in just one week. C’mon… that’s not prudent. It’s selfish.

Engaging ‘cash for clunkers’ isn’t seizing a chance to stick it to the man. It’s just the opposite. Play along, and we’re just pawns in their game.  

Have a nice weekend,

Ian Mathias

The 5 Min. Forecast

P.S. This is how a real “free lunch” works: If you’d be willing to write a book review on your blog or Web site, we’ll be happy to send you a complimentary copy of Bill and Addison’s latest work, Financial Reckoning Day Fallout. We’ll spend our own money in hopes of futhering our own interests… what a concept! If you’re so inclined, send your site’s URL and your mailing address to reckoning.daily@gmail.com


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