Government Tries to Outrun Recession... Again

I have a good friend named Bill who lives on the convergence of two tidal streams in an area aptly named: Twin Rivers.  Last year his bulkhead was destroyed in a severe storm.  The problem with repairing a bulkhead is that it is underwater, and that presents peculiar challenges.  The easiest way to repair it is when the tide goes a long way out.  That only happens when we get a strong northwest wind for a few consecutive days.  Thankfully, we just got one of those spells recently.  Of course, a NW wind in this part of the world, at this time of year, makes for a bitterly cold day working on the water.  Nevertheless, it is only during a great receding that repair can be done.

The recent jobs report is letting us know that the “Great Receding” is continuing.  The winds of change are a-blowin’.  The question remains, however, “What kind of ‘repairs’ will be made, and how will the market respond?”

We are now approaching 2 million jobs lost in the US.  The most in over 25 years.  The number came in at -533K, meaning 25% of all jobs lost were in the last month alone.  An interesting thing about receding tides and receding economies – as long as the winds keep blowing – they keep receding.  But even after the winds stop, things don’t return to normal right away.

It appears now that we are in for yet a deeper and longer recession than previously thought.  Each week that passes, more and more people say that exact phrase.  But let’s stop for a minute and review what we have at hand.

-A negative GDP

-A 50% cut in the Equity Market

-A new weekly high in the dollar

-2nd Highest Monthly Job loss in History

-Moving toward Highest Annual Job Loss in History

-A President-Elect who responds by saying that this catastrophe points out the need for more stimulus, job creation, and provides an opportunity to “transform the economy”. (translated, “God save us all…”)

The government has done such a good job with everything else they’ve touched, we just can’t wait to see what happens when they get their socialist mitts around the throat of a gasping economy.

While I hate to see such things as a “government transformed economy”, my first concern here is what will the market’s reaction be?  As long as the FX remains unfettered, we have the opportunity to be free marketeers.
When we look at the equity indexes we see that they have not hit a new low since around the 3rd week of November.  They are up 7 of the last 9 sessions, 6 of which are at or near their session highs.  A market bottom in place?  Or forming?  Let’s hold our horses.  If we compare this to a few elements of the Great Depression, some stark contrasts stand out.  Now I was not alive during that dour period of American History, so like you, I am dependant on the written accounts to guide me.  Unemployment was accounted as high as 25%.  Currently, it is 6.7%.  With a present loss of 1.9 million jobs, that would equal a total loss of nearly 6 million jobs if we were to reach a 25% unemployment rate.  So interims of sheer unemployment, we have only gone 1/3 of the way.

The next question is this. How about other fundamentals?  Are they likely to drive us further into higher unemployment?  Here’s one consideration.  As many seem to think it was WWII that got us from the Great Depression, we have to realize that the US government had at its disposal a much larger arsenal of economic weapons than it does now.  Essentially, as the gold standard was “relaxed”, government inflation could now assume a pedal to the metal position.  Government jobs were created at breakneck speed during the depression to get people back to work, with success based on this simple equation: More workers = more revenue.  The plan of course, was that what the workers produced would more than offset the cost of job creation and maintenance.  Wow! And the government could actually make a profit by employing this plan.  Holy Moses!  The government produce a profit?  What a wonderful idea!

Ok, enough of the sarcasm.  The point is, it didn’t work.  Were it not for massive inflation over the last nearly 80 years since then, we would not have the current illusion of wealth.  And this brings us to the next problem:  The illusion of wealth.  For most people wealth itself is “relative”.  Men always measure their wealth by what other men have.  We may never reach the levels of a Bill Gates or Warren Buffet…but most of us are not troubled by that.  We just want to know, that we have enough to care for ourselves by whatever standards we deem as being wealthy.  We also want to have more than our neighbors and co-workers.  Very few of us have a life goal of being the richest person in the world.  So our view of wealth is relative.  In the end, it isn’t really the money we want, or the house or boats or whatever.  We want the joy that such things bring us.  We want the “peace” that they offer us, that everything is going to be OK.  In the end, what we want from our wealth is the ability to enjoy our lives.  Philosophers and theologians have searched for millenia for the meaning of life.  King Solomon puts it this way.  “There is nothing better for a man, than that he should eat and drink and that he should make his soul enjoy good in his labor.  This I saw also was from the hand of God”.

I say all that to say this.  In America, the poorest among us are richer than 99% of all those who have ever lived in the history of mankind.  Yet we are still inclined to call them poor.  In contrast, we consider ourselves rich.  Not by just what we own, but because we have knowledge to increase our wealth.  We have our health.  We have a long life expectancy.  And up until recently, we had a better expectation for our children than we had for ourselves.  Because wealth is not only relational, it is generational.  We want to leave something to our children.  Something better than what we had.  It is becoming more and more apparent that this will not happen.

As the Fixer-Uppers of our time continue to manipulate and convolute the economies of the world, they cannot make it better unless they simply leave it alone.  But as that is not going to happen, we may have a lot of unfolding yet to do in this unwinding of mistakes.  Because the truth of the matter is, the markets are just like a bungee cord.  You can only stretch it so far before it shoots you in the opposite direction and there is nothing you can do. The markets will correct their inefficiencies, and all the manipulation in the world can’t stop it.  Just like the fool who petitioned congress to repeal the Law of Supply and Demand, only to find out that it is a law established by God, so will the modern tinkerers find that their “solutions” are ridiculous.

For us, we will continue to trade our trend.  Next week will bring us more opportunities.  So enjoy the weekend.

Until next time,
Bill Jenkins

December 10, 2008

The Daily Reckoning