7-Aug-10 News -- Financial experts freaked on jobs report - 7-Aug-2010 - Generational Dynamics

The top graph shows that 131,000 jobs were lost in June. A lot of these were expected, since it was the end of the time when hundreds of thousands of temporary government employees were out interviewing people for the census.

The real focus was on the non-government payrolls, shown in the second graph, and there were two shocks here. First, the growth in private payrolls was 71,000, lower than the 90,000-100,000 that experts had predicted, according to Reuters.

And second, there May and June figures were adjusted downward by 97,000 from where they stood a month ago. That is, 97,000 fewer jobs had been created in May and June than had previously been reported.

The reason that all this is shocking is because the trend is in the wrong direction. The Pollyannaish theories all depend on jobs creation to be surging. If job creation falls at all, especially by these large numbers, it freaks the experts out.

A number of pundits on TV on Friday mentioned temp hiring, and this was another disconcerting figure. As shown on the bottom graph, which shows temp hiring by the private sector (hence does not include the temporary census workers), shows that temp hiring fell by 6000.

The reason that this is important is because the Pollyannaish theories all assume that temp hiring will increase for a while, as businesses "test the waters" in the growing economy, and that these temp workers will be converted to permanent workers when the economic growth seems solid. Thus, the earlier rises in temp hiring were considered to be good news. The fall in temp hiring in July might have been considered good news if it had been accompanied by growth in permanent employment. But since permanent job growth was so anemic, it simply meant that businesses were hiring a lot less than expected, and were not confident about the future.

It's time, once again, for me to quote this passage from John Kenneth Galbraith's 1954 book The Great Crash - 1929, as I have several times in the past:

"A common feature of all these earlier troubles [previous panics] was that having happened they were over. The worst was reasonably recognizable as such. The singular feature of the great crash of 1929 was that the worst continued to worsen. What looked one day like the end proved on the next day to have been only the beginning. Nothing could have been more ingeniously designed to maximize the suffering, and also to insure that as few as possible escaped the common misfortune."

This is exactly what's happening again. All the experts on TV say things like, "In every postwar recession, yada, yada, yada." The problem is that this isn't like any postwar recession. The only comparable "recession" is the one that occurred after the 1929 crash.

In every postwar recession, jobs came back quickly. In this recession, jobs are coming back slowly, if at all.

But this also explains why Generational Dynamics works. Nobody remembers the 1930s depression any more, and so they consider it to be something from the age of dinosaurs that can't even exist any more.

An analogy for the Law of Mean Reversion

The problem is to explain why, if the S&P 500 price/earnings ratio has been way above the historical average since 1995, then it has to be way below average for a similar time into the future -- i.e., until 2025.

The explanation I'm looking for is to compare the huge debt bubble of the last few years with a poison that affects every part of the economy. The poison is the debt that people and businesses take on during the bubble, and then it takes them many, many years to pay off the debt.

I asked an online correspondent if he could think of a kind of human poisoning that works something like that. He suggested lead poisoning. If you're exposed to lead, then it builds up in your body tissues. Once the problem has been identified, it's necessary to take various medicines for a while to get rid of the lead.

But then I heard a woman on TV say the following: "I always say it too me nine months to have a baby and two years to lose the weight."

Now there's a great analogy. If you're a woman and you get pregnant, then you can (hopefully) enjoy the pregnancy for nine months. But once the little bundle of joy has been delivered, then it may take you years to lose the weight that you gained.

So there you have two different analogies you can think of, to help you understand why the Law of Mean Reversion works, and why it's a mathematical certainty that the stock market is going to have to fall very far, and stay down there for many years.

Increasing debt of US companies

Part of the Pollyannaish view that the economy is improving is the assumption that the 2007 financial crisis is over and all the debt has been removed from company books. However, the poison analogy that I described above says otherwise -- that it will take a long time to remove the poison of debt from businesses.

Here's how Brett Arends, a columnist on Market Watch, described what's going on:

"You may have heard recently that U.S. companies have emerged from the financial crisis in robust health, that they've paid down their debts, rebuilt their balance sheets and are sitting on growing piles of cash they are ready to invest in the economy.

You could hear this great news pretty much anywhere -- maybe from Bloomberg, which this spring hailed the "surprising strength" of corporate balance sheets. Or perhaps in the Washington Post, where Fareed Zakaria reported that top companies "have accumulated an astonishing $1.8 trillion of cash," leaving them in the best shape, by some measures, "in almost half a century."

Or you heard it from Dallas Federal Reserve President Richard Fisher, who recently said companies were "hoarding cash" but were afraid to start investing. Or on CNBC, where experts have been debating what these corporations are going to do with all their surplus loot. Will they raise dividends? Buy back shares? Launch a new wave of mergers and acquisitions?

It all sounds wonderful for investors and the U.S. economy. There's just one problem: It's a crock."

The problem is that US companies have not been DECREASING their debt levels; they've been INCREASING them since the 2007 credit crunch:

Arends calls this situation the "biggest lie about US companies." The Pollyannaish "experts" on tv tell you that the companies have tons of cash sitting on the sidelines, waiting to move into the market, and cause the stock market bubble to grow again.

What this graph shows is that it's completely untrue. US companies must be in a great deal of trouble, because they keep going deeper and deeper into debt. This is just like a consumer who's buried in credit card debt, borrowing more money on another credit card to make payments on the other debt. Sooner or later it all collapses -- for the consumers and the businesses.

This goes back to the poison analogy that I've been describing. The poison of debt has built up in the body tissues of the entire economy, and it will take many, many years for the poison of debt to be removed.

From the point of view of Generational Dynamics, the financial crisis that started in 2007 has barely begun, and we're headed for a truly major financial crisis of historic proportions. This is an absolute certainty.

Additional links

The devastating floods in Pakistan, already the worst in 80 years, are growing worse, as more heavy rain is expected in the next two days, causing hundreds of thousands more people to leave their homes. As the floods spread, power plants are being threatened. Dawn

As the floods continue to spread in Pakistan into the country's agricultural breadbasket, aid is pouring in from the United States. At the same time, militant Islamist groups are providing volunteers around the country, and are operating medical camps. CS Monitor

Fires continue to spread in Russia and choke Moscow, resulting in intense anger at the government for allowing it to happen. Global Post

A Japanese tanker carrying 270,000 tonnes of oil through the Strait of Hormuz suffered an explosion on July 28, but then made it to port. The UAE Coast Guard has now confirmed that the explosion was a terror attack on the vessel, inflicted by a boat loaded with explosives. An al-Qaeda linked group called the Abdullah Azzam Brigades has claimed responsibility. The National (UAE)

In Indonesia, which has the world's largest number of Muslims, there are 1.2 million of the faithful now on a government waiting list to make the trip to Mecca. These people are required to deposit money with the government to get onto the waiting list, but now it turns out that government officials and politicians have been misusing the money to fatten their own pockets. NY Times

The Chinese government is concerned because young people in China are increasingly unable to write in Chinese characters, because of computers. When typing on a computer, a Chinese can type out the beginning of the word in pinyin, the Romanized version of Mandarin, and the computer software will translate the pinyin into the appropriate Chinese character. Asia Times

Coming soon is the 100th anniversary of Japan's August 29, 1910, annexation of Korea, which the Japanese occupied until World War II ended in 1945. Recent polls show that Koreans are still bitter about the brutal treatment of the Koreans by the Japanese. Asia Times

Anti-nuclear activists in Pakistan are questioning the help that Pakistan is getting from China in constructing nuclear reactors, claiming that they only make Pakistan more vulnerable. Memri

The 42 year old Julia Roberts has disclosed that she is a practicing Hindu. She goes with her husband to temple to "chant and pray and celebrate." Telegraph

Generational Dynamics Web Log for 7-Aug-2010
7-Aug-10 News -- Financial experts freaked on jobs report

Jobs report reflects continued downward trend in economy

An analogy for the Law of Mean Reversion

Increasing debt of US companies

Additional links

Web Log Pages

	Generational Dynamics
	Forecasting America's Destiny ... and the World's

\| HOME \| WEB LOG \| COUNTRY WIKI \| COMMENT \| FORUM \| DOWNLOADS \| ABOUT \|

Generational Dynamics Web Log for 7-Aug-2010 7-Aug-10 News -- Financial experts freaked on jobs report

Jobs report reflects continued downward trend in economy

An analogy for the Law of Mean Reversion

Increasing debt of US companies

Additional links

Web Log Pages

Generational Dynamics Web Log for 7-Aug-2010
7-Aug-10 News -- Financial experts freaked on jobs report