Saturday, August 29, 2009

The Real Unemployment Rate

How can you take the government's statistics at face value when it's widely acknowledged that the government fudges the statistics for its own purposes?

The chair of the Atlanta Fed, Dennis Lockhart, piped up this week and acknowledged that the unemployment rate is really about 16 percent, not the 9 percent that officials are pushing in the media.

There is no recovery, and there will be no sustained recovery until the massive debt load we Americans have taken upon ourselves is either paid down or liquidated. The decline in real estate, the unwillingness of creditors to lend, and the continuation of stubbornly high unemployment all represent massive headwinds. The economy needs to reset. That's what a deflationary depression is... the economy resetting and revaluing everything downward, from labor to houses to cars to groceries. A hyperinflationary depression is a revaluing of the unit of value (i.e. the dollar) in a downward direction. I'm still a deflationist. Demand is being destroyed quite handily, and will continue to be destroyed for the foreseeable future. Therefore, I think it's going to be things that are revalued and not dollars. There may well come a day when the government and the Fed are able to get traction and generate hyperinflation, but that day is years away.

By the way, I sold out of my longs yesterday. I've made about a 25% return on my whole pot of investment money for the year, and more than doubled the money I put into Bank of America stock. I'm toying with the idea of purchasing a Bear Fund to ride the Fall plunge, but my IRA won't let me hold any purchase for less than 90 days, and I might want to get out of it before the end of November. My favorite funds have been the Prudent Bear Fund (BEARX) and the Leuthold Grizzly Fund (GRZZX). These are not for the cautious and fearful. They basically go up when the stock market goes down, but BEARX has signficant exposure to gold and the gold mining industry, which is volatile, and GRZZX employs a double short strategy that's really, really gut churning. When things are going down, you get giddy with how fast you're making money, but when a good bounce hits then Mr. Market starts taking it back with both hands. If you use these funds you have to be nimble. Make sure you know your brokerage's rules.

Real US unemployment rate at 16 pct: Fed official
Aug 26 02:25 PM US/Eastern

The real US unemployment rate is 16 percent if persons who have dropped out of the labor pool and those working less than they would like are counted, a Federal Reserve official said Wednesday.

"If one considers the people who would like a job but have stopped looking -- so-called discouraged workers -- and those who are working fewer hours than they want, the unemployment rate would move from the official 9.4 percent to 16 percent, said Atlanta Fed chief Dennis Lockhart.

He underscored that he was expressing his own views, which did "do not necessarily reflect those of my colleagues on the Federal Open Market Committee," the policy-setting body of the central bank.

Lockhart pointed out in a speech to a chamber of commerce in Chattanooga, Tennessee that those two categories of people are not taken into account in the Labor Department's monthly report on the unemployment rate. The official July jobless rate was 9.4 percent.

Lockhart, who heads the Atlanta, Georgia, division of the Fed, is the first central bank official to acknowledge the depth of unemployment amid the worst US recession since the Great Depression.

Lockhart said the US economy was improving but "still fragile," and the beginning stages of a sluggish recovery were underway.

"My forecast for a slow recovery implies a protracted period of high unemployment," he said, adding that it would be difficult to stimulate jobs through additional public spending.

"Further fiscal stimulus has been mentioned, but the full effects of the first stimulus package are not yet clear, and the concern over adding to the federal deficit and the resulting national debt is warranted," he said.

President Barack Obama's administration has resisted calls for more public spending, arguing that the 787-billion-dollar stimulus passed in February needs time to work its way through the economy.

Lockhart noted that construction and manufacturing had been particularly hard hit in the recession that began in December 2007 and predicted some jobs were gone for good.

Prior to the recession, he said, construction and manufacturing combined accounted for slightly more than 15 percent of employment. But during the recession, their job losses made up more than 40 percent of all US job losses.

"In my view, it is unlikely that we will see a return of jobs lost in certain sectors, such as manufacturing," he said.

"In a similar vein, the recession has been so deep in construction that a reallocation of workers is likely to happen -- even if not permanent."

Payroll employment has fallen by 6.7 million since the recession began.

Friday, August 28, 2009

The Great Depression and Today- Sobering Parallels Abound

Good Day, All.

Remember my operating thesis, for it colors all I say. Mass sentiment drives economic activity. Neither economic activity nor any other external event drives mass sentiment. Mass sentiment changes from optimism to pessimism in a relatively regular, predictable, and chartable way. In other words, we're all bipolar, and we're all bipolar together. The stock market is the most sensitive real-time predictor of mass sentiment known to man.

The rally grows long in the tooth, and the historically ugly months of September and October loom before us. The ratio of "Bulls to Bears" (i.e. those who are feeling optimistic about the immediate future of the stock market) is higher than it's been since late 2007, when the market peaked and rolled over. The good news is trumpeted, and the bad news is either ignored, or is prettied up to look like good news ("Hey guys, things suck, but they didn't suck as badly as we thought they would. Hooray! Good news!")

Since the government decided (for a limited time only) that the $750 Ford pickup in my driveway was suddenly worth $4500 if I'd go into debt for a new car, expect the durable goods numbers and all sorts of other measures of economic activity looking back over the summer to be quite positive. Ditto for housing. There's an $8000 gift from the government for first time home buyers. That little "Gimme" expires in December.

Meanwhile, meaningful measures of economic activity, like retail sales in the back-to-school season, are still quite glum. Expect those to pick up at the last minute, too, as consumer sentiment is on the rise in late August.

I think we've got one more little correction (200-300 Dow points) and then one final thrust up towards the 10,500 level. I wouldn't be surprised if all we managed to hit was the psychologically important 10,000 level before the rally collapsed from exhaustion and begins its descent again in earnest. We may also get a more complicated corrective pattern, like a triangle or a wedge:



That would push the date of the coming plunge back by a few weeks, but would not really delay the inevitable.

It's interesting to me that there's still an undertone of fear in all of people's dealings. Sometimes as an experiment, when I engage people in casual conversation, I bring the subject around to the economy and listen to what they have to say. When I'm feeling really curious, I'll say something like, "I actually think we're in the beginning stages of a Depression, like the Great Depression." And then I watch how they react. When they're optimistic, they dismiss it, sometimes with annoyance or even anger. But when they're pessimistic, you can see them entertaining the possibility. You also look at what they're buying. For instance, you can't find a used woodstove very easily around here. It used to be that they would languish on the market all summer and then activity would pick up towards fall. Not this year! I finally got one, and got a good deal on it, but it's going to need some work. It is, however, a wood and coal burner, which was an option I wanted. People are also gardening more and canning more. The smell of anxiety is in the air, even though there's an overlying sense of some optimism. That will soon evaporate. People will begin to loathe that new car they bought, and the payment that goes along with it. They will be longing to have their good, old clunker back. By the way, the systematic destruction of perfectly good automobiles is another parallel with the Great Depression. In the 30's, the government had the cotton farmers plow every other row of cotton under. Those who still plowed with mules couldn't get the mules to do it, since they'd been trained their whole lives not to harm the crop in the field. This foolishness will hurt not only those who traded in perfectly serviceable (and paid for) automobiles for shiny new debt bombs, it will also hurt the poor who can only afford to drive those "clunkers" (and people like me who choose to drive them.)

I expect this fall and winter to be pretty ugly. People will nervously put up with a decline to the March lows. When and if we break those, look out below! True panic will set in. I think we will wash out to the final lows sometime in 2010. Only then will it be safe to wade back into the markets. What follows is a decent article that covers the parallels between the 1930's and today. Note what it says about those who tried to "catch a falling knife" (i.e. jump back in the markets when they thought it was safe to do so, only to find that deeper plunges were ahead.) Just as an FYI, I'm getting out of my longs in the next week or so. I've only got two... Bank of America and an S&P500 indexed fund.

The Great Depression and Today – Sobering Parallels Abound
By, Simon Maierhofer
Aug 27, 2009

The market has been up, which puts investors in a good mood. It is this feeling of security, however, that preceded every major market meltdown. Think back to the 2000 and 2007 stock market highs and compare it today. 1929 was no different. In fact, the parallels are fear inspiringly similar. If there’s ever been a lesson to be learned from history, it’s RIGHT NOW.


It’s been said (and perhaps you are getting tired of hearing it) that history may not repeat itself, but it certainly rhymes. Furthermore, those who don’t learn from history are doomed to repeat it.

If there is just one time you want to take a lesson from history, it is RIGHT NOW. The parallels between today and the Great Depression are numerous and strikingly similar. This 5-minute history lesson might be the best investment you’ll ever make.

Watch out! Even this rally parallels the Great Depression

The first leg of the Great Depression reduced the Dow Jones (DJI: ^DJI) by 48%. The first leg of the 2007 bear market reduced the Dow Jones by 53%. Both times, the initial declines were followed by powerful and persistent rallies.

The five-month rally from November 1929 to April 1930, lifted the Dow Jones (NYSEArca: DIA) by 49%. So far, the five month rally from the March 2009 lows has lifted the Dow Jones by some 46%. The time frame and percentage gains are certainly too close for comfort.

Even though the S&P 500 (SNP: ^GSPC) was not around during the Great Depression, the modern day picture mirrors the Dow. The Nasdaq (Nasdaq: ^IXIC) may have already provided a window into the future as it declined over 80% from its 2000 technology (NYSEArca: XLK) bubble, to its 2009 low.

When talking about windows for the future, we can’t omit the juicy fact that the Dow Jones measured in the only true currency – gold (NYSEArca: GLD) – has also declined to an extent similar to the 1929 – 1932 market meltdown (more about that later).

From humorous to sobering – parallels that sting

Did you know that the Great Depression was preceded by a great real estate boom centered in Florida? The Florida real estate bubble burst in 1926, three years before equities. Just as we’ve seen recently, investors took their leftovers from the real estate bust and poured it into stocks. Talk about jumping out of the frying pan into the fire.

Just as in 2007, no one foresaw a decline, let alone the seriousness of the decline. On December 4, 1928, President Coolidge sent the following message on the state of the Union to the reconvening Congress: “No Congress of the United States ever assembled, on surveying the state of the Union, has met with a more pleasing prospect than that which appears at the present time. In the domestic field there is tranquility and contentment and the highest record of years of prosperity. In the foreign field there is peace. You may regard the present with satisfaction and anticipate the future with optimism.”

Jim Cramer – the modern day Harvard parallel?

The Harvard Economic Society, previously esteemed for its pessimism, turned bullish a few months before the market topped. In fact, the Society remained bullish all throughout the downturn until it was dissolved just before the depression ended.

One of the many blunders that lead to the untimely (though not soon enough for investors’ welfare) demise of the Society, was its March 24th, 1930 assessment that; “The outlook is favorable.” This was just days before the onset of the above mentioned second leg to new lows. The second leg reduced the Dow by another 47%, but it didn’t stop there.

There are many modern-day parallels to the Harvard Economic Society. The Blue Chip Economic Indicator survey, a survey of private economists, is just one of them. According to the survey, 90% of economists believe that the current recession will be declared to have ended this quarter.

Nobel-Prize-winning economist Paul Krugman, who believes the worst of the global crisis is over, is likely to be another one.

Interestingly, economists also believed that in March 2009 the market’s worst was yet to come, when the Dow traded below 7,000. Contrary to the general climate, the ETF Profit Strategy Newsletter’s contrarian view has been keeping subscribers one step ahead of the market.

Realists beat optimists

In December 2008, the Newsletter declared Dow 9,000 to be an opportunity to load up on short ETFs. This window of opportunity opened from January 2nd to the 6th. In the following 90 days, short ETFs went to record double and triple digit gains, while the S&P 500 (NYSEArca: IVV) lost 30%.

On March 2nd, at a time when an atmosphere of doom permeated Wall Street, the Newsletter issued a Trend Change Alert with a target of Dow 9,000 – 10,000 and S&P (NYSEArca: SPY) 950 – 1,050. As the following excerpt from John Kenneth Galbraith, author of “The Great Crash 1929”, observes; contrarian (or realistic) investing pays big dividends.

Before reading Mr. Galbraith’s astute assessment, take a moment to put it in context with today’s environment. Consider that the market just rallied about 50% from its March lows and the worst seems to be over, while compelling values abound (allegedly).

“The worst continued to worsen. What looked one day like the end proved on the next day to have been only the beginning. Nothing could have been more ingeniously designed to maximize the suffering, and also to insure that as few people as possible escape the common misfortune. The fortunate speculator who had funds to answer the first margin call presently got another and equally urgent one, and if he met that there would still be another. In the end all the money he had was extracted from him and lost. The man with the smart money, who was safely out of the market when the first crash came, naturally went back in to pick up bargains. The bargains then suffered a ruinous fall. Even the man who waited for volume of trading to return to normal and saw Wall Street become as placid as a produce market, and who then bought common stocks would see their value drop to a third or a fourth of the purchase price in the next 24 months. The Coolidge bull market was a remarkable phenomenon. The ruthlessness of its liquidation was, in its own way, equally remarkable.”

Other parallels that can be found are the government’s assurance that things are fundamentally sound, an increase in mergers and acquisitions, falling car prices, increasing Ponzi schemes (Madoff vs Ponzi), new tools to leverage money, credit expansion/contraction, etc. The Great Depression even had its own Warren Buffett and Jim Cramer.

If that isn’t enough, consider this: Research shows that the decline in industrial production over the last nine months has been as bad, if not worse than the nine month following the 1929 peak. The world stock markets have fallen even faster this time around compared to 70 years ago. The volume of world trade is drying up at a faster pace than the Great Depression and government surpluses are the lowest in 100+ years.

Red across the board, not seen in 70 years

Thus far, this bear market has humbled large cap stocks (NYSEArca: OEF)along with small cap stocks (NYSEArca: IWM), growth funds (NYSEArca: IWF) along with value funds (NYSEArca: IWD), defensive sectors along with aggressive sectors, real estate (NYSEArca: ICF) along with commodities (NYSEArca: DBA).

This unique “red across the board” behavior has not been seen in the 70s, 80s or 2000 bear markets. The only other similar time period to be found is during the Great Depression.

Of course you can’t simply build your entire financial future around parallels to past history. If, however, such parallels as the ones discussed above, harmonize with trustworthy indicators with an accurate historic record, the composite advice should not be ignored. In fact, ignoring those indicators as a composite would be a foolish thing to do.

History has taught us that in periods of time when investors are enthusiastic about stocks and their future prospects (1929, 2000, and 2007) has turned out to be the worst times to buy, and almost always preceded a major market decline.

The implications of the above mentioned composite indicators will do more than merely touch peoples’ financial futures. Prudent investors will take precautions now to protect their family and financial nest egg. The brand-new September issue of the ETF Profit Strategy Newsletter includes an analysis of the current rally (are higher prices ahead or is a top in place?), a target range for the ultimate market bottom, ETF profit strategies, and practical ways to thrive and survive in the coming years.

As mentioned above, the Dow’s recent decline measured in gold is a near replica of the 1929 – 1932 decline in stocks. Eventually, the Dow measured in inflated dollars will catch up with the real value metrics reflected by gold. At that time, many will wish they’d learned from history. We simply must ‘learn from the mistakes of others because you can’t possibly live long enough to make them all yourself.’

Wednesday, August 19, 2009

A Recession Only Steinbeck Could Love

I know I've gone silent for the last month. Blame the Sturgis Rally and its aftermath.

We've got one more good spurt upwards in the markets, by my reckoning, then down, down, down. This next round of down will spark terror in the souls of many. If you've decided to sell out and get out of the markets, anytime in the next few weeks would be good, I think. I still expect to see Dow 9500 to 10,500 before it turns downwards.

If I'm wrong, buy back in and jump back on the elevator in November or December. Personally, I've got two longs left. I've got an S&P indexed fund and I own some shares of Bank of America (BAC) which I bought in two different transactions, one in the mid $8 range and the other in the low $7 range. I'm poised to double or more than double my money on those when I bail out, which will be soon. I may be jumping ship on BAC early, but as one wise investor said, "I prefer to take my profits out of the middle 60% of the rise." I'm with you, Bud.

BTW, I agree with Steinbeck.



Published on Sunday, March 22, 2009 by Washington Post
by Rachel Dry


There's nothing like a Great Recession to make people want to read about the Great Depression.

Seventy years after John Steinbeck published his best-selling tale of the Joad family's journey from Oklahoma to California along Route 66, "The Grapes of Wrath," required reading that never really went out of style, is suddenly in high demand.

At the National Endowment for the Arts, the number of grant applications for "Big Read" community reading events around "The Grapes of Wrath" was twice what it was last year. In Jackson County, Mich., librarians estimate that more than 2,000 people will read the book this month as part of a "Big Read." Kimberly Rapert is teaching the novel to her 11th-graders at Western High School there, and she says that having a book this relevant to the current economic crisis "is like a godsend."

So what would Steinbeck say about all this?

It's a little silly to attempt to divine the opinions of a long-dead author -- though what would Jane Austen think of "Pride and Prejudice and Zombies?" -- but since Steinbeck created one of the most enduring portraits of the hardships of the 1930s, and since we are now in the worst, most prolonged downturn since the Joad family was forced West, it does seem a fair question to ask.

The answer, though, isn't exactly a salve to our overleveraged wounds.

Steinbeck would think that we're getting just what we deserve. And he'd like it.

Not because the Nobel laureate and best-selling author would wish misfortune upon his fellow citizens. But because, first of all, he romanticized the essential moral goodness that springs from adversity, and second, because he hated the material bloat of postwar America. He just didn't like stuff. And now that we are brought low by stuff, acquiring it without really paying for it, devising complex financial instruments to get more of it, he'd think that maybe we're ready to learn a lesson or two.

Rereading Steinbeck today -- not the compassionate chronicler of human struggle Steinbeck of the 1930s but the cantankerous social critic Steinbeck of the 1950s and '60s -- is a little eerie. If only we'd listened to him, we might not have spent our way in to the current crisis. Of course, in the aftermath of disaster, anyone who punctured enthusiasms with vague harbingers of doom can seem retroactively brilliant. But listen to Steinbeck on the American obsession with things: "If I wanted to destroy a nation, I would give it too much and I would have it on its knees, miserable, greedy and sick."

That sentiment, written in a 1959 letter to his friend Adlai Stevenson after the Charles van Doren "Twenty One" scandal, expresses Steinbeck's outrage at a world so morally bankrupt that people were cheating on television game shows. As the years progressed -- and he watched more television -- he got even angrier that everywhere he looked, people needed some purchasable product to validate their position in society, to fortify their stomachs, to coax their hair into looking its shiny best.

At the end of his career, Steinbeck's main subject was his extreme distaste for materialism in America, which he explored in a novel and two works of non-fiction: In 1961, he published a postwar morality tale called "The Winter of our Discontent," in which fraud rocks a family ensconced on the ladder of suburban ascension. Shortly after he finished it, he set out across the country in a specially outfitted camper truck, accompanied by his French poodle, for the trip that became "Travels With Charley in Search of America." He followed that with a 1966 book of essays called "America and Americans."

Those are the three books we should really be reading now. "Grapes" might have the economic hardships, but these titles have it all: apathy, greed, moral decay, a dissection of an America gone soft.

Or, alternatively, to really understand how Steinbeck would feel about the Great Recession, forget the 1930s books or postwar America. Go straight for the sea coral and Steinbeck's writings on his travels with marine biologist Ed Ricketts, a lifelong friend. That's what Susan Shillinglaw, professor of English at San Jose State University and a prolific Steinbeck scholar, suggests. I met her in 2004 when I was doing research for my college thesis at the university's Center for Steinbeck Studies. At that point, the questions I had for her -- about how deeply Steinbeck's impressions of the community born of devastating poverty in the 1930s primed him to disdain the scattered, competitive nature of life in postwar America -- were purely academic. In Silicon Valley at least, the country seemed pretty far from the kind of widespread economic distress that Steinbeck had written about in the 1930s.

But today, the connections are more immediate. Shillinglaw talks about Steinbeck's fascination, linked to his friend Ricketts' work, with marine species that are the most "survivable." He liked the ones that were "battered by waves." Even in the ocean, Steinbeck thought, if you are "too soft, if too much is given to you too easily, it leads to corruption," Shillinglaw says.

Steinbeck himself expressed that view in 1960, when he wrote to his friend and editor Pascal Covici from the road with Charley: "Over and over I thought we lack the pressures that make men strong and the anguish that makes men great."

Well, the pressure's on now.

It's on for the people in several communities north of Durham, N.C., who participated in a "Grapes" Big Read in October organized by Piedmont Community College librarian Lionell Parker. At the events last fall, Parker said, people were amazed that the timing was so perfect -- that just as the national economy was lurching toward previously unimaginable lows, they could gather to talk about the Depression, share stories about job losses and hold a food drive while they were at it. It's on for the Jackson County, Mich., library patrons who are snapping up the packets on avoiding foreclosure that were put together as part of this month's Steinbeck-related events. The pressure seems more immediate than it has ever been for the 11th-graders in Kimberly Rapert's class at Western High. Rapert is happy that the students are so engaged with "Grapes," but she's a little concerned that some of the connections are a little too easily made, the despair too fresh.

In class, her students share stories about college plans dashed, parents losing work and bleak uncertainty about the future. Student Sarah Hanson remembers a discussion the class had had about how young people had to grow up fast during the Depression. Others talked about how they, too, were shouldering more adult burdens in the current economy. One classmate's father had to move out of state for work. Many were trying to get a job but found themselves competing for low-wage work with adults who had families to support.

Since the students are spending so much time with Steinbeck, I checked out whether the author himself had ever made it there. Based on "Travels with Charley," it doesn't look as though he did. At the part of the text that roughly corresponds to Jackson County's coordinates, the landscape seems to go by in a blur: "As I passed through or near the great hives of production -- Youngstown, Cleveland, Akron, Toledo, Pontiac, Flint, and later South Bend and Gary -- my eyes and mind were battered by the fantastic hugeness and energy of production."

Now, not even 50 years after his journey with Charley, those great hives of production are mostly silent. And if any reasonable person were to use the term "fantastic hugeness" to describe anything related to our current economy, it would be the stimulus bill or the deficit.

So I wondered what Steinbeck would think if, in Quixote-like fashion, he were to pack up a second-generation (possibly hybrid?) Rocinante -- what he named the camper he drove across the country in 1960 -- and retrace his route today, seeking once again to "listen to what the country is about."

David Kipen, director of the NEA's "Big Read" programming, including the Steinbeck events, thinks that the author wouldn't feel completely disoriented. He'd find both the nation's economic predicament and the resilience of its people familiar.

"There are enough Joad-like families here in America that I don't think he'd throw in the towel," Kipen says.

He wouldn't give up on us, that's true. He'd give us a lecture. So maybe it's best to recycle one. My favorite Steinbeck scolding comes from "America and Americans." It describes the domino effect of materialism, the way "having many things seems to create a desire for more things." And it culminates in the disaster that Santa hath wrought: "Think of the pure horror of our Christmases when our children tear open package after package and, when the floor is heaped with wrappings and presents, say, 'Is that all?'" Steinbeck surveys the country and concludes: "We are trapped and entangled in things."

Yes, he's right. I don't know about then, but we certainly are now. And even if his rage makes him seem too curmudgeonly to take advice from, Steinbeck's observations are worth listening to at this moment. Untangle yourself from things.

But first, pick up a copy of "Travels With Charley." It's a road-trip book -- like "Grapes of Wrath" -- but on balance, I think it makes better Great Recession reading.

Rachel Dry is an assistant editor in the washington Post's Outlook.
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