We are still in a serious job recession

Last night I began this post by saying the markets are sure looking ugly. The jobs report published this morning for June does nothing to alter the thesis of this post: confidence is waning because job formation is so weak. The “topline” number — 9.5% unemployment — looks superficially better than last month’s 9.7%. But actually the rate shrank because the size of the labor force shrank. And that’s not a good thing. Other metrics on the jobs report were weak: hourly pay edged down a tad as did hours worked. Translation: There’s plenty of slack in the economy. Even if business picks up, employers don’t need to run out and hire more people.

Private companies did hire last month, but at an anemic rate of 83,000. Bloomberg noted: “The pace of hiring signals it will take years for the world’s largest economy to recover the more than 8 million jobs lost during the recession that began in December 2007.” The chart at left, via Calculated Risk, say sit all. (Click to enlarge.)

And, man, the markets are sure looking ugly.

As I wrote in early June, I thought the stock market rally had gotten way ahead of the recovery story on Main Street; that’s why we shifted our portfolio to about 75% cash and bonds. An 80% rally from the lows is a bit hard to swallow with 9.7% unemployment and a record number of people who despair of ever finding a job. And so the official story for the recent correction is a new raft of weak economic data: Home sales falling off a cliff, as everybody likes to write, now that the tax credit has expired;  jobless claims rising this week; weak construction numbers, etc., etc. And the European debt woes and slowdown in China are pretty good downers, too.

But I find it hard to believe that the numbers would be much of a surprise to market watchers. They are in sync with what many were expecting: a slowdown in the second half of 2010. But suddenly all of the elements that have been “out there” have shaken the confidence of investors. (And the confidence number out this week also shocked on the downside, falling to 52.9 in June from 62.7 in May.) Shaken confidence is the big enemy of markets. Can anyone remember when commentators dared last year to speak of “little green shoots” in the economy?

Confidence is the oxygen of the marketplace. The atmosphere is getting mighty thin.

Yale professor Robert Shiller recently wrote that fear of a jobless recovery is a key factor deflating confidence; the dreaded double-dip in the language of Main Street doesn’t mean that the recovery suddenly ends this minute. GDP is in fact expanding if slowly. But the fear that has seeped into the average Joe is that even if the recovery continues in its snail-like pace for another year or two, unemployment may stay high (which did in fact happen in the last few recessions). And then the economy may get hit again by another slowdown. It’s the long-term view that’s scary, not the short-term. And it can be self-fulfilling.

Confidence is also ebbing in the system itself. I think something may be changing in the way investors look at the market as a result of the May 6 “flash crash”  when the market plunged 10% in 20 minutes, with some stocks falling to zero. It’s more than a month later and we still don’t know why the market went into cardiac arrest that day. I don’t hear much chatter about the roller coaster ride in May, but I think the after-effects linger. I’m wondering if the flash crash — along with the not-so faded memory of the 2008 meltdown — hasn’t helped to revive our sense of uncertainty in the plumbing of capitalism.

And it’s not just the plumbing of capitalism that worries. The fiscal battles in Washington don’t inspire confidence. We are witness now to an epic policy battle between those who fear more spending will drown us and those who assert more spending will revive the economy. It’s a battle that voters get. In the early days of the Obama administration, when his popularity was unassailable, I wrote that this very battle would challenge his stature more than any other. That moment has come.

Tomorrow, by the way, the June jobs report comes out. Once more, Census temporary hiring will make the report look weak as the agency releases workers. A Bloomberg survey of economists predicts nonfarm payroll will fall by 125,000 vs a 431,000  gain in May– including 411,000 temporary workers; but private payroll should rise by 110,000 vs 41,000 in May.

Click on graphic to enlarge. Via dshort.com.

Image by Getty Images North America via @daylife

What’s it like to be in a roomful of people who are too dim to understand that you are the only person who understands how the world works?

Ask Joe Cassano, the former AIG Financial Products executive who masterminded the derivative strategy that eventually led to a $132 billion bailout of the giant insurance company.

I wish I could have been there. Without a soupcon of irony, Cassano told the Financial Crisis Inquiry Commission that the derivative contracts known as credit default swaps are still money-good. The WSJ live blog reports that one FCIC commissioner asked: “Were you too optimistic about the housing market and how it could impact the cash flows of the CDS instruments you created?”

Readers, be warned: Cassano is no Warren Buffett; he did not aw-shucks his interrogators with “who could have known?” type of assertions. Cassano is a man quite sure of himself and his analytics. The WSJ blog reports, quite incredulously: “Cassano won’t even go as far to say he was wrong about the housing market. Most everybody was wrong about how far the housing market would fall.”

The guy has serious cajones. First he sells insurance contracts on $78 billion of mortgages. No hedges. Just one caveat: The buyer can issue margin calls at will.

And Cassano, who is no longer under threat of civil prosecution, forgets to mention to the bosses that AIG is at risk for mega-margin calls. (The FCIC members seem pretty stunned that Cassano was able to keep this under his hat until 2007 when the phone started ringing — and it wasn’t Jerry Lewis at the other end of the line asking for money.)

So, is it small wonder then that Cassano is the only guy in the universe who can out-negotiate Goldman Sachs? (He was obviously good at negotiating something: He earned $300 million during his 6-year tenure at AIGFP, including consulting fees after his departure.) Cassano clearly has no patience for the way the feds handled the counterparty payouts on the CDS. The Reuters blog quotes Cassano as saying that he would have “negotiated a much better deal for the taxpayer than what the taxpayer got.”

Especially when it came to Goldman, which accounted for about 25% of the CDS book and was the most aggressive in its collateral calls. In one example, Cassano says Goldman requested $1.8 billion in collateral. He negotiated that down to $480 million. Again, from the Reuters blog, Cassano says: “”My job is not to trust Goldman Sachs’s numbers, but to verify.”

In other words, Treasury Secretary Timothy Geithner should have realized it was sunrise in America and told Goldman and friends to bugger off when they demanded 100 cents on the dollar for their contracts. True, Lehman Brothers had just bitten the dust, so it was hard in that moment to be full of optimism for the future. But a touch of the Old Gipper would have been beneficial: trust but verify.

So, it seems Cassano does have one regret: He was forced out in 2008 when the auditors decided the AIG FP accounting methods were a bit unorthodox. If he had been at AIG during the worst of the storm, he says he could have saved taxpayers billions. Who knows, maybe he could have convinced everyone to stop with all that crazy mark-to-market accounting and pretend that all was well in the land of Financial Oz. It worked for former Fed Chairman Paul Volcker during the Latin American debt crisis of the early 1980s and even has a name: extend and pretend.

We’ll never know now if it would have worked. But we know one man who has no doubts about it. In fact, for Cassano, there would have been no pretend because really, according to Joe, the investments are working out exactly as he expected.

Why, by the way, c-span didn’t air these hearings is beyond me. Also testifying today was Gary Cohn, No. 2 at Goldman, aka, CEO Lloyd Blankfein’s best friend. Twitter had great live-blogging on the hearings today from @cate_long. Check out her stream.

The General Slocum (via Wikipedia)

The other evening, as my husband and I went for a walk through the East Village, we stumbled on a plaque commemorating the deaths of more than 1,000 people aboard the General Slocum, a pleasure-seeking side-wheel steamship. They were German immigrants, mostly women and children bound for the annual community picnic. Technically,  it was flames or the treacherous currents of the East River that killed them. But that wouldn’t accurately describe the true cause of their deaths. The real culprit was corruption.

Would it surprise you to learn that regulators had inspected the ship not long before the 1,300-plus Lutheran church members had embarked on their excursion, and declared it fit? Would it surprise you even a little that the crew had never trained for disaster and the safety equipment was faulty? The lifeboats were painted and wired to the deck; the life jackets were so old that those who donned them sank.

The anniversary of that disaster in 1904 is almost here — June 15.  And until terrorists struck the World Trade Center towers in 2001, it was the deadliest fire in New York City history.

After we finished reading the plaque, my husband turned to me and said: Nothing ever really changes, does it? We fight the same battles over and over. The oversight breakdown at the General Slocum is sui generis, the losses too horrible to contemplate. But over the course of time we seem to bump into the same issues over and over. Moral laxness is a poison in our system. BP. The financial meltdown. It’s still hard to believe that people in charge of our safety and well-being would  shirk their responsibilities for personal gain.

Almost no one was held accountable for the General Slocum tragedy. Only the captain went to jail. He later received a pardon from President Taft. No on else from the ship company even went to trial. And the inspectors? They lost their jobs. That appears to be it; the Coast Guard took over inspection duties.

Accountability seems more elusive than ever. Over the past week we’ve seen a barrage of news bruiting the perils of regulator capture and indifference to the weakest among us.

Rolling Stone reports in chilling detail the sins of omission and commission leading to the disastrous oil spill in the Gulf of Mexico. The application for the rig, put forth when the new broom of Ken Salazar promised to sweep away the fecklessness of the Bush administration Department of the Interior, was a joke. A telling detail: In the event of a catastrophe, BP promises to protect walruses and other cold mammals swimming off the coast of Louisiana. Some plan.

And then come two new reports of regulatory capture. The SEC’s Elizabeth King, a key player in market and trading oversight, is joining high-frequency trading firm Getco — which is doubtless keenly interested in the investigation the agency is now putting together on the May 6 flash crash. John Paulson, the hedgie who  (in)famously shorted the housing market through a trade with Goldman Sachs, has added two former SEC heavies to his board, the NY Post reports exclusively: former SEC Chairman Harvey Pitt and former SEC Commissioner Roel Campos. Could this move be a form of insurance against a civil investigation?

Meanwhile, Forbes is stunned at the way financial reform so unabashedly favors the strong over the weak: six too-big-to-fail banks, beneficiaries of taxpayer money and central bank policy moves, earned $51 billion in 2009 while 980 lost money, the story notes. “Public policy has benefited the oligopoly at the cost of hurting some of the other 980 bank holding companies in the nation. The financial overhaul bill unfairly penalizes any bank with more than $50 billion–even if it is a retail bank serving Main Street, making loans to small business and mortgages to ordinary people, not billionaire hedge fund managers.” continue »

A federal panel has issued a subpoena to Goldman Sachs after the firm dumped a billion pages of documents in response to requests for information. I guess you could say the panel wasn’t amused.

Cue up Gene Hackman and the 1991 film “Class Action,” a legal thriller that pits father against daughter (Mary Elizabeth Mastrantonio) in a suit involving an auto maker — think Pinto and Ralph Nader. The film turns on the ability of the lawyers to manipulate a data dump:  SPOILER ALERT!  Will the key players notice missing documents in the mounds of paper? Will someone be able to slip in incriminating material?  I seem to recall Mastrantonio muttering: “It’s a f***ing Library of Congress!”  (See trailer at bottom of post.)

Next question: Who will play panel chairman Phil Angelides in the inevitable movie, “God’s Work”?

June 7 (Bloomberg) — Goldman Sachs Group Inc. was subpoenaed by the Financial Crisis Inquiry Commission after panel members said the most profitable firm in Wall Street history engaged in a document “dump” to hinder a probe.

Goldman Sachs sent more than a billion pages of documents, FCIC Vice Chairman Bill Thomas said on a conference call with reporters today. Not all of the information is what the panel requested, and Goldman Sachs didn’t cooperate with requests to interview Chief Executive Officer Lloyd Blankfein, Chief Operating Officer Gary Cohn and Chief Financial Officer David Viniar, FCIC Chairman Phil Angelides said.

“We did not ask them to pull up a dump truck to our offices and dump a bunch of rubbish,” said Angelides, 56, who previously served as California’s treasurer. “This has been a very deliberate effort over time to run out the clock.”

via Goldman Subpoenaed After FCIC Says Firm Slowed Probe (Update1) – Bloomberg.com.

The data-miners are still combing through the jobs report for May. Below, I present three savvy analysts — each with very different takes on how the economy is doing. I start with David Rosenberg, economist extraordinaire and bear; then move to bullish comments from “Davidson”, an anonymous contributor to the blog for value investor Todd Sullivan; and conclude with another investment advisor/blogger, Barry Ritholtz, who slaps down the bears but is pretty cautious in his outlook.

David Rosenberg – Disturbing tidbits:

A FEW MORE DISTURBING EMPLOYMENT TIDBITS

First, if it weren’t for the plunge in the labour force, the U.S. unemployment rate would have climbed to 10% in May. Second, the Household survey actually flagged a 35,000 outright decline in employment last month. Third, the 41,000 increase in private payrolls, about one-third of what was widely expected and the low-water mark for the year, was exaggerated by a 29,000 boost from the “birth-death” model. Fourth, the fact that the hottest sector of the economy, manufacturing, could only post a 29,000 gain, a sharp slowing from 40,000 in April is quite disconcerting — especially since it is clear that the ISM index has peaked for the cycle. Fifth, the declines in the financial sector, construction and State/local governments are a vivid reminder that the parts of the economy that were most affected by the bursting of the housing and credit bubble are still licking their wounds and cannot be relied upon to play any role in helping revive what is still very much a moribund jobs market.

It’s not just the labour market that is behaving poorly, but the housing market is too. It is remarkable that with interest rates so low that we would be seeing mortgage applications for new purchases down to a 13-year low. Take a look at page A6 of the weekend WSJ and you will see that Ivy Zelman, the country’s best housing analyst, is calling for nationwide home sales to slide between 25% and 30% in May and that is sequential, not year-on-year (that is very close to a 100% annual rate plunge. Even the usually optimistic National Association of Realtors is expecting “June and July to remain fairly weak”). A survey conducted by Credit Suisse (released on Friday) showed that in stark contrast to the latest National Association of Home builders survey, the traffic of prospective homebuyers in May was back to depths of late 2008 when the financial crisis was in full gear.

via Breakfast with Dave (by subscription only)

“Davidson”

Part 1: An anomaly:

…The fact that the [employment] surveys cover ~1% of the population which is then scaled to produce a current est. leaves plenty of room for statistical error. The accelerating employment growth since Dec2009 does not suddenly slow down. In recoveries they accelerate and are the source for consumer spending especially car and light truck sales which have been so strong of late. Economic cycles are slow ponderous things and do not start and stop. Measuring economic activity has always been fraught with errors which are corrected over time and even then becomes only our best estimate. I think the survey sample was an anomaly which will be corrected next month. The data shows similar patterns throughout its history.

via Todd Sullivan

Part 2: On good news from the Conference Board and help-wanted:

Help Wanted Online as tracked by The Conference Board has remained strong at elevated levels. This can only be good news eventually for equity investors. I pulled two excerpts of interest below. There is simply not much commentary to add when the news remains this positive.

The full press release is available at this link: http://www.conference-board.org/pdf_free/HWschoolout.pdf

Excerpts:

“After the large 223,000 April increase in online advertised vacancies that kicked off the spring hiring season, employers essentially held steady in May,” said June Shelp, Vice President at The Conference Board. “As the economy comes out of the recession, online demand has risen in a wide variety of occupations. Occupations commonly associated with office work (administrative, legal and computer jobs) as well as manufacturing and construction vacancies are improving but remain below their pre-recession levels, while online demand for workers in sales, education and training, entertainment, food preparation and service, healthcare support and personal care are all at or above their pre-recession 2007 levels.”

Online help-wanted on the upswing

via Todd Sullivan,

Barry Ritholtz — Soft Patch?

As the data confirms, there can be no doubt we have entered a soft patch. Indeed, the following data points confirm a general slowing:

• Jobs: Private sector hiring cooled off last month, with just 41,000 hires;

• GDP grew at a 3% in Q1 2010, down from 5.6% Q4 2009.

• Europe: The problems in Greek Spain and Hungary are likely to lead to significant austerity measures in Europe. Expect the Continent to see anemic growth at about 1% GDP, and that can shave 0.5% off of US GDP.

• Retailers showed a disappointing May, making no gains (outside of Autos).

• Homebuilders sentiment and mortgage apps have plunged, following the expiration of the home buyer tax credit.

• China appears to be guiding its credit and real estate sectors to slower growth.

• Conference Board Leading Economic Index (LEI) fell in April by 0.1% — the first downturn since March 2009; (May data wont be out for another 2 weeks, but it also appears to have softened).

• Dr. Copper looks pretty sorry, as commodity prices plunge worldwide.

• Unemployment claims were declining, but that progress seems to have stalled

This is, historically speaking, normal. ECRI’s Lakshman Achuthan told Newsweek: “You always have a spurt in growth out of recession and then you throttle back. But we’d need to see a pronounced, pervasive, and persistent decline in the level of the leading indicators to start talking about recession risk.”

That “pronounced, pervasive, and persistent decline” is simply not present. Indeed, double dip recessions are actually rather rare. As Yale Professor Robert Shiller pointed out in a recent Sunday NYT article, “When inflation-adjusted G.D.P. has come out of a decline and posted three or four quarters of gains, it has never immediately begun to fall again — at least not since quarterly numbers began to be issued in 1947.”

From The Big Picture, Double Dip — Or Soft Patch?