Back in September, 2012, Jack Welch, former CEO of General Electric (GE), didn't believe the government's unemployment numbers. He reacted harshly to what he strongly implied was an attempt by the Obama administration to win an election by lying about unemployment. The numbers came from the U.S. Bureau of Labor Statistics (BLS). Welch was immediately attacked, in the media, for making what many alleged was an "irresponsible allegation".
It is impossible to say whether BLS statisticians were actually trying to help Obama win. We can't speak to motive. What we can do is discuss facts, and disclose the fact that the base data gathered by BLS does not seem to support their statistical conclusions. As we will show, the pronouncements coming from the BLS are out of synch with its own raw data.
It would take too many pages to go into a long in-depth historical analysis. Suffice it to say that, in spite of what Mr. Welch may believe, this problem predates the last Presidential election. Long time readers of the main monthly report on the jobs issue, titled "The Employment Situation", have been led to believe, over a very long time, that the USA is creating private sector jobs. They have also been led to think that the government sector is shrinking, while the private sector is expanding.
Last Friday, as usual, BLS announced a nice increase in jobs, 146,000 new ones, to be exact. According to the rarely viewed BLS' base data, however, what they reported was simply not true. The base data shows that total U.S. employment was 144,039,000 in October and 143,549,000 in November, resulting in a real world net loss of 490,000 jobs. The monthly "jobs increase", reported by BLS, were the result of the application of "statistical assumptions" to the base data.
It is not hard to collect base data. The U.S. government receives withholding taxes from most employed Americans. The BLS claims that any anomalies can be attributed to "seasonal" and other irregularities that it "corrects" for. But, when the final conclusions include such a large departure from the gathered data, it is hard to accept with a straight face. For example, BLS says that government employment is decreasing. In contrast, the base data shows that government employment is soaring.
Alleged job numbers, out of correlation with real world experience, raise questions of credibility. Furthermore, there is a lot of outside data that supports the idea that BLS is misreporting. For example, in November, the U.S. trade balance significantly deteriorated. Imports dropped big time, and exports dropped even more. That would normally imply a slowing economy, and job losses. In spite of this, BLS claims that the number of jobs increased by 146,000.
If jobs cannot be proven to exist by data gathering, and the belief in their existence is predicated solely on statistical theories, it is natural for people to become suspicious. A careful look indicates that subjective BLS methodology is creating official results that are wildly out touch with what is really happening. Bad reporting will cause policy makers to make bad policy choices, assuming they believe the reports.
Setting the record straight comes too late for Mr. Romney. However, it is essential for investors to carefully consider this matter, when they make long term investment plans. President Barack Obama has 4 more years. That is just as well. The election of Mitt Romney would not have changed the nation's trajectory. If the Romney campaign had dug deep enough, it could have also proven the numbers to be unreliable, but it did not. The outcome of the last election might have been changed, but it is a waste of time to cry over "spilled milk".
Frankly speaking, America is in a severe pickle that transcends parties and Presidents. If the Republicans had won the Presidency, they would be blamed for what is coming. Right now, it is much better to be the opposition party. The BLS monthly reports use statistical methods to paint a picture of a recovering economy. The raw data, however, free of subjective distortion, shows an economy in critical meltdown. We have lost close to one and a half million private sector jobs in just the last 5 months! None of the current economic policies are working.
In June, 2012, the BLS counted 143,202,000 people employed in the U.S. Of that total, 20,660,000 were employed by federal, state and local governments. By November, the total number of employed Americans had climbed to 143,549,000, representing an increase of 347,000 jobs. However, in the same period, the number of government employees rose by 1,778,000 to 22,438,000. In other words, so far, in the second half of 2012 alone, the United States has LOST 1,431,000 private sector jobs. And, we still have one more month to go! Perhaps, BLS will claim "seasonal factors" this time as well. But, how can seasonal factors continue through and beyond so many seasons?
People should NOT assume that the Obama administration actively conspired to raise government employment to win an election. They should just accept the base data as a statement of "facts on the ground". For those who become employed, rising government jobs are better than no jobs. But, sharply falling private sector jobs means a net decrease in tax revenue. A net increase is desperately needed.
The federal government already runs regular yearly budget deficits that exceed $1 trillion. Many state governments, like California and Illinois, are nearly bankrupt. Yet, governments are going to be paying new workers. And, in the midst of a sharply declining private sector, they won't have the money to do so. Money can only be borrowed and/or it can be raised through higher taxation. Both alternatives have negative implications for economic growth.
More problematic is a problem well explained by Christopher Cox in the Wall Street Journal. America's true net social liability is $86.1 trillion and growing. These numbers are so high that taxes cannot be raised high enough to fund it. In the short run, the Federal Reserve is using a so-called "twist" program to buy 90% of all new debt issuance from the U.S. Treasury. It also has an open ended monetization strategy to help the banks, buying $40 billion per month in mortgage-backed bonds, thereby raising the values of that particular asset class.
Third parties are still more than willing to buy lower-risk short term treasury bills, but that's it. That demand will dry up when and if Europe either straightens itself out or the eurozone breaks up. U.S. interest rates are simply too low, and the likelihood of a steep decline in the dollar too high. Federal Reserve mandarins, like Janet Yellen, think they have the answer. They are pressing for even more aggressive "easing". The Fed is going to be buying more long-term Treasuries beyond the "twist". No one else is available to buy them.
A stark truth is lodged within the BLS raw data. It is serious stuff. It is the reason so many people are sure that the Fed will soon announce another $45 billion per month worth of outright treasury buying. "QE4" will be in addition to the $40 billion in mortgage backed bonds already being purchased every month. The only alternative, to what the Fed is now doing, is "tough love". Tough love would involve no money printing.
Turning off the funny money flow won't go over well. It will mean a forced adjustment to a less affluent lifestyle, at least for many Americans. People reject this idea. Most still believe that the social promises of the past can be kept. This majority would be shocked and dismayed by a government default on such programs. The public is not yet willing or ready to accept the idea that unrealistic social promises are impossible to keep.
Many people are always ready to "kill" the messenger. That's why Jack Welch was heavily attacked when he raised the issue of wild inaccuracy in BLS reporting. But, the end of the welfare state, at least as we've known it, may well be at hand. That is sure to bring a great deal of unrest and some civil disorder before things get straightened out. One major economic cycle is ending and a new one is beginning. Maybe, in the long run, the end of the Soviet Union will be considered connected to the end of the western welfare state model.
A fast-flowing river of newly printed funny money is essential to maintaining nominal stock and bond values, given the mass retirement of baby boomers. The Federal Reserve wants to protect the status quo. By monetizing debt, it helps government pay its bills, and helps banks avoid closure. But, that creates a serious problem. It cannot float markets on a sea of liquidity, forever. We don't know long it can get away with this, before critical mass is reached.
It is the flow, and not the ever-increasing absolute amount of "counterfeit" cash that really counts. Cut down the flow, and result will be falling bond and equity prices. Keep the flow steady and the same thing will happen in a slower manner. The law of diminishing returns will eventually take hold. The severity by which the flow is cut will determine how fast prices fall.
Maintaining the status quo requires ever-expanding printing levels. But, if they keep this up, lack of confidence will permeate the system. That will result in extraordinarily high levels of inflation, or implosion if the printing is stopped. In other words, the raw BLS data shows the situation getting worse, not better. Waves of newly printed cash can and do create rallies. Temporary slowdowns in the flow of funny money cash can cause price declines. That has happened and will continue to happen.
Astute traders, of course, can make lots of money in spite of dismal economics. They can surf the monetary debasement waves. Money is made from volatility, but don't let anyone fool you. Be careful! Long term investors do not do well under such conditions. And, most people who aspire to be "traders" do little more than end up losing money.
A large rally is likely, after the Fed announces an extra $45 billion per month. Long term investors can use it as an opportunity to sell bonds and equities (DIA) (SPY) (QQQ). Unless the Fed's open market committee is willing to enter hyperinflation, however, the next big rally is likely to be the last one driven by money printing alone. Future rallies, if any, will be much smaller, until the nominal values will start to decline in spite of stable levels of printing.
Studies show that, with the exception of high-frequency trading firms, and a few other professionals, infrequent traders make more money than frequent traders. Many very successful long term investors choose to stay "uninvested" for long periods of time. They jump back in when a big price decline happens which is not justified by the fundamentals.
If everyone suddenly started reading BLS base data, stock prices would probably plunge. But, history tells U.S. that they don't and won't. Because of that, it will be possible to manage the public perception for a long time. "Extend and pretend" economics continues to be the order of the day, and may continue for while. But, when the facade finally falls off, the Emperor will be wearing no clothes. Intense upward pressure on interest rates, as well as intense pressure to cease printing money, will be the result.
The funny money flow will take a heavy toll on the dollar and other currencies being heavily printed. Gold is a type of "cash" that highly sensitive to short term manipulation. But, it is immune to long term central bank monetary debasement. Since investors need money to be a store of value until the next business cycle, smarter investors will change their thinking pattern. They will think in terms of ounces of gold (GLD) (IAU) (PHYS), rather than Federal Reserve notes, British pounds, Euros, Japanese yen, Chinese yuan, etc.
Raw BLS data gathering continues to be accurate, but the BLS data analysis appears to be deeply flawed. The Mandarins of the Federal Reserve seem to be aware of this. They are not being overly swayed by rosy BLS employment reports. The BLS conclusions may simply be designed to calm the public. But, the Fed doesn't know what to do. Printing trillions of new dollars, out of thin air, will result in bad consequences, but it reflects a level of intense desperation.
Those have less understanding of the economy, such as the politicians in Congress, accept BLS reports as the basis for other bad decisions. For example, nothing has been done to roll back the cost of social programs even though there is no possibility of paying for them over the long term. Instead, by expanding entitlements the U.S. fiscal situation is getting worse. The combination will result in an excruciatingly "hard landing".
The U.S. economy is continuing to melt down at an alarming rate. Someday, U.S. energy independence, combined with a change in pubilc expectations, may turn things around. But, that is years in the future. Meanwhile, statistical theories create "reportable jobs" that probably don't exist in the real world. Stocks and bonds, in general, are now a long term value-losing proposition when adjusted to the value of a non-debased form of cash, such as gold.
Appendix: Raw Data from the U.S. Bureau of Data Statistics
|Labor Force Statistics from the Current Population Survey|
|Original Data Value|
|Not Seasonally Adjusted|
|Series title:||(Unadj) Employment Level|
|Labor force status:||Employed|
|Type of data:||Number in thousands|
|Age:||16 years and over|
|Years:||2002 to 2012|
Employment, Hours, and Earnings from the Current Employment Statistics survey (National)
Original Data Value
Not Seasonally Adjusted
ALL EMPLOYEES, THOUSANDS
2002 to 2012