Jobless claims came in above expectations, at half a million, and some people were surprised by the number. And now the bulls are apologizing, the mea culpas all starting with: “I thought at the beginning of the year…”
Why the disconnect between intelligent, typically well informed people and reality?
They refuse to look at numbers – real world numbers – and match this data with what they know about the US economy. Start with housing.
· Since World War II every recession has ended due to a rebound in housing. Before the crash, the bottom in new housing starts was seen as one million – the current run rate for single family homes is less than half a million.
· Forty percent of all new jobs created between 2002 and 2007 were housing related.
· Current demand for housing is anemic due to real world unemployment above 20%, falling household income, the inability of 25% of homeowners to trade up or down since their house is under water, and tightened credit standards. The historical rate for home ownership is roughly 63%; we hit 70%; we are now at 67% and falling.
· The current supply of housing is near an all time high, as measured by monthly sales, and is now exploding as banks throw in the towel and are putting their foreclosed homes on the market and foreclosing on more homes. This will not end until 2013; the country will see another six million plus foreclosures in the next three years using the simple math of current defaults, late payments, foreclosures and so on.
· As long as inventory remains high, prices for houses will fall, reducing wealth, creating more foreclosures and inhibiting the building of new homes.
· Consider shorting the homebuilders and the material suppliers.
Now look at government, another big creator of jobs in the past decade.
· Forty four states are in the red, Uncle Sam is broke and layoffs continue. With pension and health care obligations out of control, it will take many years to re-structure the work force and match promises and pay to revenues. I put the number at a decade.
· Localities are also struggling and without federal stimulus – which is not coming – tens of thousands of teachers, cops and so on will be laid off in the coming months.
· There will be no new net hiring at the federal or state level for at least five years – probably more – depending on how soon local tax revenues rebound. At the federal level, the wind down of the war in Iraq and eventually Afghanistan, not to mention the eventual rationalization of the homeland security apparatus, will reduce total levels of direct and indirect federal employment by at least a quarter of a million jobs.
· Consider shorting defense contractors.
What about health care, the other motor of job growth?
· The government will put the clamps on health care spending after the November election and as doctors manage to preserve their fees, overall hiring will stall and then decline. Even now hiring is very slow compared to past years.
· Over time, health care spending, specifically Medicare, will intersect with the federal budget, rather than the supposed Medicare Trust Fund, and when that trust fund goes broke, around 2015-2016, harsh cutbacks in health care spending will hit job growth.
· Consider shorting regulated health care providers and Big Pharma
· The US exports high value industrial goods, and these require few new workers compared to the overall population. A doubling of exports in industrial goods would knock less than two points off the unemployment rate.
· Consider going long the industrial goods producers – make no mistake, they are the best on the planet and US workers, much maligned, are the most productive on the planet.
· Funny thought – the US has between 35% and 50% more stores than needed and hundreds are closing every day, eliminating thousands of jobs each month.
· Back to school was a bust and temporary hiring for this season now means layoffs. This failed season means hiring for the holiday season will be muted.
· Consider shorting the specialty and mid-tier, non niche department stores.
Return to College
· Hundreds of thousands of the unemployed are now students, borrowing and creating a new hole and will face a lousy job market. Then they will default on their loans. This is already happening – and Uncle Sam will be cutting back on loans, specifically for online schools that produce, for many, nothing but debt.
· Consider shorting the online colleges.