The Daily Reckoning - Employment Disaster

verfasst von Firmian, 24.09.2003, 21:55

-->The Daily Reckoning

Bonn, Germany

Wednesday, 24 September 2003

----------------------

*** Optimism is ubiquitous... so is humbug... the
disappearing jobs...

*** We pull down the recovery's pants and reveal the
disappointing truth!

*** Buffett idolatry... dissecting Il Duce... and more!

----------------------

"Economic optimism is widespread," begins an article in
yesterday's Financial Times."Merrill Lynch's global
survey of fund managers, published last week, showed that
87 per cent of those polled expected the global economy to
grow over the next 12 months with most in favor of 'much'
stronger growth."

Unemployment is low. Inflation poses no obvious threat.
The Fed is free to hold rates down"a considerable period"
to make sure the economy gets underway. The U.S.
government is ready to help, too - as long as someone will
lend it the money - with a $500 billion deficit spending
program.

"The growth rate is widely expected to reach 5%,
annualized, in the third quarter," continues the FT.

You have read our scoffs before, dear reader. Every time
the 'recovery' appears before us, we feel like yanking on
his beard, for we are sure he is an imposter. Today, we
pull down his pants and check for birthmarks.

To hear the popular press tell it, the nation's factories
and malls are in full up-swing. GDP rose 3.1% in the 2nd
quarter - twice as fast as expected.

"Consumer spending accelerated to its fastest pace since
the fall; business investment grew at its fastest rate in
3 years and construction was stronger than thought,"
concluded the Wall Street Journal.

We have already pointed out that more than half the GDP
growth of the 2nd quarter was the result of military
spending. Without it, GDP would have grown scarcely more
in the 2nd quarter than it in the first. We also mentioned
the curious effect of crunched and tortured numbers on
computer spending. Information technology, it turns out,
"accounted for more than the overall increase in business
fixed investment," writes Dr. Kurt Richebächer, snitching.
"This investment component soared by $38.4 billion, or
12%, from $319.1 billion to $357.5 billion. This clearly
looked like a new boom."

But it was a boom that no one heard... for it never
happened. The real increase in spending on computers
barely squeaked; it was only $6.3 billion. Still, using
its quality-enhancement jets, government statisticians
were able to blow the number up by more than 600%.

If you let the numbers take their natural shapes, you get
a very different impression of the first quarter. GDP grew
by a paltry 0.27%."Even including the huge amount of
defense spending, this is hardly better than the growth
rates in the rest of the world," Richebächer concludes.

Pulling down the recovery's pants, we discover the
disgusting truth. It is right there in the unemployment
numbers. Not one of the 7 or 8 postwar recoveries failed
to produce jobs, Dr. Richebächer tells us. But in the 20
months following the official end of the most recent
recession, about 1 million jobs have been lost. In the 2nd
quarter, 260,000 is the number given for jobs lost. Even
this is a bit of a lie. It doesn't measure the number of
people who've given up looking for work - a number said to
be twice as large.

Plus, with his trousers down, we find an even bigger
disappointment in Mr. Recovery."The government adds every
month some 30,000 - 50,000 imaginary workers to the job
total," Richebächer tells us."It is based on the
assumption that in an economic recovery, people start
their own businesses... Once a year, the statisticians
reconcile their assumption with reality by a revision.
When they did this in May of this year, 400,000 new jobs
that have been reported earlier simply vanished. Such
revisions, of course, take place outside the monthly
reported job losses. Together, we presume, these
statistical casuistries have reduced the reported job
losses in the past two years by well over 100,000 per
month." More from the good doctor below...

Addison?

-------------

Addison Wiggin, writing from Paris...

- When it rains it pours, goes the saying... we have been
rather excited by the launch of our book"Financial
Reckoning Day" through bn.com. Last weekend, after the
announcement we mailed to you, we raced past John Grisham
and The South Beach Diet in the sales rankings on the
site. Then, we knocked"Dr. Phil" off the #1 slot on the
bn.com best-seller list - and stayed there all weekend. It
was all very exciting, indeed. But unfortunately, for
whatever reason, bn.com hasn't stocked enough copies to
keep up with the demand.

- Briefly, last night, while we were nervously refreshing
the screen to check the best-seller page, we noticed that
they had received a second shipment. And for a brief
moment, we were back in the game! Alas, it only lasted an
hour; the shipment was already spoken for. Now, the book
has been sidelined again... de-listed:"Not Yet Released",
as if we had not launched at all. We have subsequently
dropped to #9 on the list... even the pair of loud-mouths
Bill O'Reilly and Al Franken have passed us by... quelle
tristesse!

- Secondly, one of our French colleagues, responsible for
the distribution of La Chronique Agora, the French-
language edition of the Daily Reckoning, has taken an
abrupt leave of absence. Consequently, his colleagues here
in the Paris office were faced with the challenge
broadcasting using the American broadcast system, whose
instructions are written in English. The result was... as
you may have noticed... a three-fold broadcast of La
Chronique Agora to your e-mail address yesterday. We'd
like to apologize profusely. With any luck, it won't
happen again.

- Back to the markets... the dollar plunged to a near 3-
year low yesterday... Treasury Secretary John Snow warned
"other nations" as he was leaving the G7 shindig in Dubai
that they had better not count on the U.S. consumer to
continuing buying imports... and Koffi Anan, head honcho at
the U.N., warned the general assembly that"we have come
to a fork in the road... a moment no less decisive than
1945 itself, when the United Nations was Founded."

- Meanwhile, gold staved off selling pressure from Goldman
Sachs and Morgan Stanley, closing the day down only one
dollar at $385.

- What do all these events have in common? Dave Lewis,
writing on his Chaos-onomics website, summed it up nicely:
"Economic policy makers around the world appear to have
finally decided to try to restore equilibrium. This is
never a painless effort as it involves behavioral change
on a mass scale, most recently experienced here in the
U.S. in the 70s. Whether the political will can be found
to stay the course remains to be seen... As Arthur Miller
describes so well in Death of a Salesman, it is the
illusions of greatness which come back to haunt."

-"If you don't think it can happen here," writes Dan
Denning in the opening salvo of Strategic Investment this
month, referring to collapse of the U.S. dollar,"you
might be surprised to find out that it already has, twice.
And both times, the crumbling currency has taken the
financial markets with it, but left investors in hard
assets comparatively safe.

-"It wasn't the end of the world either of those two
previous times... [and contrary to the opinions of your
editors,] it won't be this time either. But it will be a
period of painful adjustment for most."

- What will a painful period of adjustment look like?
Perhaps this is an indication. The AARP released a report
yesterday saying a survey of its members finds"most" plan
to keep working well into their 70s."Higher healthcare
costs," says a review of the report posted at CNN.com,
"insufficient retirement funds and recent investment
losses feed the need to keep earning."

- Given Kurt Richebächer's comments below, one wonders,
what jobs will they continue to work in? The day of
financial reckoning has more and deepening consequences
than even we, who watch with the awe of a witness to train
wreck each day, are aware...

--------------

Bill Bonner, back in Bonn...

*** We have come to Germany to see Robert P. Miles, a
Warren Buffett worshipper. We say 'worshipper' because his
comments on Mr. Buffett last night brought him dangerously
close to mortal sin.

Mr. Miles explained Warren Buffett's investment secrets.
Our train was held up, so we arrived late, but we pass
long the secrets we heard:

"Don't buy a little of a lot of stocks, like Wall Street
tells you," Miles explains."Buy a lot of just a few.
Buffett says he knows of no outstanding super-investor who
owns more than 4 or 5 stocks."

"Don't diversify," he went on;"concentrate on a few
companies and make sure you choose them very, very well."

What companies should you buy?"Those that you can buy at
their intrinsic value or less [based on discounting the
stream of earnings over the life of the franchise]... which
have in place good management and a durable franchise with
a moat around it."

What do you look for in managers?"Buffett looks for three
things: integrity, energy and intelligence. Of those, the
most important by far is integrity. If they don't have
integrity, Buffett would rather have managers who are lazy
and stupid. And he doesn't want to buy businesses from
people who just want money. He wants managers who love the
business and will stick with it. Buffett has no vice
presidents. He has fewer than 15 employees. He can't send
out anyone to supervise or trouble-shoot these businesses.
He leaves them alone. One CEO of a Buffett-owned company
told me that he hadn't seen Buffett in 20 years.

"Don't trade in and out of stocks. Buy just a few and hold
them for a long, long time. Warren Buffett's favorite
trading period is forever," continued Miles."Did you know
what the average holding period for Nasdaq stocks is? It's
just 6 months. And stocks on the NYSE? Just one year. But
the average share of Warren Buffett's Berkshire Hathaway
only changes hands once every 17 years. And Buffett
himself holds its shares for an average of 20 years."

There you have it, dear reader. All you need to know to
become a billionaire. Of course, you may need the biggest
bull market in world history too, but Mr. Miles didn't
mention it.

Here at the Daily Reckoning, we have mixed feelings about
Mr. Buffett. We appreciate his sage advice, but we find
his example both noble and pathetic. Mr. Miles showed a
photo of Buffett's plain house in Omaha. We were supposed
to applaud the simplicity of it and admire Mr. Buffett's
devotion to his métier. Like Hannibal, the leading general
of American shareholders shares his soldiers' hard
life... and only slips away occasionally, to his $6 million
California condo.

But, looking at the Omaha photo, we can't help but wonder:
if you have to live in a barrack like that, you might as
well be poor.

More on Warren Buffett... Abraham Lincoln....Johnny
Cash... and other unrelated subjects... on Friday.

*** An alert Daily Reckoning reader, still on the trail of
Il Duce:

"Earlier, I emailed you with some more detail about
Mussolini. This level of background is what John Flynn
does not tell you (he probably did not know this much
history about Il Duce back in 1943-44), when he says that
absent the War some other person might have come to power
in Italy, and governed with a different form of 'fascism.'
Absent the War, Mussolini would have remained a Socialist
crank on the fringes of power.

"But the keel of the fascist ship had been laid in Italy
over the 60 years previous to Mussolini's rise to power.
Mussolini was a war hero who used the disaffected arditi
to consolidate his rise to power. The instrumentalities of
fascist power were already in place. Mussolini took over
the throttles of this power. But could any other captain
have taken the helm of the Italian ship of state? Would
the history of Italy, if not Germany, if not the world be
any different? Thus Flynn wrote part III of 'Marching,'
all about FDR and his New Deals.

"This, I think, is the key point of John Flynn's
'Marching.' When the roots of fascism grow in the cultural
and political soil of any nation, it takes only a man with
a certain kind of vision to bring out a certain kind of
result. When the apparatus of state planning and
government spending via massive public debt are in place,
these items can be used for better or worse (and usually,
for worse). Flynn spent decades writing and criticizing
FDR, and he did not need to take time out of his schedule
just to write a book of Italian-German history. 'Marching'
is a book about how things similar to what occurred in
Italy and Germany, giving rise respectively to Signor
Mussolini and Herr Hitler, were occurring and had occurred
in the USA, circa 1930's-40's.

"The U.S. republic bought a reprieve from the apparatus of
fascism in 1936 when the Supreme Court struck down two of
the key early New Deal agencies, the National Recovery Act
and the Agricultural Adjustment Act. But after FDR began
to place 'his' justices behind the high bench, the
'general welfare' and 'interstate commerce' clauses of the
U.S. Constitution took on new meanings that legitimized
the growth of the central government's powers according to
FDR's schemes. Interestingly, FDR's new justices found
things written and or implied in the U.S. Constitution
that no Supreme Court justice had seen in the previous 150
years of the nation's history. Supreme Court jurisprudence
began its decades-long drift away from black-letter law
and Gold-standard moorings. In 1955 John Flynn proposed
that the States adopt a Constitutional amendment to the
effect that no Supreme Court decision from 1937 onwards
stand for any precedent, or have any controlling power in
the law. But that is another story for another time.

"Still in shock and awe, I remain... BWK"

---------------------

The Daily Reckoning PRESENTS: The strong, compelling
evidence of an economy that is as far away from a recovery
as its disastrous job numbers.


EMPLOYMENT DISASTER
By Kurt Richebächer

There has been much talk to the effect that America has
just had its slightest recession in the whole postwar
period. That is measured in real GDP growth, being
bolstered by many statistical tricks. Measured, however,
by job losses, which certainly are the far more important
gauge, it is already America's worst recession by far.

In June it was declared that the recession had ended in
November 2001. Yet in the 20 months since, payroll
employment has declined by a total of about 1 million
jobs, or about 8%. In not one of the seven or eight
postwar recoveries has there been any employment decline.
Immediate strong job growth has been the regular
characteristic of all business cycle recoveries. On
average, payroll jobs increased 3.8% in the 20 months
following the end of recession.

What's more, no letup in job losses is in sight. During
the second quarter, widely hailed for its better-than-
expected GDP growth, the household measure of employment
slumped by 260,000. However, this figure concealed an even
greater number of workers - 556,000 - who statistically
quit the workforce because they have given up looking for
nonexisting jobs.

This rapidly growing group of people no longer count as
unemployed. What American job statistics really measure
are not changes in unemployment, but changes in job
seekers. Including the frustrated job seekers, the U.S.
unemployment rate is hardly lower than in Europe.
Certainly, it is rising much faster.

In addition, the Labor Department is employing month for
month the same two practices that camouflage the horrible
reality. In July, for example, it reported a decline in
payrolls by 44,000, while job losses for June were revised
upward from 30,000 to 72,000. For May, the retrospective
upward revision was even from 17,000 to 70,000. As such
upward revisions of job losses in the prior month have
become a regular feature, this practice has the convenient
effect of producing correspondingly lower new numbers
every month. The same happens, at more moderate scale,
with weekly reported claims.

There is still more spinning involved. The government adds
every month some 30,000-50,000 imaginary workers to the
job total. It is based on the assumption that in an
economic recovery a lot of people start their own
business. In normal recoveries, they have done so, indeed.

All it needs to activate this statistical job creation is
a unilateral decision by the government that the economy
is in recovery. Once a year, the statisticians reconcile
their assumption with reality by a revision. When they did
this in May of this year, 400,000 new jobs that had been
reported earlier simply vanished. Such revisions, of
course, take place outside the monthly reported job
losses. Together, we presume, these statistical
casuistries have reduced the reported job losses in the
past two years by well over 100,000 per month.

It rather abruptly became the consensus view that in
America the great recovery from protracted, sluggish
growth is finally on its way. Record-low interest rates,
runaway money and credit growth, new big tax cuts, record-
high cash-outs by consumers through mortgage refinancing,
increasing house and stock prices, and rising profits are
cited as the compelling reasons for this optimism.

We are more than skeptical about the true impact of all
these influences on the economy primarily for one reason:
Most of them, if not all of them, have been at work for
some time already, but with grossly disappointing overall
effects on the whole economy, and now some of these
influences are weakening or even reversing.

Think of the sharp rise in long-term interest rates that
is most assuredly stopping the mortgage-refinancing bubble
dead in its tracks. That, in our view, will not only abort
any recovery but will also mean the economy's relapse into
new recession.

As for fiscal policy, it clearly gave its biggest boost to
the economy between the fourth quarter of 2000 and the
second quarter of 2002. That is a period of six quarters
during which the federal budget gyrated from a quarterly
surplus of $306.1 billion to a deficit of $526 billion,
both at annual rate. This year, the deficit is supposed to
hit $455 billion. Most probably, it will come out much
higher. But this follows a deficit in the last year of
$257.5 billion. The fiscal stimulus is waning, not
increasing.

In any case, actual, historical experience in the 1970-80s
with large-scale government deficit spending has been
anything but encouraging. It created more inflation than
economic growth. Over time, rising deficits were rather
recognized as impediments to economic growth. Japan's
recent experience makes frightening reading. Since 1997,
government debt has skyrocketed from 92% to 150% of GDP,
rising every year by more than 10% of GDP. Yet nominal GDP
keeps shrinking.

As to monetary policy, we have very much the same doubts
about its efficacy in generating economic growth under
current economic and financial conditions. It is the
traditional American consensus view that monetary policy
is omnipotent if properly handled. In this view, any
recession, or worse, always has its decisive cause in the
failure of the central bank to ease its reins fast enough.
In this view whatever happened in the economy during the
prior boom is irrelevant.

This time, both monetary and fiscal policies in America
have acted with unprecedented speed and vigor. To people's
general surprise, the economy's rate of growth abruptly
slumped during 2000 from 3.7% in the first half to 0.8% in
the second.

Starting on Jan. 3, 2001, the Fed slashed its short-term
rate in unusually quick succession. Within just 12 months,
its federal funds rate was down from 5.98 to 1.82.

Assessing the development, the first thing that struck us
as most unusual was that this sudden, sharp economic
downturn occurred against the backdrop of most rampant
money and credit growth. Total nonfederal, nonfinancial
credit grew by $1,144.3 billion in 2000, after $1,102.6
billion in the year before. This compared with nominal GDP
growth during the year by $437.2 billion. The first
important conclusion to draw therefore was that this
sudden economic downturn had obviously nothing to do with
money or credit tightness.

Ever since, nonfinancial credit growth has sharply
accelerated. In the fourth quarter of 2002, it hit a
record of $1,612.8 billion, at annual rate, followed in
the first quarter of 2003 by $1,338.3 billion. This
coincided with simultaneous nominal growth of $388.4
billion and real GDP growth of $224.4 billion, both also
at annual rate. For each dollar added to real GDP, there
were thus six dollars added to the indebtedness of the
nonfinancial sector.


Regards,

Kurt Richebächer,
for The Daily Reckoning

P.S. During the 1960-70s, by the way, there was on average
about 1.5 dollars of debt added for each dollar of
additional GDP. Just extrapolate this escalating
relationship between the use of debt and economic
activity. And think of it: the GDP growth of today is
tomorrow a thing of the past, while the debts incurred
remain. Plainly, Greenspan's policy has collapsed into
uncontrolled money and debt creation that has rapidly
diminishing returns on economic activity.

As we noted in these pages last week, the late economist
Hyman P. Mynsky would call this a Ponzi economy where debt
payments on outstanding and soaring indebtedness are no
longer met out of current income but through new
borrowing. Soaring unpaid interests become capitalized.

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• The Daily Reckoning - Employment Disaster - Firmian, 24.09.2003, 21:55