The Present Contains All Possible Futures
The Ugly Unemployment Numbers
Argentinian Disease
The Austrian Solution
The Eastern European Solution
Japanese Disease
The Glide Path Option
Philadelphia, Orlando, and Phoenix
The present contains all possible futures. But not all futures are good ones. Some can be quite cruel. The one we actually get is dictated by the choices we make. For the last few months I have been addressing the choices in front of us, economically speaking. Today I am going to summarize them, and maybe we can look for some signposts that will tell us which path we’re headed down. For those who are new readers and who would like a more in-depth analysis, you can go to the archives at www.investorsinsight.com and search for terms I am writing about. And I will start out by briefly touching on today’s ugly unemployment numbers, with data you did not get in the mainstream media.
But first, let me welcome the readers of EQUITIES Magazine to this letter. The publisher is sending the letter to you directly. This letter is free, and all you have to do to continue receiving it is type in your email address at www.investorsinsight.com. Likewise, I have arranged for my regular readers to get a free subscription to EQUITIES Magazine, if you would like. You can go to www.equitiesmagazine.com. For those who don’t know, I write a brief monthly column for them.
The Ugly Unemployment Numbers
The headlines said unemployment, as measured by the "establishment survey," was down by 190,000; and even though that was slightly worse than forecast, market bulls were cheered by the fact that the number was not as bad as last month’s. It is an improvement that we are not falling as fast.
Well, maybe. What I did not see in many of the stories I read was that the number of unemployed actually soared by 558,000, to 15.7 million, as measured by the household survey. The establishment survey polls larger businesses; the household survey actually calls individual households.
Let’s look at the real number in the establishment survey. If you don’t seasonally adjust the number, the actual change in unemployment for October was 641,000, or about 450,000 more than the seasonally adjusted number. And the Bureau of Labor Statistics added 86,000 jobs that they simply guess were created through the so-called birth-death ratio. Interestingly, the birth-death ratio number is not seasonally adjusted, so it is just added to the unemployment number. http://www.bls.gov/web/cesbd.htm
The total (U-6) employment rate is at a record high of 17.5% (this includes those who are part-time for economic reasons). There are now over 10.5 million people who have lost their jobs since the beginning of the downturn.
My favorite slicer and dicer of data, Greg Weldon (www.weldononline.com), offers up an even more horrific number. As I have noted before, if you have not looked for work in the last four weeks, the BLS does not count you as unemployed. Quoting Greg:
"Moreover, when we combine the monthly change in the number of Unemployed, with the number Not in the Labor Force, we might consider the result to be a proxy for the actual ‘change’ in the underlying labor market situation … in which case, October’s figure of 817,000 represents the fourth LARGEST yet, behind last month’s (September’s) second largest figure of 1,021,000 … for a two-month combined figure of 1.838 million, in newly Unemployed, or no longer ‘in’ the Labor Force …
"… the second LARGEST two-month total EVER posted, barely trailing the December-08/January-09 total 1.955 million.
"Bottom line … basis this measure AND the ‘Total Unemployment Rate,’ we could conclude that not only is there NO ‘improvement’ in the labor market, but moreover, that it continues to DETERIORATE, intently."
There are plenty more implications in the data, but let’s turn to the topic of the day.
It is looking more and more like we could see another default crisis like we saw in 2008, but it may not be directly related to banks or even business. Yes we will probably see even more banks and businesses close their doors and personal bankruptcy will most likely be high. But those situations could prove to be a small problem compared to the most critical situation of “Nation Failure”. David Oakley of Financial Times, London says what he sees happening that points to just that very situation, below.
“The mounting level of debt in the industrialised world is prompting a growing number of investors to use the derivatives market to bet on the chance of rich governments defaulting on bonds.
The volume of activity in sovereign credit default swaps — which measure the cost to insure against bond defaults — linked to the US, UK, and Japan have doubled in the past year because of concerns about their public finances.
CDS volumes for Italy, which has one of the highest debt burdens of the developed economies, are now the highest for an individual country, according to the Depository Trust & Clearing Corp.
In contrast, the outstanding volume of CDS linked to emerging nations such as Russia, Brazil, Ukraine, and Indonesia have been flat or fallen in the past 12 months as investors have become less interested in trading the risks of those countries.
In the past, the CDS market for developed countries was sluggish, because few investors saw the need to buy or sell protection against a risk of default that seemed exceedingly remote.
However, rising debt levels and growing political and economic uncertainty has created a more active market, with more investors now seeking insurance. Meanwhile, many banks are prepared to offer protection in exchange for a fee.
This fee has recently jumped, since the cost to insure the debt of developed countries has increased since the summer of last year, while the cost of insuring emerging market debt has fallen.
Gary Jenkins, head of fixed income research at Evolution, said: "The biggest single risk hanging over the bond markets is the rapid rise in public debt in the industrialised world. If we get to a point where the market thinks the levels of debt are unsustainable, then we will see an almighty selloff in the government bond markets, with yields soaring. Governments need to take action to cut deficits and debt."
Fitch Solutions, the data arm of the Fitch Group, said that there is almost as much uncertainty in the CDS market about the outlook for the developed economies and their bond markets as there is for emerging economies.
Comparisons between Italy and Brazil are often used by strategists as an example of the contrasting fortunes of the developed and emerging world.
Italy’s debt to gross domestic product ratio is forecast to rise to 127.3 per cent in 2010.
On the other hand, Brazil’s debt to GDP ratio is forecast to stabilise at 65.4 per cent in 2010.
Nigel Rendell, senior emerging markets strategist at RBC Capital Markets, said: "It is not surprising that investors are increasingly worried about debt in the industrialised world. Debt to GDP of more than 100 per cent is difficult to sustain."”
We agree with Oakley’s assessment of what is happening with the developed Nations. The overly excessive debt loads coupled with the massive increase in spending, creating more debt to buy their way out of debt, is exactly the wrong policy and will only delay the “day of reckoning”.
Jay Taylor
Gold Investor
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