Issue 52 • November 11, 2009 The Mother of All Jobless Recoveries
Of course, investors barely flinched at the bad news, with markets opening lower, but soon reversing to close up for the week. This has been the custom since March ... stocks rallying on bad news under the perception that it is getting “less bad.” It appears that market gains are increasingly being fueled almost exclusively by government stimulus, with investors hopeful that the real economy will play catch up at some point. After all, the Fed and Treasury have so far spent, lent or guaranteed $11.6 TRILLION in a desperate attempt to end this Great Recession. How do their actions measure up? Well, they have a rally of nearly 60% off the lows and third-quarter GDP growth of 3.5% to show for their efforts.2 But is this sustainable? Can our economy resume a “normal” growth path any time soon ... WITHOUT massive government money printing? True, we have been told to remember that unemployment is a LAGGING, not a leading indicator. CNBC has drilled this point home repeatedly. The unemployment rate typically does not peak until after a recession has ended. That’s true, but the trouble is ... there is nothing TYPICAL about this particular recession. First, let’s review the latest jobs report ... starting with the good news. Revisions to the last two months of data resulted in 91,000 fewer jobs lost than previously reported. Also, the pace of layoffs is certainly slowing. Employment declined by an average of “only” 188,000 per month from August through October, compared with 357,000 jobs lost, on average, during the prior three months.3 This is definitely “less bad” and certainly a welcome sign. Nevertheless, fewer jobs lost is not the same as job growth ... which is what’s generally required to sustain an economic recovery. The reality is that while the “official” unemployment rate has crossed above 10% for the first time in decades, the “real” unemployment rate — a broader measure of joblessness – has been in double-digits for awhile and is even higher than the official numbers.
In fact, if this U-6 measure went back that far, it would almost certainly be at the highest level since the Great Depression. Looking at the details, seven million of these lost jobs have occurred just since the recession began in late 20075 ... and nearly three million layoffs have happened in the last eight months alone, coinciding with the current stock market rally beginning in March!6 I don’t know about you, but I find it hard to believe that the economy is on a normal, sustainable recovery path with numbers like these. So, let’s take a look at what “normal” recoveries tend to look like:
This tells me, there is nothing “normal” about this recession, which also makes comparisons to other recessions since the Depression much less meaningful. Something truly is “different” this time around. What we are dealing with today is a massive balance sheet and credit contraction that continues to impact both consumers and businesses severely. The largest corporations, those deemed “too big to fail” have a safety net of lending and bailout programs in place … courtesy of Uncle Sam. The government hopes that this cash injected into the economy will somehow “trickle down” to the rest of us who aren’t too big to fail ... but so far, it’s just not happening.
The bottom line is that banks are NOT lending ... and consumers are NOT spending. This is not a “normal” business cycle recession we’re dealing with today folks. In fact, it’s similar in some ways to the problems facing Japan since their asset bubble burst 20-years ago. Japan’s economy grew at an average rate of just 1% per year during the 1990s ... and since 2000 it has done even worse ... expanding just 0.2% on average. Japan has had practically NO net new job growth for the last two decades, and of course, the Nikkei stock index tumbled -70% from its high in 1989.12 To be sure, there are some important differences between Japan and the U.S. In Japan, an aging population, a less flexible economy and higher deficits as a percent of GDP than the U.S. has been a bigger drag on growth. After Japan’s commercial real estate bubble burst, property values plunged -87% from their peak. By contrast, U.S. real estate values have fallen only about -30% ... at least so far. Japan’s banks also had more exposure to bad real estate loans than in the U.S. Although banks here — both large and small — continue to post loan losses and asset write offs.13 Unfortunately, there are some other disturbing similarities with Japan as well.
Today, Washington is printing money like mad and propping up the big banks, just like Tokyo did 20 years ago. In fact, just like the Fed has done, the Bank of Japan slashed short-term interest rates to less than 1% way back in 1995, desperately trying to get banks to lend and jump-start their economy, but with no luck. Nearly 15-years later, interest rates today are still stuck near ZERO!14 Are we headed down this same path? Larger deficits loom in the U.S. and it’s almost certain that our tax rates will move higher to pay for this stimulus. As for unemployment ... it’s not a pretty picture. A recently published book, “This Time is Different”, takes a closer look at recessions that followed severe financial crisis — including Japan’s. And last year’s near meltdown of the U.S. banking system would certainly qualify. What the authors found was that, in the aftermath of such crises, rather than the economy soon returning to normal, the jobless rate continues to rise for nearly FIVE years afterward. If that’s in store for the U.S. this time, then brace yourself for an unemployment rate that could keep rising through the end of 2011!15 Good investing, P.S. Could U.S. rates stay near zero for another 10 to 15 years ... as in Japan? I sure hope not, considering the damage done to Japan’s economy. To learn about strategies with the potential to earn higher yields, you should see our Webinar: Earning Higher Income in a Low Yield Market. The replay is available on our Website, but only for a few more days. Go here now to view it before it goes offline. 1 Bureau of Labor Statistics, Employment Situation Summary, 11/6/09 Disclaimers: 1. Weiss Advice is a publication of Weiss Capital Management, an SEC Registered Investment Adviser. Weiss Research is a separate, but affiliated publishing company. Both entities are owned by Weiss Group, LLC. 2. "Weiss Advice" is published for general information and educational purposes only and should not be construed as a specific recommendation to buy or sell any security. Specific recommendations can only be given to advisory clients of Weiss Capital Management, with the benefit of knowing their financial condition and suitability. Receipt of this publication should not be construed as a solicitation to do business outside the jurisdiction for which the Firm is approved. Currently, Weiss Capital Management offers investment advisory services to individuals maintaining legal residency within the United States. For details, please contact the Firm. View Weiss Capital Management's Privacy Policy. To make sure you don't miss our urgent updates, add Weiss Advice to your address book. Just follow these simple steps. |
The “V-shaped recovery” crowd was dealt a slight setback on Friday when the October employment report came in worse than expected — showing another 190,000 job losses and an “official” unemployment rate that has now reached double-digits at 10.2%.
The U-6 jobless rate takes into account discouraged job seekers who have given up looking for work and those forced to work part-time due to the recession. This measure has risen to a new all-time high of 17.5% ... surpassing the previous record set during the devastating double-dip recession in the early 1980s! By this measure, nearly 16 MILLION Americans are now out of a job ... or one out of every six workers is displaced.
Normally, by the time the stock market has risen 60% off lows the economy has generated more than 2 million NEW jobs ... not LOST almost 3 million existing jobs, as we’ve seen this year!
In fact, bank lending has fallen sharply, with total commercial loans and leases plunging by more than $500 billion since October 2008.
