Great Depression

CNBC’s long-running “jobs Friday” fetish is getting downright appalling.  Each month the BLS puts out a treasure trove of data on the rich and complex mosaic of the US labor market - a download that embodies a truly frightening trend of economic failure. Yet the clowns who assemble in its screen boxes to opine on Hampton Pearson’s 30-second summary of the BLS release never have a clue. Namely, that outside of health and education there has not been one net new job created in the American economy since July 2000! Yes, not a single new jo - as in none, nein, nichts, nada, zip!  The point here, however, is about economics, not social worth. And in the realm of economics, the notion implicit in “jobs Friday” - that all jobs are created equal - is simply a fatuous shibboleth.

The term “jobless recovery” is itself an oxymoron since the main function of any economic advance is to broaden participation. Thus a “jobless recovery” is nothing of the sort, indicating more so the re-arranging of numbers rather than full achievement – the hallmarks of redistribution.

As financialism spreads, so does disharmony, not just in function but in breaking correlations among economic accounts and statistics that were once seemingly so unconquerable.

Labor unions are a dying breed. According to the Pew Research Center, union membership in America “is at its lowest level since the Great Depression.” In 1983, there were approximately 17.7 million union workers. Today, that number stands at 14.5 million, with every estimate showing a continued downward trajectory. Clearly, the Norma Raes of the world are going extinct. But as Samuel Johnson quipped, one should never dismiss the triumph of hope over experience. With economic growth still staggering, the decline of union membership can’t come soon enough. Freed from the demands of overpaid bargainers, innovation and productivity inevitably rise. Increasing numbers of Americans are migrating to states with less strenuous union laws. When given a choice, workers go where the money is; not where there’s tough talk about bargaining rights. Ayn Rand had unions pegged best when she declared their purpose has never been to empower the average worker. “Unions and trade associations,” she wrote, “are not directed against employers or the public but against the best among their own members.” The goal has never been about “raising the weak in any way whatever, but simply forcing the strong down to the level of the moron.”

Here are some of the choice excerpts from the man who is baffled by a new effort to punish him, proud of past triumphs and incensed by criticism: “You’ll have to ask those people, ‘What do you have against Mozilo, what did he do?’” he said in a 30-minute call with Bloomberg News before Labor Day, one of his few interviews since the firm’s downfall. “Countrywide didn’t change. I didn’t change. The world changed.”  Mozilo doesn’t understand why he and his firm, blamed by lawmakers and authorities for lax underwriting and predatory lending, have been seen as villains. “No, no, no, we didn’t do anything wrong,” he said, adding that a real estate collapse was the root of the crisis. “Countrywide or Mozilo didn’t cause any of that.” Yes, the Moz talks about himself in the third person.

That 4% market correction was quick and virtually painless. Not missing a beat after the market briefly tested 1900, the dip buyers came roaring back - gunning for the 2000 marker on the S&P 500, confident that longs were not selling and that shorts had long ago been obliterated. Needless to say, bubblevision had its banners ready to crawl triumphantly across the screen. When the algos finally did print the magic 2000 number, it represented a 200% gain from the March 2009 lows. And to complete the symmetry, the S&P 500 thereby clocked in at exactly 20X LTM reported earnings based on consistent historical pension accounting. The bulls said not to worry because the market is still “cheap” - like it always is, until it isn’t. To be sure, the Fed is a serial bubble machine. But even it cannot defy economic gravity indefinitely.

From Arab Spring-related uprisings in Libya or Egypt, to a civil war in Syria and now violence in Iraq and the Ukraine, geopolitics are impacting oil. True, geopolitical risk measured by combat deaths does not always correlate well with market volatility. But wars and conflict are easy to spot on an oil price series. With combat deaths rising four fold in the last 10 years, oil markets should prepare for more turmoil. BofA 's Francisco Blanch asks "Can the US preserve geopolitical stability?" America still takes up 38% of global military spending, but appetite for foreign adventures has been low. As an example, a drop in US combat deaths in recent years has been mirrored by a rise elsewhere. Following a drop to multi-decade lows, implied vol in long dated oil options at 15% looks cheap. Oil after US hegemony may not be as steady.

"We seem to be headed for such a fateful turn. We are approaching a serious turning point that may reshape the world as did 1932 following the economic trend of the Great Depression. We are witnessing the collapse of democracy."

“It’s a Little Misleading to JUST Call This a Depression. It’s WORSE Than That”

Global crises wreak havoc on all levels of existence, not to the mention the great cost to human lives. If we are to learn from history, however, it seems as though we might have to nevertheless brace ourselves for yet another one in the near future, as it marks the end of one saeculum and the start of a new economic paradigm aligned more positively with proper balances of trade, debt, and policies. The US is trying to postpone the crisis by printing money, however this is creating currency wars with nearly all major central banks in the world. As history has shown us time and again, causing this delay through money printing will only aggravate the problem, not only not preventing the inevitable, but indeed making the transition more painful and costly.

Low volatility is being driven, in BofAML's view, by both fundamental and technical factors. Fundamentally, the volatility of real economic activity and inflation has fallen to near 20 year lows in what some are calling the Great Moderation 2.0. However, the recent further collapse in volatility is also explained by a feedback loop fueled by low conviction, low liquidity, low yields and low fear. Central bank policy has been the largest explanatory factor of both the fundamentals and technicals... and that has BofAML concerned about the risks of short-term volatility spikes exacerbated by market illiquidity.

Although the NYSE was closed between July 30 and December 12 of 1914, stocks were quoted by brokers and traded off the exchange.  Global Financial Data has gone back and collected stock prices during the closure of the NYSE to recreate the Dow Jones Industrial Average while the NYSE was closed.  We collected the data for the 20 stocks in the new DJIA 20 Industrials and calculated the average of the bid and ask prices from August 24, 1914 to December 12, 1914.  This enabled us to discover that the 1914 bottom for stocks actually occurred on November 2, 1914 when the DJIA hit 49.07, over a month before the NYSE reopened.  Few people realize that stocks in the US had already bottomed out and were heading into a new bull market when the NYSE reopened on December 12, 1914. The DJIA did not revisit this level until the Great Depression in 1932. 

Another month, another case where the primary age group of the US work force, those aged 25-54, gets shafted. According to the BLS' household survey, while overall July jobs rose, if modestly less than the 209K revealed by the establishment survey, there was no joy for those aged 25-54: historically the most important and highest earning age group (in case anyone is wondering where all that missing average hourly earnings growth is) within the US labor force. As the chart below shows, while all other age groups posted a jobs uptick, it was those 25-54 that saw a 142K jobs decline in the past month.

One of the biggest mistakes that investors make is falling prey to cognitive biases that obfuscate rising investment risks. Here are 5 counter-points to the main memes in the market currently...