Rosenberg On Central Planning, The Truth Behind NFP, And The Unmasking Of "Facts"
Today Rosenberg releases yet another piece that scratches the veneer off the government "data" and finds that the less presentable truth is always beyond just skin deep.
First, on the government's "centrallized" intervention in the economy:
We have reached a point where government transfer payments are up more than 12% in an otherwise flat retail inflation environment, and they now represent about 20% of the overall personal income pie. What the government doles out today in the form of “income” supplements is equivalent to the total income the private sector generates in terms of rental income, partnership income and goods-producing wage income all combined. The only market that seems even remotely concerned with all the fiscal largesse may be the Treasury market, but we are told by the experts that such an environment of government-led economic activity is fertile ground for high-risk high-beta investment strategies. (Though we should add that at the same time the state and local governments are doing everything they can to absorb income out of the private sector to plug their huge fiscal gaps — see Taxes on Hotel Rooms are Rising on the front page of the USA Today.)
Liquidity continues flowing the wrong way:
Liquidity conditions are actually becoming less pro-cyclical as U.S. M1 money supply contracted $10 billion in the last reporting week — down now for four weeks running — and MZM shrank $50 billion and is down now in four of the past five weeks. In fact, MZM is now contracting at a 1.0% YoY rate, which last happened just ahead of the Fed’s easing cycle in the summer of 1995. This should actually be very bullish for the fixed-income market.
A record number of personal bankruptcies in March as nobody feels like paying off their mortgage anymore. Why should they - moral hazard is now in the constitution.
There were over 158,000 bankruptcy filings in the personal sector in the U.S. (that’s 6,900 per day!) which was a 35% surge over February’s result and up 19% from last year’s elevated levels. This also shows the extent to which fewer people are attempting to save their homes. They realized that their mortgage payments are not affordable and their attitudes towards residential real estate as a viable retirement asset have been altered permanently as many now see their house as nothing more than a debt-laden ball and chain.
On the transition from employment contraction to wage deflation, and a finer read of NFP:
Here we are fully 28 months past the point of the onset of the Great Recession and ostensibly nine months after the bottom in real GDP, and it seems safe to say that the economy is out of job-shedding mode. The steady downdraft in jobless claims and layoff announcements would attest to that view. Then again, after a record 8.4 million decline in payrolls from the cycle peak, bringing employment down to levels prevailing a decade ago in a cycle of job destruction not seen since the 1930s, inertia alone would have ensured that a bottom has been reached. After all, the level of payrolls was not going to decline forever. So while it may be encouraging to see employment, especially in the business sector, finally begin to rise after such a lengthy and precipitous decline, the labour market still remains in the grips of a serious deflationary undertow.
Indeed, the most disturbing aspect of the jobs report was the 0.1% MoM decline in average hourly earnings — to see a contraction in wages in any given month is practically a 1-in-100 event and the last time it happened in April 2003, Alan Greenspan and Ben Bernanke were busy building a ‘firebreak’ around deflation. The year-over-year wage trend has been sliced to 2.1% from 2.5% three months ago when employment hit rock bottom, not to mention the 3.5% pace a year ago. As long as excess supply dominates in the jobs market, expect the downward trend in wages to persist. So despite the positive headline print on payrolls, don’t think for a second that the Fed is not aware of or sensitive to the deflationary pressures that continue to build in the labour market. Against this backdrop, any premature tightening by the central bank or a sustained backup in bond yields is simply out of the question.
In a nutshell, as one chapter of the labour market downturn is closed (employment contraction), another one starts (wage deflation). March’s employment data, on the surface, may well have met the challenge served up by the consensus of economists, but it fell well short of addressing the massive amount of excess slack that still exists in the labour market. Not only did the headline unemployment rate not budge, at 9.7%, but the broader U6 measure actually rose for the second month in a row, to 16.9% (the highest it ever reached in the prior recession/jobless recovery in 2003 was 10.4%, just to show what we are up against this time around). So long as we have this much spare capacity in the labour market — with nearly one in every six unemployed Americans vying for every job opening — deflation pressures can be expected to build.
Finally, the ranks of the unemployed who have been looking for work for at least six months soared 414k in March, or nearly 7%, to 6.5 million. This is double from 3.2 million this time last year when equity investors believed the world was coming to an end. Of course, the world did not end for the equity investor who was bailed out by massive government incursion, but the world for the long-term unemployed has tragically become even darker (the gap between Wall Street and Main Street has scarcely been as wide as it is today). Long-term unemployment as a share of the total jobless pool now stands at a record 44% versus 26% and the last time the official unemployment rate was as high as is today was back in the early 1980s. There are three main reasons for this:
- The first has to do with the lack of mobility in a distressed national real estate market.
- The second reflects the permanent job loss that permeated this recession because the jobs in bubble sectors like construction and finance are simply not going to be coming back any time soon.
- Thirdly, large states such as California, Florida, Illinois and New York could always be relied upon in the past to be significant drivers of employment opportunities but they are just too cash-strapped today to play any role at all.
Finally, there are many factors related to the tragedy of rising long-term unemployment that lead us to the conclusion that deflation will prove inevitable, because the longer it takes to find a job — the average duration of unemployment just hit a fresh all-time high of 31.2 weeks from 29.7 in February — the more likely it is that these people will be rehired at a lower wage than they were receiving before they were let go from their previous job.
Deconstructing someof the key facts, that Zero Hedge has also been keenly focusing on over the past month:
- U.S. consumer spending in the first quarter is higher because the savings rate has slipped to 3.1% from 4.7% at the end of last year. Organically, spending is actually doing quite poorly and that reflects the fact that wage-based incomes remain under pressure. So, without that unsustainable decline in what is already a low personal savings rate, consumer spending in January would have actually contracted 0.4% and 0.6% in February. In other words, what we are seeing unfold right now is a ‘low quality’ consumer recovery in the U.S., not deserving of the P/E multiple expansion that the retailers have enjoyed in recent months. A sector to clearly fade going forward is consumer discretionary.
- On home prices, the seasonally adjusted data did indeed show an increase of 0.4% MoM (using the Case-Shiller Composite-10), but the raw data revealed a 0.2% dip — the fourth decline in a row! Now it would be one thing if January was an unusually weak seasonal month for home prices deserving of an upward skew from the adjustment factors; however, from 1998 through to 2006, they rose in each and every January and by an average of 0.6%. But what happened is that home prices collapsed in each of the past three Januarys — by an average of 1.8%, or a 25% annual rate. And, seasonal factors typically weigh the experience of the prior three years disproportionately so what looks like steady gains in housing prices may be little more than a statistical mirage.
- Consumer confidence (Conference Board version) rose to 52.5 in March and yet again this was treated gleefully on the Street and in the media because it beat the consensus estimate. But here is the reality: in recessions, this confidence index averages out to be 71.0, and in expansions, it averages 102.0. What does that tell you?
- The ISM index came out before the payroll numbers did and injected a big round of enthusiasm into the pro-cyclical camp. The index did shoot up in March, to 59.6 from 56.5, and while many of the components were up, the prime reason for the increase was the eight-point surge in the inventory component, to 55.3. Moreover, the orders-to-inventories ratio slid to a level suggesting that we could be in for a big pullback in the next few months. Meanwhile, very little attention has been made to the construction spending data, which sagged 1.3% MoM in February with broad-based declines across sectors — and January’s 0.6% drop was revised to -1.4% (the fourth slippage in a row).
- Stock buybacks are widely (and erroneously) viewed as being a major fund-flow driver of the equity market, and many a pundit points to the 37% QoQ jump (+98% from the 2009 lows) in buybacks as source of comfort. But here’s the rub: The vast majority of companies are buying back their stock to avoid the dilutive effects of expiring stock options — of the 214 companies that did a buyback in Q4, only 50 resulted in share count reductions (see page B2 of the weekend WSJ). Moreover, it really says something about the widespread excess capacity in the economy and poor perceived rates of return on new investments that companies would opt to deploy cash for buyback strategies at this presumed early stage of the business expansion. If there is one trend that is indeed constructive — certainly for our income theme — it is that companies are beginning to pay out more of their retained earnings in the form of dividends — $5.1 billion in net dividend increases in Q1, the most since 2007Q4 (but still down 21% from two years ago).
- There seems to be this entrenched view now that the government can be expected to come in and resolve all the problems in the economy. This view is deserving in some sense because not only did the Fed and the Treasury break the boundaries between the private and public economy this cycle to bail out the banks, auto sector and housing companies, but they have continued in these efforts despite a record $1.5 trillion deficit. With no other goal, it would seem, than to allow the residential real estate market to clear at lower prices, the government now intends to permanently reduce the mortgage balance for all homeowners who are “under water” and unemployed homeowner mortgage borrowers are also going to be recipient of taxpayer assistance (but not the renter). The problem ahead is that the bond market may no longer be in a cooperating mood to finance all this largesse. With the 10-year yield now pressing against the 4% threshold, we have a crucial week ahead for the Obama team’s financing capacity as a further $82 billion of debt sales are being put to the market for added digestion.
Another source of concern for the bulls who continue to rely on government support for the recovery is the general population — the part of the public that took in a mortgage it could afford and never used the house as an ATM. Resentment is starting to build as Uncle Sam is increasingly being viewed as Robin Hood at best, or the Artful Dodger at worst. There were two great reads over the weekend pertaining to this theme of emerging class warfare — Tea Party Anger Reflects Mainstream Concerns on page A13 of the weekend WSJ and Help Paying Mortgages Elicits Anger on page B1 of the Saturday NYT.
- While everyone is treating the nonfarm payroll report as gospel, let’s keep in mind that the ADP count showed that private payrolls fell 23k, completely at odds with the Bureau of Labor Statistics (BLS), which claims that this metric was up 123k. Now, we are not going to dismiss the BLS data at all, but wouldn’t it be nicer if both surveys said the same thing? The ADP is a pretty simple concept — and does not have any “plug” factors to try and assume how many new businesses were created or destroyed in any given month. Meanwhile, wages are now deflating and the 0.1% decline in March could be the thin edge of the wedge as the Gallup Daily tracking finds that 20.3% of the U.S. workforce was underemployed in March — a slight uptick from January and February.
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