When 18K isn't 18K!

Good day… And a Marvelous Monday to you! I am at home writing, which isn’t unusual, but when I’m finished writing, I’m heading back to bed! I was up all night with a stomach that didn’t like something I ate yesterday… UGH!

OK… The Jobs Jamboree was quite the sight on Friday… Not only did we create a mere 18K jobs in December, but the unemployment rate jumped to 5% from 4.7%. The manufacturing sector lost another 31K jobs in December, and the construction sector lost 49K! I hate to bring you such bad news on a Monday, but folks… I believe we’re already entering the recession for the economy. First we had the ISM (Manufacturing Index) fall on the “contraction” side of the ledger, and now this awful jobs report.

So, I guess you’re wondering what the title of the Pfennig is all about today… When 18K Isn’t 18K… It all comes back to one of my favorite piñatas to beat on… The Bureau of Labor Statistics’ “Birth/Death Model” – which I refer to as “ghost jobs”. Now, over the years, I’ve explained this “model” over and over again. So for the new readers, I’ll let my friend John Mauldin do the “explainin'”.

From John Mauldin’s weekly newsletter, Thoughts From the Frontline:

“The BD ratio estimate is based upon past history. While estimating the most recent month’s employment picture is quite difficult, you can do a fairly accurate job when you go back a few years, using other government data, tax information, etc. And so you can create a trend for how many jobs you miss due to the birth and death of jobs in the small business area. Now, remember, that number is an average of many years of history. As an average it is fairly accurate over long periods of time.

“But there is one flaw in this methodology: it will tend to underestimate new jobs when the economy is recovering from recession and overestimate them when the economy is slowing down. Thus, in 2003-4, the Democrats were beating up Bush about the jobless recovery. As it turns out, those employment numbers were massively revised upward a few years later. There was in fact a powerful recovery going on, just not in the statistics. However, nobody but a few economic geeks paid attention, as it was last year’s news.

“This month the BD ratio created 66,000 new jobs for the establishment survey, or 48,000 more jobs than the headline number.”

So… As John explains, when we’re heading to a recession/slowdown, the methodology is flawed, it adds too many jobs.

OK… I won’t dwell on the Jobs Jamboree any longer except to say that it lit a fire under the currencies and before you knew it, euros (EUR) were back to 1.48! But that didn’t last long… Oh, no! There are some knuckleheads out there claiming that the bleak jobs picture was “overdone”, and this news has the dollar rallying… UGH! I shake my head in disbelief!

Last night… Martin Feldstein, president of the National Bureau of Economic Research, which dates U.S. economic cycles, said that the odds of a recession have risen to more than 50% after a report showing unemployment jumped in December. He suggested a 50 BPS cut in January would be helpful, consistent with the change in forecasts for Fed action from several large banks, although Feldstein also indicated the need for action beyond just a rate cut (i.e. fiscal stimulus) to prevent the economy from dipping into recession.

Thanks for that insight there Marty, but I think your dancing to the tune… Too much, too little, too late! The recession is here… Right here right now, watching the world wake up from history.

There’s not much in the data cupboard this week, until we get to Friday’s trade deficit. So… We’ll be held hostage to “Fed Speak”. The first Fed Head out of the starter blocks will be the Fed Atlanta President, Lockhart.

Oh, and don’t look now but the Fed Funds Futures guys are pricing in a 66% probability of a 50 BPS rate cut later this month. Hmmm… If the Fed sees what I see, then that should be a lay-up… But you and I would be giving the Fed Heads far too much credit, wouldn’t we?

And on the “funding” problem that the U.S. is currently encountering, my technical charts friend that sent me a note about the dollar remaining weak in 2008, followed up with this note:

“Throughout most of 2006 and 2007 the S&P 500 and other US stock indices moved inversely to the USD index. So when stocks went up, the dollar was getting cheaper and vice versa. This kept US investors flat on a global scale.

“Then something very scary began happening in about mid-October, the two indices started moving in tandem again.

“So now…we’ve got a falling stock market AND a falling dollar. Coupled with real inflation running at over 10% most U.S. investors don’t stand a chance!”

That’s right… A falling dollar, and falling stock market will scare away the foreign investors in droves… And that’s scary folks!

I’m going to head to the Big Finish for today, I know this is short, but I’m a hurtin’ bird this morning.

Currencies today: A$ .8740, kiwi .7670, C$ 1.0007, euro 1.4710, sterling 1.9730, Swiss .8975, ISK 61.81, krone 5.3450, SEK 6.3610, forint 173.41, zloty 2.4490, koruna 17.75, yen 109.10, baht 29.80, sing 1.4340, HKD 7.80, INR 39.28, China 7.27, pesos 10.92, BRL 1.7650, dollar index 76.05, Oil $97.50, Silver $15.40, and Gold… $865

That’s it for today… The home office Jacksonville Jags sure pulled out an exciting win on Saturday… It’s basketball season for my little buddy, Alex, and that means Friday nights and Saturday afternoons… Happy Birthday to our Mary Vance… (I could be late on that one!) What a great day yesterday! It was like spring! We sat outside with neighbors and family… Hard to believe it was the sixth of June! We’ll pay for this warm weather in January, I’m certain of that! Hope your Monday is Marvelous, I’m back to bed!

Chuck Butler
January 7, 2008