On Bailouts, Inventories and Jobs

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 |  About: SPDR S&P Bank ETF (KBE)
by: Sudden Debt
The "green shoots" that everyone is talking about, and which are greatly responsible for causing the current (dead cat ?) bounce in stocks, are best explained thus:

1. The massive bailout of the financial system (approx. $14 trillion in equity injections, loans and guarantees) prevented its meltdown. However, financial stocks had priced in such a risk by moving much lower (the KBW US bank share index was down 85% at its low) and are now simply correcting this negative excess.

  • But, this is NOT the same as a rally based on better business prospects for the future. Thus, it has "short-term and limited" written all over it.

2. The sharpness of the consumer pull-back caused businesses to likewise sharply curtail new orders to work down inventory. Since the economy now operates on VERY tight inventory-to-sales ratios (JIT: Just In Time deliveries) this caused a whole series of dominoes to drop all the way back to BRIC+ manufacturers, commodity producers and transportation companies. As inventories dropped, however, some new orders are now - necessarily - reappearing, exactly because of JIT.

  • But, these are NOT orders based on projected robust growth; they are simply replacement orders, and they reflect reduced consumption going forward. Thus, the "real" economy has "anaemic" written all over it, at best.

3. Because of the above sharp pullback, employment got hit very badly, very fast. Continued claims for unemployment insurance shot up in a straight line and are at the highest level ever. Because of the inventory adjustment orders, however, going forward the rate of job losses will subside somewhat and this is causing unwarranted cheer.

  • But, fewer job losses should not be interpreted as a sign the economy has turned the corner, as it has in the past; the slower pace is expected, after such a huge decline.

Bottom line:

Do not be fooled by the "green shoots". They are merely happy talk from officials anxious to turn lemons (a slower pace of decline) into lemonade. Let me put it in mathematical terms: just because the second derivative is getting less negative doesn't mean the first derivative has stopped going down..

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Jobs Report Addendum

The BLS reported that 539,000 jobs were lost in April, "better than expected" because the consensus amongst analysts was for a figure around -600,000. Markets cheered.

Some observations, however:

  1. The previous months were adjusted down to show an additional loss of 66,000 jobs.
  2. The government added a near record 72,000 jobs because it is hiring upcoming census takers.
  3. The BLS Birth/Death model was at it again, adding 226,000 jobs (not seasonally adjusted). For what it's worth, this statistical model has added jobs to the reported figures in 12 out of the last 13 months; in a recession, no less...