Market Review: Déjà vu: Jobless Recovery, Part ll
A new boom rarely starts with the past boom’s leaders.
We Daily Reckoneers have repeated the phrase so many times, italmost sounds like it might be true. Of course, that won’t stopus from saying it again: "a new boom rarely starts with the pastboom’s leaders"…
Especially since, for a moment this week, the market actuallyappeared to confirm our suspicions: Gold, homebuilding, oilservice, oil drilling were among the "real" asset sectors thathelped drive the Dow if not up, then, at least, notably sideways. The harbinger of blue chips gained 37 for the week to 9191…
The Nasdaq, meanwhile, got dumped on its arse. For the week, "the Nas" was down -71 to 1644. Makers of semiconductor equipment,semiconductors, telecom equipment, wireless services, and biotech groups all took it on the chin.
But never fear, there’s still plenty of room for concern.
"Rather than exiting the equity market altogether," writesBrifing.com’s Patirck O’Hare, "it appeared as if tech investorssimply rotated funds into blue chip names that haveunder-performed the highflying tech stocks on a relative basisyear-to-date." In other words, we’re still on hold for the bigshift out of US stocks altogether. For if the trend holds truewithin the stock market, why wouldn’t it hold for the globalmarkets, too?
Can you really blame them though?
For their part, the lumpeninvestoriat were no-doubt reassured byanother round of "solid economic news" released by governmentquants this week. Both consumer spending and non-residentialfixed investment were notably up in the second quarter. And asharp drop in inventories suggests we may see a boost in GDP inthe quarters ahead.
According to mes potes over at Apogee Research, consumer spending increased 3.3% vs. a 2% decline in the first quarter, propelledby a 22.6% increase in durable goods purchases. Advance estimates showed second-quarter GDP growth of 2.4%, annualized, which wasup from 1.4% in the previous two quarters. All good news to theinveterate Keynesian.
"But… before you break out the champagne," warns ApogeesAndrew Kashdan, "hark back to the volatility of past growthstatistics and the disappointments. And you’ll see that whilethis GDP report, and possibly the next few, will be welcomed bythose who take comfort in a nice headline-making numbers, thelong-awaited self-sustaining recovery has still not arrived.
"In 2002, for example, the first and third quarters registeredgrowth of 5% and 4%, respectively, while the second and fourthperiods mustered only 1.3% and 1.4%, respectively. In similarfashion, growth of private fixed investment soared at 4.4% in the 2002 fourth quarter, only to plummet to minus 0.1% in this year’s first quarter."
Instead of getting all giddy about rising GDP numbers, we mightwant to do something a little more practical and ask as my friend and colleague, John Mauldin does: "Where Are the Jobs?"
As those who toil behind the scenes in economics profession know, employment is the key to recovery. This so-called "recovery" hasand is not doing the one thing recoveries are supposed to do:create jobs.
"Unemployment didn’t actually fall," Mauldin points out. "Theauthorities who count such things only count those who areactually seeking jobs as unemployed, which makes some kind ofsense. But last month, they dropped around one half million ofour fellow citizens from the unemployed ranks, not because theyhad found jobs, but because they had become so discouraged, theystopped looking."
Sure, the GDP figures suggest the economy may have grew at 2.4%in the second quarter… but we can’t overlook the fact one time spending by the government on the Iraqi war. Factoring in thoseexpenses puts the real GDP at less than 1%. Unfortunately,"one-off" expenses don’t lend themselves easily to annualisedfigures.
"If the investment rebound is for real," writes Apogee’s Kashdan, "businesses will hire workers. In other words, while there maywell be some encouraging signs, continued spending by consumersand the Pentagon will not be enough to ignite a full-fledgedrecovery, especially in this unique post-bubble climate."
What’s more, as we suspected would happen, the recently hailed,recently-quashed refi boom also appears to be a "one-off" forsecond-quarter GDP numbers, too. Again we turn to Mauldin: "While there will still be re-financing in the future (as long as ratesstay where they are), it will not be the huge stimulus it is this second half. As an aside, I have seen estimates that a largedrop-off in mortgage refinancing could result in the unemployment of tens of thousands of people who have been hired recently toprocess them. More unemployment pressure."
So, in light of this week’s rosy economic scenario, we’re back to the age-old question: Can consumers prop up the economy until the recovery takes hold? For example, do we expect the Bush team’s"can do" proposal for tax cuts and low interest rates to bolsterthe spend-thrift consumer until real investment picks up towork?
Casting aside our fall-back answer (ie. that Daily Reckoningreaders ought to get used to the taste of raw fish) a new reportby The Levy Economics Institute suggests a probable answer: no.
Even though home prices and frenzied mortgage-refinancing appear, at least for the time-being, to have offset losses in the stockmarket, the Levy Institute concludes simply that "the short-termoutlook remains uncertain," while "the long-term one is bleak."
In a nutshell, the Levy report suggest that, despite a rise inreal disposable income, consumers are still afraid of losingtheir jobs. Household balance sheets are already straining: debts are mounting; asset values (stocks, for sure, but homes possiblytoo) are falling. Thus, spending will remain weak.
Meanwhile, the corporate world is undergoing a similar crisis.Their balance sheets just have a lot more zeros tacked on theend. The Levy report makes the claim that even if monetary andfiscal policies create a cyclical upturn, the recovery will notbe sustainable. Post-bubble imbalances… and the inevitablebursting of the next great bubble (real estate) are likely todoom it from the get-go.
Grim stuff, huh? Buy gold. And try to stay cool.
The Daily Reckoning
August 10, 2003
P.S. As I was finishing up this little bit of gloom and doomanalysis, Dan Denning sauntered into the office and handed me aWall Street Journal article with the headline: "August WinsDubious Honor Of Worst Month For Stocks." The first line of thearticle encourages readers to "brace themselves for a potentially ugly couple of weeks on Wall Street."
Dan then made the gratuitous prediction that the Dow would finish the year at 7925… down 14% from where we sit right now. "Infact, we could probably see a big chunk of that here in the nextmonth or so… " says Dan. "Puts, baby, buy puts".
THIS WEEK in THE DAILY RECKONING
MARRIAGES OF CONVENIENCE (08/08/03)
by Bill Bonner
"… Convenient, calculated marriages have their drawbacks; whenthey become inconvenient, they fall apart. These are the thoughts that lurked in your editor’s head as he listened to his wifeelaborate Alan Greenspan’s case: "Economies are alwaysevolving… but not everyone has to make shoes. Look at theSwiss, they don’t have to manufacture shoes either. But they arestill very wealthy. They offer services, like banking, to therest of the world." But your editor had to win the argument… "
THE KINDLEBERGER TRICK (08/07/03)
by Dr. Steve Sjuggerud
"… Can deflation even be avoided? Interestingly enough, Charles Kindleberger suggested an answer back in 1978 – during the height of inflation. ‘A lender of last resort should exist, but hispresence should be doubted,’ Kindleberger concluded. Whether youagree with him or not, Kindleberger’s Trick is exactly the policy the folks at the Federal Reserve are operating under… "
GAME OVER (08/06/03)
by Eric J. Fry
"In the Age of Greenspan, nobody builds anything unless they have to. ‘Financial services’ is where the modern-day rubber meets the road… And investors have celebrated the low-residue realitiesof this Brave New Economy by bestowing a massive marketcapitalization upon the financial services sector. That’s why the stock market is much more vulnerable to soaring interest ratesthan most folks realize… "
ATTORNEY-CLIENT PRIVILEGE UNDER SIEGE (08/05/03)
by Robert E. Bauman, JD
"… If the IRS position is upheld, the agency can simplyspeculate that certain groups of people are engaging in allegedillegal tax avoidance schemes and grab their lawyers’ files. Asimple statement from the IRS that it believes a certain taxshelter or other plan to be ‘abusive’ will open the files of anyclient who may have discussed the plan with a lawyer, let aloneadopted the plan as his own personal or business tax strategy…"
MONEY-GRUBBING AT THE CENTRAL BANK (08/04/03)
by The Mogambo Guru
"… ‘So why would governments, our own governments, do this tous – why would they sell gold and try to manipulate the price?’you ask in that charming little way you have that just melts myheart. The reason, my nimble-minded reader, that European central banks would like to see their contract for gold sellingrenewed… even boosted up from 400 tonnes to 500 tonnes ayear… is as old as the midas metal itself: good old-fashionedmoney-grubbing… "