It is now common to use the term
when referring the actions of governments and central banks as they
try to avert a credit crisis. And this week we saw a coordinated
effort by central banks to use their bazookas to head off another
2008-style credit disaster. The market reacted as if the crisis is
now over and we can get on to the next bull run. Yet, we will see
that it wasn't enough. Something more along the lines of a howitzer
is needed (keeping with our WW2-era military arsenal theme). And of
course I need to briefly comment on today's employment numbers.
There is enough to keep us occupied for more than a few pages, so
let's jump right in.
Employment Up But Not Enough
The headline number is that 120,000 new jobs were created in
November, in line with estimates. That total is the sum of 140,000
jobs from the private sector coupled with the now usual loss of
20,000 jobs in the government sector. But when we look at the
details, things are not as upbeat.
First, the good news: the U.S. economy is continuing to grow. As
I have said for quite some time, the U.S. should not fall into a
recession unless it is pushed by something from beyond our shores,
which, sadly, I expect (details below). However, we are nowhere
near the typical recovery pattern. By this time into a recovery we
are usually making new highs on the employment front. As everyone
knows, we are millions of jobs from that level.
And my friend Bill Dunkelberg, the Chief Economist of the
National Federation of Independent Business, sends us these
headlines today from his own survey:
· AVERAGE EMPLOYMENT PER FIRM ROSE
· HARD TO FILL JOB OPENINGS INCREASED, UNEMPLOYMENT DOWN
· PLANS TO CREATE NEW JOBS NEARLY DOUBLED
The net change in employment per firm wasn't much different from
zero, but it did have a plus sign in front of it for the first time
in nearly half a year. On average, owners reported increasing
employment an average of 0.12 workers per firm. Seasonally
adjusted, 14 percent of the owners added an average of 3 workers
per firm over the past few months, and 12 percent reduced
employment an average of 2.9 workers per firm. The remaining 74
percent of owners made no net change in employment (47 percent
hired or tried to hire and 35 percent reported few or no qualified
applicants for positions, both figures up 4 points).
The percentage of owners cutting jobs has returned to "normal"
levels (even in a great job market, over 300,000 file initial
claims for unemployment, i.e., they are fired or laid off). And the
percentage of owners adding workers (creating jobs) continued to
trend up. Reports of new job creation should pick up a bit in the
(I spent last Sunday with Bill, and we outlined our new book on
creating jobs and employment. Our goal is to finish it in record
time and have it out next spring.)
120,000 jobs is not quite enough to keep up with the growth in
the population. Along with positive revisions to previous months,
we have now averaged about 114,000 a month for the last 6 months.
But then why did the headline unemployment number fall to 8.6%?
That is a very large drop for one month. The simple answer is that
the number of people looking for a job fell by 315,000. And the
number of people counted as not in the labor force (a different
measure) swelled by 487,000 to a record 86.5 million.
Again, for new readers, you are not counted as unemployed if you
have not looked for a job in the last four weeks. Let's look at a
chart from the St. Louis Fed database that shows the number of
citizens not in the labor force. What we see is a rise from 77
million in 2007 to 86.5 million today. Part of that can be
explained by population growth, but it would be less than half of
the increase of almost 10 million people not considered to be in
the labor force.
If we looked at a chart of those counted as being in the labor
force, we would see that it is roughly where it was back in 2007,
yet there has been working-age population growth of at least (my
guess) 5 million. And the next chart shows the number of people
that are actually employed, private or government, full- or
part-time. What we see is that the number of people working is
about where it was 8 years ago.
That is not a pretty chart. What all that means is that
unemployment would be closer to 11-12% if we went back to the labor
force of just a few years ago and adjusted for population.
Let me quickly note, too, that if we went back to the
unemployment measurement basis of a few decades ago, the numbers
would be closer to what I suggest above. Counting unemployment the
way it is currently done allows whoever is in charge to publish
numbers that look better than they are in reality on the street. I
expect Republicans to point this out in the next election cycle,
although if they get into office they will have to live with that
analysis when it comes back to haunt them in four years. Because as
the next chart shows (from my friend Lance Roberts of Streettalk
Advisors in Houston), we need job growth of about 400,000 jobs a
month to get back to the long-term trend by 2020. This shows the
employment-to-population ratio, which has dropped by 6% since 2000,
falling precipitously since the beginning of the recession. We have
never had such strong employment growth, and are unlikely to get it
as we reduce government spending, which we must do.
This shows above all else why the #1 issue for the coming
elections will be jobs. The U.S. economy is looking more and more
European all the time in terms of unemployment numbers. If the
course is not changed, it will make any real recovery back to what
we think of us "normal" for the U.S. highly problematic.
Let's quickly look at a few other problems in this employment
report. The work week was unchanged at 34.3 hours (and was down 0.2
hours in manufacturing). Aggregate hours were up just 0.1%. Average
hourly earnings were off 0.1%, leaving the three-month average at
-0.1%. For the year, hourly earnings were up just 1.8%. When the
Great Recession began, they were rising at a 3.4% annual rate.
Aggregate payrolls were up just 0.1% for the past month. The
decline in unemployment was concentrated among the shorter
durations, with almost all of it among those jobless for 14 weeks
or less. Those unemployed for 99 weeks or more rose 143,000 to 2.0
million, very close to an all-time high. The mean duration of
unemployment rose to 40.9 weeks, a record. (Hat tip
The Liscio Report.)
This does not bode well for consumer spending. Any growth of
late has come from a reduced savings rate, as income is barely
keeping up with inflation; and if you look at the inflation we
"feel" in healthcare, food, and energy, then the average consumer
is losing ground. This also means any recovery is only one external
shock away from slipping back into recession.
Finally, the "quality" of the new jobs is not what we would
like. More and more people are taking lower-paying jobs. We saw
105,000 jobs in retail, temporary, and food services out of the
total of 120,000. Many of these are seasonal and will fall off in
the next quarter. (Let me hasten to add that I am not being
derogatory of food-service jobs. They are important and are hard
work. I have two kids who are employed in the food-service world,
and most of my kids, and your humble analyst, have been employed in
various food-service jobs at one time or another. Without those
jobs some of my kids might be moving back home! So, the next time
you're out, leave a bigger tip than normal if it's deserved. Your
wait person is someone's kid!)
The World Slips into Recession
How fragile is the recovery? The rest of the developed world is
either in recession or soon will be.
This next chart is
from friend Prieur du Plessis
of Plexus Asset Management in South Africa. Notice that every major
region is slipping into contraction except the U.S.
Now, let's look at more details, provided by SISR (sadly, I lost
the email of the person who provided this, so I can't credit him).
It shows that outside of the U.S. and Canada, the rest of the
developed world is watching their PMI (manufacturing production)
numbers go into contraction. Of the emerging world, only India and
South Africa are growing. Notice that the contraction in both
Germany and France is getting worse month by month.
Source: Markit Economics, SISR
How long can the U.S. resist a global slowdown? My answer would
be, for longer than you might think, absent the potential shock
coming from Europe. But the above data does set the stage for the
rest of the letter.
Central Bankers of the World, Unite!
Now, a few quick observations. This was truly a global effort by
the central banks of the world (the U.S., Europe, Japan,
Switzerland, Canada, and China). But then, what else did you expect
them to do? Their main tool is to provide liquidity, and that is
what they promised. They lowered the cost of coming to the "window"
and certainly lowered the "shame" factor in doing so. Going to the
central bank could be seen as a sign of weakness and, at higher
rates, banks might be reluctant to do so. At the new rate it is
reasonably economical, and the central banks have signaled it is
more than OK.
Second, this effort also included China, which cut its bank
reserve requirements by 0.5%. David Kotok pointed out to me
something unusual about this. Normally, China makes it moves with a
number ending in "7," like 27 or 47, as 7 is good luck. For those
paying attention, this was China's way of saying "We are part of
the team," rather than acting on their own, as they usually do.
Now, it makes sense that if you include Canada in the "club" you
should include China.
The stock markets of the world went into an ecstatic frenzy,
capping off a very positive week. But I would remind my
enthusiastic friends of a few things. Let's look at what really
happened. We just recovered from a very over-sold condition and are
still down almost 7% from this summer.
And this has happened before. Let's rewind the clock to October
of 2008, deep in the credit crisis. This is a report from Jim
Lehrer of PBS (emphasis mine):
"JIM LEHRER: World stock markets staged a comeback today. They did
so as key governments moved to support troubled banks. On Wall
Street, the Dow Jones industrial average scored its largest point
gain ever, soaring 936 points to close above 9,387. The Nasdaq was
up more than 194 points to close at 1,844. Overseas, stock indexes
rose 8 percent in Britain, 11 percent in France and Germany.
Markets across Asia also shot higher, including a gain of 10
percent in Hong Kong.
News of European efforts to end the banking and credit
crisis helped ignite the rally. On Sunday, nations that use the
euro agreed on coordinated steps. Today, Britain was first to
act. It was followed by Germany, France, Spain, Portugal,
Austria, and the Netherlands."
The good news is that this week's action may (and I emphasize
may) help stave off a true bank credit crisis on the order of 2008.
That is, if the central banks of the various European countries
follow through (more on that below). The real problem was best
summed up this week by Mervyn King, the governor of the Bank of
England, speaking at the press conference to launch his Financial
"Many European governments are seeing the price of their bonds
fall, undermining banks' balance sheets. In response, banks,
especially in the euro area, are selling assets and deleveraging.
An erosion of confidence, lower asset prices and tighter credit
conditions are further damaging the prospects for economic activity
and will affect the ability of companies, households and
governments to repay their debts. That, in turn, will weaken banks'
balance sheets further. This spiral is characteristic of a systemic
"Tackling the symptoms of the crisis without resolving the
underlying causes, by measures such as providing liquidity to banks
or sovereigns offers only short-term relief. Ultimately,
governments will have to confront the underlying causes... The
problems in the euro area are part of the wider imbalances in the
world economy. The end result of such imbalances is a refusal by
the private sector to continue financing deficits, as the ability
of borrowers to repay is called into question.
"The crisis in the euro area is one of solvency and not
liquidity. And the interconnectedness of major banks means that
banking systems, and hence economies, around the world are all
affected. Only the governments directly involved can find a way out
of the crisis..." (Hat tip, Simon Hunt.)
Time to Bring Out the Howitzers
If the problem were one of liquidity, then this week's action
would be enough. But the problem is solvency. The majority of
European banks are insolvent. They own too much debt of sovereign
countries that are going to have to reduce their debts. There is a
growing number of analysts who are realizing that even Italy may
have to reduce its debt burden. I have highlighted the problems
faced by Belgium. And how about Spain, and Portugal?
What this action does is give the ECB the dollars it will need
to loan to the various national central banks, so they can loan to
their insolvent banks. Will they bail them out, or nationalize
them? The answer depends on the country and its voters. But absent
recapitalizing their banks, there will be a credit crisis that will
affect the whole world.
The amount of debt that will have to be written off and the loan
portfolios reduced, as well as new capital raised, is daunting. As
I have noted previously, the need is for around €3 trillion.
Writing off so much debt in the midst of a recession, coupled
with austerity moves, will be massively deflationary for the
eurozone. But Merkel and the German Bundesbankers have made it
clear that they will not be part of any "printing press" action
that is not coupled with serious commitments for balanced budgets.
Even in the face of a recession.
Which makes it quite strange that the ECB has been tightening in
terms of money supply the past year. Notice in the graph below that
M1, M2 and M3 are all in negative territory. (Chart from the London
The ECB under Trichet was apparently fighting inflation. He
raised rates and let his inner Bundesbanker take control. Maybe
with the rate cut and the new head of the ECB, Mario Draghi, we can
see signs that the ECB may in fact act to ease. This is from my
friend Dennis Gartman, writing this morning:
"Turning to the ECB, the new President, Mr. Draghi, has
obviously taken on the most difficult of jobs and we've no choice
but to admire him for the audacity necessary to take on a role
such as his... especially at a time such as this. Yesterday, Mr.
Draghi made a statement that we find
tectonic-plating-shifting-like in nature when he said firstly
'Downside risks to the economic outlook have
"They have indeed, and we've no problem with what he said for
that is indeed the truth. Then, however, the plates shifted when
he said, noting that the ECB's mandate, that price stability is
to be maintained '
in both directions
.' In other words, the ECB's mandate forces the authorities to be
concerned about deflationary risks as well as those
"Did you hear the plates shifting? You should have for they
have indeed shifted. Draghi's warning was that the authorities
are just as concerned about deflation as inflation and that
monetary expansion is to be considered just as has monetary
"So we are now... or shall soon be... faced with a monetary
and political union that is manifestly different than that which
the original united nations had signed up for AND we have a
central bank intent upon fighting deflation as strongly as it has
fought inflation. These are the attributes of a regime intent
upon weakening, not strengthening, its currency in order to
strengthen the economy and to save the union... if at all
The coordinated central bank action will make dollars available
to the ECB, which will in turn loan them to the national central
banks, which presumably will loan them to their in-country banks,
taking lower-quality collateral than the ECB (which under the rules
they are allowed to do). Given the deflationary pressures that are
the natural result of a recession and deleveraging/default, they
can print a lot of money without igniting too much inflation. But I
agree with Dennis; I just don't see how they can do so without
seeing the valuation of the euro fall rather smartly.
Merkel and Sarkozy have told us they will meet Monday and
announce a plan on December 9, when the full eurozone meets. Forget
bazookas, this needs the equivalent of a howitzer. They are
seemingly intent upon rewriting the treaty, which is the only way
that the Germans will go along with any major ECB action. But by my
reckoning, a few hundred billion, or even a trillion, is not major
action, at least not on the level of what will be needed.
The price for German acquiescence will be a loss of sovereignty
and the ability to run deficits of any real size for any
appreciable length of time for the countries of Europe. Will the
peripheral countries go along? Heck, forget them; will
go along? This situation has been coming along since the foundation
of the eurozone. The early founders acknowledged that a tighter
fiscal union would eventually be necessary if the euro experiment
were to survive. And eventually is now. As in this month. Time is
running out if they want to forestall a credit crisis that would be
worse than 2008.
The world is watching, as what happens in Europe will affect us
all, in every part of the globe. It could easily tip the U.S. into
recession, and it will only be worse for the emerging markets. For
Europe, the Endgame is now. We can only hope they come up with a
plan that avoids disorderly defaults and a crisis far graver than
2008. They have no good choices, only difficult ones and disastrous
ones. Let us hope they choose wisely.
(And for my fellow Americans, note that we will face the same
consequences if we do not get our own house in order, and very
soon. This is more than an academic observation.)
New York, Hong Kong, Singapore, and Cape Town
And My Conference
I am reading Niall Ferguson's new book,
It is a great read. Quick note: If you enjoy Niall's writing, you
may also enjoy watching his TV series on 4oD:
The Ascent of Money
(same name as his early book). He presents six 1-hour episodes.
Only 11 days left on the website, a good idea for this weekend!
Niall, along with Marc Faber, David Rosenberg, Mohamed El-Erian,
Woody Brock, Lacy Hunt, David McWilliams, and your humble analyst,
will all be at my conference (co-hosted with partners Altegris
Investments) May 2-4 near San Diego. Does this not sound like the
best line-up of any conference this year? Details will follow, but
you won't want to miss this one.
I am more or less home for the next six weeks, except for a
quick trip back to New York later this month with Tiffani for a
business meeting (good changes are coming, as always), and we will
take some time to enjoy friends and the city lights.
Then I will go to Hong Kong and Singapore on January 10 for 12
days, coming back to finish a few things and then head off to Cape
Town, South Africa in the middle of February (details later).
Tomorrow I go with Tiffani to take my granddaughter Lively to go
Yo Gabba Gabba
"live." This is a new kid's show for very young toddlers that
captures their attention like nothing I have ever seen. Below is a
photo from last spring, when we were on a plane to somewhere
(Lively is now a seasoned traveler!) and she was watching
Yo Gabba Gabba
on an iPad with her special baby earphones. Look how rapt she is.
"Papa John" gets to sit in on this and even go back stage to meet
with the cast. Wild horses could not drag me to endure this with
your kid, but with my granddaughter? Try and keep me away! How we
change with the advent of the next generation.
I am looking forward to the holidays. All the kids will be here,
and we will go out to look at the lights, take in movies, and munch
lots of great food! And it now looks like professional basketball
will launch on Christmas Day, with the Mavericks playing the Miami
Heat in a reprise of the NBA Finals last year. I do have rather
good seats (front row behind the chairs), and my phone has been
blowing up! The #1 most rabid Mavericks fan in the whole world, my
daughter Abbi, has begged me to take her, and Dad can't say no.
(Are you listening, Mark?)
All Dad wants for Christmas is to meet his deadlines for the
irrational amount of writing I have committed to do before I leave
for Hong Kong. That and to have my kids around.
It is time to hit the send button so the translator in Hong Kong
can get started. In theory, no more really late nights on Friday
for me. But this letter has been more than long enough. Have a
Your wondering how we Muddle Through analyst,
John Mauldin is president of Millennium Wave Advisors, LLC, a
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