The Government Has Played Its Hand Nicely

The government played its hand nicely with the stress test of the nation’s largest banks. The bar was set sufficiently low (optimistic assumptions, let banks dictate how assets should be accounted for, leaving off-balance sheet items out of the equation). And details were leaked, generating a positive buzz.

All of this was mere staging to voice confidence in the banking system to assure the American public. The unstated hope is that market’s advance will allow the banks to raise more capital, and with a little bit of luck enough confidence will be restored to the system to convince consumers to spend again, jumpstarting the economy so that the banks can growth their way out of their mess.

The sad truth of the matter is that the banks will raise far less capital than what’s truly needed. And so long as they remain on the government dole, they’ll gladly accept Uncle Sam’s money and guarantees of their assets while remaining reluctant to lend a dime.

For its part, the government, via the Federal Reserve, will be forced to continue with its “quantitative easing” (buying Agency and Treasury paper with newly printed currency) in order to keep interest rates artificially low in the face of rising inflation, which is already showing up in commodities and to a lesser extent in the uptick in mortgage rates, as well as interest rates on other consumer loans.

In the meantime, investors continue to cheer the “green shoot” economic data points that suggest the economy isn’t contracting as fast as it was in the first quarter—even though it’s still clearly in trouble. Look at last week’s print on the employment situation, to take just one example.

The official unemployment rate would have been above the stated 8.9 percent if not for 102,000 hires by the U.S. government for temporary (and presumably low-paying) jobs for the 2010 census.

Worse still, each month as part of the unemployment survey, the Bureau of Labor Statistics (BLS) literally takes a wild guess at how many laid-off people turn around start their own companies and hire others in the process in what is known as its birth/death model. Last month the BLS guesstimated that 226,000 new jobs were created, including 76,000 in the hospitality/leisure industry. That figure is beyond credulity. Include marginally employed workers (those forced to take part-time jobs for economic reasons) and those that have given up looking for work and the number reaches 15.8 percent!

The stock market has yet to really pause to catch its breath in the last nine weeks as stocks have climbed 35 percent. Our stock market forecasting models, meanwhile, remain exceedingly bearish. We just can’t say when and from what levels stocks will break down. We would love to wrong on this score, but we have a fiduciary duty to maintain a bias toward the short side the investment ledger in anticipation of a sizeable decline.

Comments

[socrateazz:]

Hot air will rise until it gets colder than the surrounding air! Then it will fall. Adding hot air without adding more fuel will eventually result in falling to earth! You guess the future

May 13 06:52 AM

[djc:]

Well lets see Cetin... Jobless numbers hmmm...

A sign that employers are reducing capacity... gee wonder why ?

Exacerbating the debt default issue ... who woulda guessed that ?

Creating consumers who cant consume in an economy 70% based on consumption... surely that doesnt matter

Continuing the housing spiral through mortgage default, foreclosure and added housing supply in an already way oversupplied market.

Increasing pressure on 'national entitlement' programs when the government is already too far in debt...

No real productive work to go back to at similar wage, as the capacity problem is part of the negative spiral and needs to be withdrawn yet still.

Ive heard you keep harping about the jobs numbers, and why they dont matter over and over again.

Why is it you cant figure out something so simple ? Im an idiot, and I can figure it out. What are you ?

May 13 07:47 AM

[One Eyed Guide:]

BLS still playing games with the birth/death model? This is the number one reason that the recession was not recognized faster. It should be put on the first page of the employment report under "Imaginary Numbers:"

Of course, it is a good indicator of negative or positive surprises coming for the stock market. During expansions it understates the good news on employment -we're just not there yet.

May 13 08:32 AM

[ain't no fo...:]

He's right - what you nervous nellies and nattering nabobs of doom don't understand is that the huge jump in foreclosure numbers doesn't matter because housing is overrated - we are in the summer months and many people love to be outside living in tents in summer, watching the green shoots grow right outside their tent flaps. Besides, if people are losing their homes that means less big kitchen appliances will be needed, so all those crates they come in will provide excellent, affordable housing.

You naysayers just don't have the right outlook on basic economics or the markets. You need to listen to cretin and Erin Burnett more! And Kudlow! And Crammer! They'll set you straight.


On May 13 07:47 AM djc wrote:

> Well lets see Cetin... Jobless numbers hmmm...
>
> A sign that employers are reducing capacity... gee wonder why ?<br/>
>
> Exacerbating the debt default issue ... who woulda guessed that ?
>
>
> Creating consumers who cant consume in an economy 70% based on consumption...
> surely that doesnt matter
>
> Continuing the housing spiral through mortgage default, foreclosure
> and added housing supply in an already way oversupplied market.<br/>
>
> Increasing pressure on 'national entitlement' programs when the government
> is already too far in debt...
>
> No real productive work to go back to at similar wage, as the capacity
> problem is part of the negative spiral and needs to be withdrawn
> yet still.
>
> Ive heard you keep harping about the jobs numbers, and why they dont
> matter over and over again.
>
> Why is it you cant figure out something so simple ? Im an idiot,
> and I can figure it out. What are you ?

May 13 09:06 AM

[Leftfield:]

Let's see, we give the banks money so they can loan but they don't. But if we didn't, the economy would crater because it depends on the banks lending. Millions are quickly losing their jobs and our national debt has just doubled. Maybe Obama or someone can explain. Maybe our leadership can get performance-based pay only. Maybe some bailout money can trickle down to real people who are on the hook anyway.

May 13 09:23 AM

[Ferdinand E...:]

My point of view exactly, and until further notice I am ready to believe that Ben and Larry will continue to optimally play the hand they were dealt. As for the banks - or to be more precise the people that run them - I think that right now they are more interested in the respect that comes from delivering a good performance than some extra cash. Of course it might be impossible to regain the old income distribution dynamic, with the rich getting richer and the middle class presented with an unchanging real income, but remember that there is another election in 4 years.

May 13 09:37 AM

[LilBob:]

"Maybe some bailout money can trickle down to real people who are on the hook anyway." - Leftfield

I'm on board with you 100% there. Why can't the fed offer a bailout for those of us still paying off huge student loan debts? Allow me to combine and refinance all of my loans at 4% interest...I promise that will spur consumption-Absolutely guaranteed.

May 13 09:37 AM

[doubleguns:]

Company A has 2 employees leave. Company B and C has one employee each leave to fill company A positions. Company;s C,D,E,,,, have people jocky up to jobs. Eventually 2 new hires get hired in some company.

Everyone that took a different position is counted as a new hire by the govt.

I chuckle every time I have to fill out the new hire reports. Its a joke.

May 13 10:03 AM

[Ben Young:]

Another way that gamed statistics cloud thinking is the "owners equivalent rent" line item in the Consumer Price Index. By pretending that mortgage payments don't exist, but only rents.

If mortgage payments during the bubble were reflected accurately in the CPI, it would have been reflected as hyperinflation during the runup, and would *definitely* have generated an outcry to STOP it. Instead, it was ciphered away, inflation was "low"! and the problem went unrecognized/unrepaired. Owner's equivalent rent is *still* being used, and this is now disguising the true shape of CPI which is in net deflation due to massive deflation in housing prices over the last 3 years.

Why in the world would owner's equivalent rent be used instead of a patently accurate figure? If this had not been used, the country would long ago have gone bankrupt from automatic CPI adjustments from Social Security and other contracts that give auto-raises based on CPI.

But, eventually facts, like gravity will have their say and their way

May 13 10:04 AM

[Glen L.:]

@wpdragon - thanks for the laugh!

I didn't know about the BLS "birth/dealth model" shenanigans. Just another datum to add to the proof that government sucks.

I know what the B and S stand for, but what about the L?

May 13 10:32 AM

[Larry House:]

Sounds like you don't have a job or want one, Cetin, if jobless numbers are meaningless.

May 13 10:37 AM

[doubleguns:]

L = Lies.


On May 13 10:32 AM Glen L. wrote:

> @wpdragon - thanks for the laugh!
>
> I didn't know about the BLS "birth/dealth model" shenanigans. Just
> another datum to add to the proof that government sucks.
>
> I know what the B and S stand for, but what about the L?
>
>

May 13 10:38 AM

[UbuTranscen...:]

.
Dr. Leeb,

Thank you for reminding us that effective tactical execution is commendable and necessary, but if the strategy is incorrect, the goal will not be achieved.

The Fed and Treasury seem to be making moves that gamble that short-term gains will negate very risky long-term positions.

If they were playing a game of chess, their punishment would likely be checkmate.

Let's hope against the odds that their tera$ gamble works, because we taxpayers are the ones left with the bill.

Thank you again, Ubu.

May 13 10:39 AM

[inflation:]

If you look at a long term chart on the S&P how can you not see the massive double top that was put in? Are people blind? The downside target is somewhere in the 400-600 range yet we are supposed to believe that we have bottomed?

May 13 11:06 AM

[gordon:]

Obama is a facilitator, a sham. He bought into Goldman Sachs incest in his political circle. Give trillions to the Banksters who got him elected and it will TRICKLE DOWN? Reward the fraud, punish the savers? Americans need higher wages and saving. How many fools can be persuaded to inflate their debt and spend to their grave again?
If he wasn't bought- off he would make all banks taking any taxpayer money pay a MINIMUM say, 3% on a 6-month or 1-yr FDIC CD.

May 13 11:32 AM

[gordon:]

Michael Pento said on Crudlow/CN-BS 2 nights ago the S&P earnings are coming in @ $24.00, that equates to a p-/e of 36! THIRTY SIX. (2.2% yield) right or wrong? The Nasdaq is about 59! All past recessions had p/e 6-10 (and 6%+ yield)

May 13 11:36 AM

[gordon:]

Here's the Birth/Death, notice they added almost TWICE the 114,000
phantom jobs they added in April 2008, and it includes 38K construction jobs! Look at the big jump'npump from March, wow, must be BLS started a green shoots garden!
www.bls.gov/web/cesbd.htm

Do you know how they arrive at these fraudulent numbers? According
to Phil Grande (philsgang.com) radio, they comb the 7 or 8 Federal Reserve Bank districts, whatever number it is, and look at NEW CORPORATE FILINGS. Many, of course, are bogus tax dodges, S-Corps, mom & pops, but they decide how many employees each of these POTENTIALLY will hire. Bingo!

May 13 12:36 PM

[jambo:]

Wait now djc, that's the third smartest person in the world you are speaking to! How dare you question the imperical CH?
Currently, the guy has marginalized himself to the extent that his responses can no longer be taken as serious... hence his neg response ratio. Of course that may well be a GOOD sign to him!?


On May 13 07:47 AM djc wrote:

> Well lets see Cetin... Jobless numbers hmmm...

> Why is it you cant figure out something so simple ? Im an idiot,
> and I can figure it out. What are you ?

May 13 12:53 PM

[highwaytose...:]

I don't like to pump news letters but shadowstats is one fine one. CPI, M3,employment, FRB, GDP are calculated and compared to the calculations before the manipulation. Realistic and reasoned site..

May 13 03:48 PM

[Moon Kil Woong:]

With Treasuries rising, I don't think QE is an option anymore. In fact, they probably should be tightening. Of course politicians won't like that. Volker will, but apparently he is just suppose to stand around like a symbolic statue.

May 13 08:45 PM