Friday, July 8, 2011

The June Jobs Report

Our current depression that began in December of 2007 has been temporarily masked by a rising stock market and an increase in consumer confidence.  This is due to both endless trillions in federal government deficit spending and endless trillions in Federal Reserve monetization. (the purchase of assets with printed money)

Under the surface, however, the depression that began close to 4 years ago continues and the foundation for true economic growth is now far weaker.  It is similar to a home where the foundation is being eaten by termites that received new exterior paint and landscaping.  Someone driving by quickly would think the home looked much better than it did last year.

The two foundational growth factors for our economy are employment and housing, both of which have not returned during the current depression.  The government has nationalized the mortgage market, currently creating or insuring over 97% of new mortgages in our country.  They are providing these loans at all time record low interest rates.

Banks have temporarily kept about 6 years worth of home supply off the market, known as the shadow inventory.  With all these temporary and artificial factors in place, home prices hit a new post bubble record low last month. 

The second foundational growth factor is employment.  This morning we received the jobs report for the month of June.  Economists estimated an increase of jobs between 105,000 to 125,000.  18,000 new jobs were created for the month.  A complete disaster.  Last month's report was revised down from 54,000 to 25,000.

The birth/death model which "estimates" the number of jobs small businesses are hiring added 131,000 jobs to this number.  Without these make believe jobs we would have lost 113,000 jobs on the month.

The more important factor is the number of people "leaving the workforce" which are no longer counted by the government.  People can leave the workforce if they are retiring or if they have been unemployed for so long they have given up looking for work.  With the average retirement savings today at $11,000 and 30% of home mortgages underwater, my guess is more people are "leaving the workforce" because they have given up.

The following graph shows the labor force participation dropping to a new 25 year record low at 64.1%.

Up next we have the average duration of unemployment, which is currently at 39.9 weeks:

And finally we have where our current unemployment depression (red line) stands in comparison to previous recessions of the past century.  It shows how far we need to go to get our country back to full employment.

As discussed on Monday in The Debt Ceiling Compromise, look for the continued collapse in both housing and unemployment to provide the catalyst for the next round of government "stimulus" spending and quantitative easing from the Federal Reserve.

Our country is a heroine addict trying to recover from too much "stimulus" spending and federal reserve printing from 2001 to 2006.  Their goal will be to inject an even larger dose of heroine to try and artificially wake up the economy one more time before the 2012 elections.

Ultimately it will destroy the economy completely as our sick country will never be allowed the opportunity to recover.  The termites will continue to eat through the foundation as another layer of paint is added to the exterior of the home.

Thursday, July 7, 2011

Going Full Circle

Incredibly well done picture showing exactly how the global financial crisis will play out over the next few years.  It began with mortgage lenders failing in February of 2007 and will end with a currency crisis as it become impossible to bail out the largest countries. (Japan and the United States)

I will refer back to this picture many times as we move forward.

(Click for larger image)

Portugal And Ireland Play Hockey

As the stock market continues its tear higher, across the pond Portugal and Ireland are in huge trouble.

Portugal 2 year government bonds have blasted up to 17.5% this afternoon, while Ireland 2 year bonds have crossed 15.6%.

For comparison a 2 year government bond for the United States yields .47%.  Yes, that is 1/2 of 1% per year. (Don't be jealous that all the action is in Europe.  America, who is also bankrupt, will see its subprime government bonds explode as well)

The European Central Bank announced this morning that they would take toxic Portugal government bonds as collateral for bank funding.  This will slow but not stop the bleeding.

The chart from Portugal says it all. (Rates rising means bonds are losing value)  It is referred to as a "hockey stick." 

Wednesday, July 6, 2011

Europe Crumbles: Gold Watches

Portugal rates this morning have gone through the roof as the bond market appears to be cornering its next victim in need of a bail out. (It would be Portugal's second bail out)

Rates on the 10 year bond have crossed 13%.

Irish (next up), Spanish, and Italian rates are all sharply higher as well.

Gold has taken a look at the 4 country bond massacre and is rocketing higher once again today. ($1,530)

Monday, July 4, 2011

The Debt Ceiling Compromise

With the Greek bail out now in place, the focus of of the media and the average American can move back toward our own political clown show, also known as the debt ceiling.

We have been told if the budget debt ceiling is not raised by August 2nd, allowing the federal government to borrow additional debt, then we will see mass chaos greater than the fall of 2008.

This may be true. With a global financial system built on a house of cards, any small push could topple the giant ponzi scheme we live in today.

I don’t think we’ll get there and the show being put on by our political actors will have a conclusion before August 2nd.

The important question is what type of agreement will both sides compromise on?

Before we get to that answer you need to focus on the fact that we are only 16 months away from the next election. The most important job in America for a politician is his or her own. They understand that the economy is once again on the verge of rolling over, and they will do what they can to push back the reckoning day another 16 months.

I believe this will come in the form of a new stimulus program focused on jobs, housing, or both. It will have a name like “The Federal Job And Housing Stimulus Act.”

This spending will obviously add to the deficit in the short term. In exchange for this spending, politicians will promise massive cuts out in the future. This will allow them to present the total package as a reduction in spending.

Then the debt ceiling will be raised, and we are off to the races.

On the opposite side of the accounting ledger someone has to pay for this spending, and that is where our Federal Reserve comes in. There have already been discussions of implementing an old program called "Operation Twist." I will discuss how this program works in the future if and when it becomes the tool the Fed uses, but the important part to understand is that it is just the purchase of assets with printed money.

It is QE3, only with a different name, which is important for perception.

After the debt ceiling is raised, I see both these programs implemented the second half of the year:

“The Federal Job And Housing Stimulus Act” coming from the federal government and “Operation Twist 2” coming from the Federal Reserve.

Then our politicians can sit back and hope that we can make it through one more election before the collapse arrives. The day of reckoning that is on the way for the endless government spending and the printed money used to pay for it.

For every action there is an equal and opposite reaction. The second half of that equation is coming. Enjoy your 4th of July and appreciate the important things like your friends and family. 

Things are going to get a lot worse for America in the years ahead before they get better.  Our government is creating a disaster far greater than what we saw during the Great Depression.  This decade will be America's most difficult in its 235 year history.