Jobless Recovery: Few Winners, Many Losers

Perhaps one of the most preposterous statements made during the ongoing financial crisis was by Ben Bernanke when he stated that we would have a ‘jobless recovery’. Certainly this is not a new term, but that doesn’t change the fact that in concept, the idea that a real recovery can occur with rising unemployment seems pretty ludicrous. Again, the devil is in the details and it all comes back to how you define your terminology and ask “A recovery for whom?”

A number of months ago, I pointed out the somewhat flawed rationale of using GDP itself as a gauge of economic growth since government spending is a portion of that measurement. Normally, this wouldn’t be a huge problem, but when the government tries to in essence become the economy by spending exorbitant amounts of borrowed money, then GDP loses its usefulness as a measure of genuine economic growth. I willingly admit that it is exceedingly difficult to argue against government spending to a construction worker who is able to remain employed because of a road project paid for with stimulus borrowing. However, we all need to be concerned with the undeniable fact that more and more of our national well-being is becoming dependent on the hazardous practice of reckless borrowing and debt monetization.

Unfortunately, in Bernanke’s jobless recovery, there are few winners and many losers.

Foreclosures Continue to Increase

Home foreclosures in the third quarter of 2009 hit an all-time record high according to RealtyTRAC. Nearly one million homeowners received a foreclosure notice during the past three months. Nevada continues to lead the pace nationally with 1 foreclosure notice for every 23 homes. Nevada is no surprise, but Vermont, on the other hand, is. Vermont, which had barely been impacted by the housing crisis until recently has seen foreclosure rates jump 170% from the same quarter a year ago. Keep in mind that foreclosures continue to run rampant despite numerous fix-it attempts at the Federal, GSE, and state levels. The system is still clearly reaping what it has sown over the past decade. These numbers would be far worse if lenders were foreclosing on all the properties that met the criteria. In many low-income areas, lenders aren’t foreclosing at all, opting instead to leave the properties in abeyance and allowing the residents to remain.

Many borrowers are unable to refinance even with historically low interest rates thanks to Bernanke’s MBS buying program because their credit is destroyed. Unemployment certainly isn’t helping. The lack of accumulated savings has left many folks with little or no wiggle room to deal with financial hardships.

The fact of the matter is that as bad as foreclosures are right now they’d be several orders of magnitude worse if it weren’t for government intervention. Unfortunately, this rationale will be used moving forward to justify even more intervention. Obviously the reason things aren’t getting better is because government hasn’t done enough or done it long enough… right? I fully expect to see the $8000 tax credit for first time buyers eventually extended to any buyers, and then somehow fit into refinancing deals as well. Maybe a government-sponsored mortgage holiday is in the works. You laugh? I know people howled when I mentioned the idea of government stimulus by handing out store gift cards, but several politicians have already mentioned doing exactly that.

[click to enlarge charts]

It is also clear that the Fed has made the decision to work the demand side of the equation by monetizing the mortgage-backed securities market. The Fed has purchased nearly a half trillion dollars worth of MBS in the last 2 quarters in an attempt to artificially suppress rates. During this period, they made one concerted attempt to back off on the purchases and rates immediately shot up as was documented in my 6/5/2009 missive. This action, coupled with the first-time homebuyer tax credit has been a shameless effort to lure renters and younger people into sopping up the excess inventory from foreclosures. This while new home construction continues, albeit at a lower pace. Does all this sound like a recipe for a genuine recovery?

Employment

It continues to be my opinion that the headline unemployment rate will never reach 10%. I realize this is a considerable stretch simply because it is already on the precipice, but I’m sticking with it. Frankly, the headline number, while heralded by the telescreen, is largely irrelevant in the real world. A closer approximation lies in the BLS’ broadest measure U6 (shown below) and even that understates unemployment due to the use of the arbitrary and capricious birth-death model. For decades now, BLS has engaged in the highly questionable and political practice of changing methodologies when the numbers become unfavorable.

Shadowstats does a fine job of keeping up the tradition of the older, more accurate methodology and states employment to be nearly 22%. This is a level of depression proportions, but you wouldn’t know it watching the telescreen. Perhaps again the devil is in the details and when you coalesce the consumer confidence numbers, and the massive and ongoing retrenchment in consumer credit, which I have been screaming about as a signpost for over 3 years, it is easy to see that things on Main Street are not what many would like us to think they are. The retrenchment is certainly good news for the consumer, but bad for growth in our twisted world. Given the proclivities of the American consumestocracy to blow money over the past decade, it is probably a reasonable assumption that the retrenchment is not voluntary. 22% unemployment and a shattered consumer hardly seem like firm foundations from which to build a recovery - even a jobless one.

Credit Card Resets?

And now we move on to our ‘salt in the wound’ section of this week’s journey. We all know very well about the $23.7 trillion (courtesy Bloomberg.com) lavished on the financial system to ‘rescue’ it. We know about the tens of billions in bonuses handed out by financial firms and the nonsensical battles over the AIG (AIG) handouts Congress occupied itself with while Rome burned. We know full well about the federal reserve’s efforts to artificially manipulate interest rates lower and essentially give away money to the banks, then pay them 15 basis points to store their reserves at cartel headquarters. So after receiving all these perks of the well-connected, the banks are doing the logical thing: they’re sticking it to the consumer.

How, you say? In the form of higher interest rates on credit cards, additional fees, higher minimum payments, and ironclad rules on repayment terms with substantial penalties for non-compliance. So all of those folks who dodged a bullet on mortgage resets just might get one after all when they open their next credit card statement. After all, if we can’t get consumers to take on debt, we can do the next best thing – charge them more for the debt they do have, right? You can’t make this stuff up. The above are just a sampling of the stresses that exist on the backbone of our real economy: Main Street. So the next time you hear a government or quasi-government official discussing economic optimism or a jobless recovery, all you need to do is ask yourself, “For Whom?”

Comments

[Tom E.:]

"After all, if we can’t get consumers to take on debt, we can do the next best thing – charge them more for the debt they do have"

Well said.

Oct 19 06:12 PM

[RicK IL:]

I'm almost sickened by the optimism I see in the stock market. Great for Apple today---36.5% profit margin, but at whose expense? Whole mkt rises and assumes the ocean is rising. I'm in the trenches, the temp/perm placement biz, and I see what is happening in the non-tech world: wages going down, margins thinning. My best year was 2000 (net over $200,000); 2001 was down 20%; 2002 was down (net profit) 78% from 2000. And this year, 2009, is the absolute pits. There will be no recovery---ever. Any new jobs will be crappy jobs. CNBC and Kudlow are so full of crap. The hell with it. I'd rather live like a dog than put up with this BS. Fortunately, while in the service 64-69 (two years in Vietnam) I had a lot of survival training; and a LOT more fun!

Oct 19 06:48 PM

[Moon Kil Woong:]

Ben Bernake is a moron. He thinks deflating the dollar 15-50% to get GDP positive means a recovery. That's like thinking that as long as you sign your name to an A paper in class that means you aced your test. It's a lie, pure and simple.

Thanks to everyone who bothers to point out that a jobless recovery is an economic oxymoron.

And by the way Ben Bernake, get your facts straight, your manipulations may have created a false technical end to the recession according to economists, but by no means creates a recovery. Apparently, even you are moronic enough to get caught up in your own lying doublespeak. Don't lie to the American public. We are not fools.

Oct 19 07:41 PM

[Poor Texan:]

What's sad is that our community based charities (Salvation Army, St. Vincent dePaul, etc) are overwhelmed with the unemployed and underemployed but the government subsidies go to agencies like ACORN which provide no real relief. And now to make matters worse, some fools in Washington want to limit charitable deductions so that the community based charities will be able to do even less. Obama may want others to share the wealth, but only someone else's wealth.

Oct 19 09:59 PM

[derryl:]

Joseph Goebbels, Hitler's propagandist, is famous for adopting the "big lie" approach. It works because people just cannot believe that anybody would have the arrogance to think they could pass off the opposite of the truth. Little lies are obvious because everyone can see that things are not quite like they are being presented. But big lies make people doubt their own eyes and think that maybe they just don't understand.

So if we have real 22% depression level unemployment, and the powers and the MSM shout "Recovery!", maybe they're hoping the big lie will actually get people to start acting like there is a recovery and the belief will become self-fulfilling. Except in an environment of gross overindebtedness, falling or lost incomes, and rapidly contracting credit, it just isn't possible to 'believe' your way to recovery. It's not real, and lying about it cannot make it so.

Oct 19 10:02 PM

[bluesky123:]

No jobless recovery in Arizona. Here's what Arizona is proactively doing to create thousands of new jobs. As reported yesterday by the Arizona Republic in "State now in race to home-grow, recruit jobs", the small city of Surprise Arizona has created a $5.6million fund for biotech start ups. The Arizona Economic Resource Organization, an economic development support group, just announced plans for a $200 million fund to finance startups. Now, that's cool.

The solution for America is laughably simple. Every state should follow Arizona's lead. Get behind business creation and innovation. Stop lamenting the state of the world and proffer solutions. Create what Arizona is doing in every state and you'll create ten thousand new incredibly dynamic, brilliant companies every year. Look forward. We have enough people looking backwards.

www.azcentral.com/ariz...

Oct 20 04:46 AM

[gmwright:]

It's tough. I share many of the same views in terms of the unsustainability of the recovery but there is no clear indication that anybody has learned the lesson. I thought banks/financials and the large caps could drive the recovery from gov. stimulus and a recovering stock market (trading profits) but now AAPL is reporting monster numbers.

Who is buying these luxury AAPL items if things are so rough? These are numbers you can't make up (I hope) which show that there is still a lot of money willing to be spent by the consumer. Is it money they have to spend? I don't know, but this is the problem with trying to apply logic to the consumer or to the stock market. Sure you may be proven right in the end... but the end could be a long way away.

These times are truly a test of your convictions in your investing strategies and opinions. Just remember that a good investor is always open to changing their opinion.

Oct 20 05:02 AM

[The Simple ...:]

@gmwright: The buying of luxury items from Apple actually does make sense, and reflects a phenomenon I discovered in an academic paper written as a university srtudent in the 1980s: People who cannot afford to buy homes or cars will afford themselves smaller luxuries, like the world's finest mustard, or really cool mp3 players.

Oct 20 08:07 AM

[Duude:]

Credit card rates are rising due to higher default rates as well as Congress attempt to fashion a new bill to make more credit card rules more transparent. The bill they passed goes into effect next year and among other things requires companies to give consumers plenty of notice before raising interest rates. Credit card companies claim they're reacting to the bill.

Oct 20 10:29 AM

[a fat panda:]

"Perhaps one of the most preposterous statements made during the ongoing financial crisis was by Ben Bernanke "

There is a lot of competition for the most preposterous statement made by Ben Bernanke alone. I would hate to think anyone had to suffer through all of the possibilities.

If it weren't for his fancy job title, Ben Bernanke would be to economics what parsley is to food.

Oct 20 07:22 PM

[Plan B Econ...:]

Ok - devaluing the dollar to prop up asset prices is a money-illusion. But, the Yuan is pegged to the dollar so it is effectively getting devalued at the same time. Makes no difference to US importers, but to anyone else buying from China the cost of doing so just got a lot cheaper. Outside of that, I'm not sure how the weak dollar is supposed to help the US (a net importer).

Yes - credit card defaults are up. But the big swingers are property loans:

www.planbeconomics.com.../

Oct 20 07:53 PM

[storm999:]

Humorous style, infuriating content. You made me smile about the back East BS machine. Those foreclosure numbers represent real, destitute familes, God bless them.

How long is it going to be before Angelinos like me wake to find that the angry masses have set Wall St on fire? Or D.C?

Oct 21 12:25 AM

[predictorma...:]

The subverting of the free market continues unabated.

Other shoes to drop:

Major layoffs of state and local government workers.

Sharply rising loan defaults of all kinds.

Limited or no hiring by companies.

Very little new business formation.

The people at the top, as always, are clueless.

Oct 21 08:59 AM