In the Face of Mounting Pain, Avoid Extremes 16 comments
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Each new economic update is painful these days, and today's release of the October employment report is no exception.
The U.S. economy lost 240,000 jobs last month, the Labor Department reports. That's not as steep as September's 284,000 tumble, but there's no mistaking the trend. The economy is in recession and the labor market is now Exhibit A for that view, in no uncertain terms.
No wonder, then, that the jobless rate jumped to 6.5% in October, up from 6.1% in the previous month. The unemployment rate, as a result, is now at its highest since 1994.
Unfortunately, it looks like the negative momentum has a ways to go. Even the mighty services industry is now routinely stumbling. For the second month running, services employment dropped sharply, falling more than 9% last month, which comes after a 17% decline in September. The significance of this slump can't be underestimated, given that services jobs represent about 85% of total nonfarm payrolls.
Weighing heavily on services is the retail business, which is now knee-deep in contraction. So-called same-store sales in the retail industry plunged 0.9% last month, reportedly the steepest monthly drop in almost 40 years.
As bad as all the economic and financial news is of late, what's most disturbing is the worry that the contraction for the general economy has only just begun. It may seem like we've been living with economic pain for years, but in fact the downcycle so far is measured in months, broadly speaking. If the downturn is longer than usual, which looks increasingly likely, the challenges in the months and perhaps years ahead will be bigger than we've been accustomed to in the past 20 years. One reason: The U.S. is entering a downturn with nearly all of its conventional monetary policy ammunition used up.
Indeed, America enters the recession with the Fed funds rate at 1% currently, down sharply from 5.25% barely more than a year ago. High interest rates didn't trigger the recession this time around and so low interest rates won't pull us out of one.
The excess that built up across the economy over a generation is unwinding, and the correction will be as painful as the boom was pleasurable. The government will pull out all the stops to ease the pain, as it should, but this time out there's no sidestepping the purge.
It's been easy to think, until recently, that the Fed could keep the growth cycle going indefinitely, as it seemed to do in recent history. After the tech bubble burst in 2000-2002, the central bank rapidly slashed interest rates in a bid to keep consumer spending from falling. The strategy worked -- big time. But the obvious lesson about what was possible was misleading -- big time. One could argue that a similar consumption-at-any-cost strategy has been the stock in trade for the past 20 years. But the liquidity injections have lost their power to elevate consumer sentiment.
In the long run, the economy will be stronger once the cleansing process is complete, but in the short run the pain will be considerable. The prospect of Fed funds at or near zero grows by the day. As a temporary matter, that's fine. As the risk of deflation rises, central banks should act accordingly. The Bank of England's huge 150-basis-point cut in rates yesterday is a sign of the times.
But no one should think there's an easy way out via monetary policy. Even the prospect of an increasingly aggressive round of fiscal stimulus from Washington will, at best, dull the pain.
For those with a long-term view, the good news is that the opportunities will be huge -- of once-in-a-lifetime proportions. Yet history suggests that only a few of us will have the discipline to partake of the prospective gains, once the time is right. Why? By the time the recovery begins in earnest, most of us will be far too numb from the months (years?) of bad news to contest the idea that bears rule the world.
As such, emotions run amok remain the greatest threat to long-term investing success. Same as it ever was.
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???
This has very little to do with consumer sentiment. Consumers are broke and so is are all the atm's and other credit machines!
When increasing consumption is based on borrowing there always comes a time when the borrower cannot afford to meet the payments on the loans. We are beyond that juncture now. There is no way to 'stimulate' spending when nobody can afford the cost of living and debt payments they have now.
This is the fatal flaw in the Keynesian monetary theory our gub'mint practices.
What needs to happen is for people and businesses who cannot afford their debt payments to go bankrupt and liquidate the debt at whatever can be gotten via selling off remaining assets. This will cause the lenders to take losses, but they will get something back and the debt payments will be ended and their drag on economic spending removed.
Unfortunately, the lenders in this case are the big Wall Street banks, and the gub'mint apparently doesn't want to see them to take any more of those losses than they have to. I guess it might adversely affect their campaign contributions or something.
The longer gub'mint acts to prevent the liquidation of outstanding debts, the longer the 'recession' will drag on. It's going to be a while.
Get used to it.
The stock market, if left to its own, is going to cannibalize it own siblings with the young and the unborn left unprotected when fear and panic sets in and self preservation becomes the norm.
Technically speaking; the Dow Jones is headed towards 5000 by Q2 to Q3 2009 with 7300-7500 expected drop within the next few weeks before the next attempted rally. The expected rally is going to fail by Q2 to Q3 2009 and the inevitable plunge to 5000.
This is based on Elliott Wave analysis of the 100 year Dow Jones chart. Probability is simply too high of a 5000 plunge that there are no existing govt programs fast enough and strong enough to be able to reverse the trend. Likewise, govt seems to be more interested in buying time without first addressing investor uncertainties directly.
Time is the worst enemy in a plunging market.
A break below 2002 low of Dow Jones 7,200 is going to inflict a severe psychological blow not only to the US but all over the world. A global chain reaction of fear and panic cannot be discounted and 5000 may not even be able to hold and 1000 or lower level will be the next target.
That is more than 40 years of labor down the drain. Just imagine the reaction across American when their 401k becomes 40k or less.
Company bankrupcies could be in the tens of thousands.
The plunge of 1929 to 1932 took 3 years and produced 10 years of depression. This current crises started year 2000 with the Tech
meltdown and followed by 2007 by the housing plunge still halfway thru. 9 years of stock market correction with more than 40 years of history erased is going to produce a profound damage almost unimaginable and unsurmountable to say the least. How about 50 years severe depression?
The stock market is the root of all evil in this current crises. It has grown so big and so pervasive over the century that everybody in the western world is affected financially directly or indirectly.
However, there is no immediate alternative or solution except for the govt to provide leadership and equity assistance in order to prevent a catastropic failure of the stock market the likes of which has never happened before.
Govt has to guarantee stock market purchases by investors (specially those with 401k investments) in the immediate future against company bankrupcies since bankcrupcies have the vicious domino effect everybody is afraid of. Govt has to install mechanisms to prevent uncontrolled rally and to dampen volatility such as guaranteeing only allowable daily price rises.
A guarantee for at least 3 years will be prudent in order to sort out the current financial credit crises; the CDOs and CDSs deleveraging; and the housing crises all of which needs a lot of time to unravel/unwind.
That will provide enough stability in the global markets and world leaders will be able to formulate more effective programs for their
respective economies that are not slaves to stock market psychology.
Investors, likewise, need more time to do research and make plans for the future without being hampered or even crippled by massive market volatility.
It is not too late; the psychological and structural damage to world economies are still in the early stages due to the suddenness of the stock market plunge. However, the plunge was so vicious everybody is trying to get out of the markets on the next
available opportunity.
Remove uncertainty is first and foremost. A quick and effective reversal is needed. More time spent dilidalying will only foster more fear, panic and disolusionment among market participants.
AARC - I duth protest!
Continuous unbridled use of credit (easy money) by US Gov't / vast majority of its citizens is the root of all evil. Ah, through unbridled greed in there too. The current stock market is the result. Things will only improve if deleveraging and de-debting are allowed to take place (short term pain for long term gain). That will never happen as it is "politically distastful". Therefore, I'm afraid there will be a forced ending to this story sometime in the future.
Without an immediate solution to the current investor uncertainty and fear panic; those intermeadiate goals will only become systemically unmanageable.
Time is the most important at the current stage for all market participants.
Current volatility is only hindering any effort to think and plan for the longer term. This downturn is indescriminately destroying everybody, even the innocent.
A 3 year moratorium will give all participants a chance to pay for their excesses of the past without lining everybody to the firing squad - guilty or not.
On Nov 07 12:24 PM rber wrote:
> "The stock market is the root of all evil in this current crises"
>
>
> AARC - I duth protest!
>
> Continuous unbridled use of credit (easy money) by US Gov't / vast
> majority of its citizens is the root of all evil. Ah, through unbridled
> greed in there too. The current stock market is the result. Things
> will only improve if deleveraging and de-debting are allowed to take
> place (short term pain for long term gain). That will never happen
> as it is "politically distastful". Therefore, I'm afraid there will
> be a forced ending to this story sometime in the future.
What a stupid thing to say. We are not now just "entering" a recession. We've been in a recession for nearly a year. And Fed target was only recently lowered to 1%. Very different conditions than you describe.
"High interest rates didn't trigger the recession this time around and so low interest rates won't pull us out of one."
Yeah. Like YOU know. What next? Climatology models for the year 2100?
What a waste of time reading mental masturbation articles like this.
What an interesting statement. My interpretation is that it will take a while for goofy bubble blowing to begin again. It will take a while to raise a crop of "greater fools" to play musical chairs with. But with the Fed suppressing interest rates what other choices will be available? Too bad I can't plop money in a savings account and expect it to grow in real terms.
Now, consumption is declining in the face of over-capacity. We should use this destructive time in the economic cycle to re-invent our manufacturing base. An economy rooted in selling each other cheeseburgers and condos is fundamentally flawed.
Since the cost of labor is so much cheaper in China or Mexico, the only way to do this would be to impose protectionist tariffs. Otherwise, it's too expensive to make stuff here.
Drive interest rate down to the negative territory. This will make cash as king and ergo the deptors. While the creditors can only watch their loans shrinking as time goes by, in effect paying "interest" to those who borrowed their money.
But that will only cause more money to be hoarded and not be available for investment.
Without new investment, no economy can possibly grow and will only shirnk with time.
Why do you think the big banks are hoarding as much cash as they can?
On Nov 07 01:15 PM slickvguy wrote:
> "Indeed, America enters the recession with the Fed funds rate at
> 1% currently, down sharply from 5.25% barely more than a year ago."
>
>
> What a stupid thing to say. We are not now just "entering" a recession.
> We've been in a recession for nearly a year. And Fed target was only
> recently lowered to 1%. Very different conditions than you describe.
>
>
> "High interest rates didn't trigger the recession this time around
> and so low interest rates won't pull us out of one."
>
> Yeah. Like YOU know. What next? Climatology models for the year 2100?
>
>
> What a waste of time reading mental masturbation articles like this.
Announced a unanimous confession,
Said the NBER,
"We're not sure how far",
"But a while back we entered recession".
Aarc is not only entertaining thoughts of Dow 7k but even Dow 5k. If 5k is broken, even 1k is not unthinkable. Dow below 5k is really quite unlikely although Jon Markman of cnbc.com has just written an article saying he would not be surprised if it comes to that.
Currently we can only say the broad trend is bear market, looks like prolonged pain in terms of years and not months. Bad but how bad is always the subject to speculation and debate amongst bulls and bears. In the light of such a uncertain scenario, it may be appropriate to navigate with great care to preserve capital with some controlled trading.
but everyday i become more convinced that any attempt of the government to do anything more than keep the decent of the economy orderly is throwing good money away. the banking system must not be allowed to fail. everything needs to find a new equilibrium point including equities and real estate.