Vanishing Jobs and the Rising Bailout Costs

Includes: DIA, QQQ, SPY
by: Nick Thomas

While The DJIA Hits Key Resistance

Last week we discussed the prospect of rising job losses and last week's November payroll report confirmed the phenomenon. The consensus amongst economists was that there would be 350,000 jobs lost. They were wrong, though: The actual number was a lot closer to 550,000 instead.

Even though the Dow continued to rally into this depressing news, a daily chart tells us that a veritable moment of truth has arrived:

The DJIA has tried and failed to clear its 50 day moving average. The 9000 level has proved to be serious resistance previously, and now that ominous blue line is adding further lead to the Dow’s feet as it desperately treads water and waits to be rescued.

So is a rescue on the way? It doesn’t seem likely, as the government continues handing out bailout funds to everyone with minimal oversight and (apparently) maximum wastefulness. The latest industry to visit Washington with hat in hand is the airline industry. It seems that American Airlines (NASDAQ:AMR) chief executive Gerard Arpey feels that any federal plan to boost the economy should include the aviation industry.

To be fair, he stops short of directly requesting aid to carriers themselves (instead claiming a need for spending on only runways and a better air traffic control system), but we can bet that the temptation to run to the trough will overcome him and his fellow airline executives soon enough.

All this on top of the $14 billion being doled out to “save” the auto industry from its own incompetence, and of course the banks are angling to grab the second $350 billion of the ridiculous TARP plan as soon as possible.

Clearly there isn’t a single financial problem in America that can’t be solved without additional free money from the government (and ultimately your wallet, in which case these bailouts are anything but “free”).

Treasury Yields Make History, But Not The Kind We Really Want

Commodities and precious metals have lately been rallying and virtually everything’s gone up except the yield on government paper.

In fact, the yield on three month treasury bills went negative for the first time ever. The Treasury recently sold three-month bills at a discount rate of 0.005%, the lowest since it starting auctioning the securities in 1929. And then Friday the four-week bills were subsequently auctioned at 0% for the first time since that particular bill began selling in 2001. Yes, 0%. That wasn’t a misprint.

And so those recently auctioned three month bills are effectively now yielding a negative discount rate of 0.01%. To put this into perspective, the rate for four-week bills peaked at 5.175% only two years ago. What a difference 23 months makes, indeed.

Even the 10 year note is barely providing any real income as the buying frenzy for perceived security just keeps rolling on. (Yes, you’re getting less than 3% for lending your money for 10 years to the U.S. government, as per the table above.) Here’s a picture to demonstrate this more clearly:

But corporate bonds aren’t enjoying such “spoils”, however. Only government bonds have surged as the housing slump has inflated the cost of credit (one in ten U.S. homeowners is either in arrears on his mortgage or already in foreclosure).

Companies and their bonds are seen as too risky as the world's biggest financial companies have incurred almost $1 trillion in writedowns and credit losses since the start of last year.

A trillion here, a trillion there. Soon we’ll be talking about real money.

A Bull Market in Inflation…And Also Commodities

With all this bailout money floating around (and the printing presses running full bore to "create" it all), there are now credible rumors that the Treasury might use Fannie Mae (FNM) and Freddie Mac (FRE) to bring down 30-year fixed mortgage rates to the 4.5% range. This sounds good on paper, but someone's forgotten to tell our leaders that artificially low interest rates were one of the primary causes of the current mess.

After all, when credit is too easy, it encourages businesses (and consumers) to spend and invest recklessly. Far too much money is pumped into markets where it has no business belonging. And prices rise, and rise, and rise some more. Then the bubble pops and we have an even bigger crisis than the one today.

Therefore inflation hedges including gold and oil should rebound strongly in the coming months. Here's what the Financial Forecast Center is predicting for inflation in general:

Gold in particular should do very well. In fact, it’s leaped up dramatically Friday as we see here.

A gain of more than $36 an ounce is nothing to sneeze at, especially when Citigroup says gold could rise above $2,000 next year. The bank bases its claim on the central banks’ ongoing effort to flood the world's monetary system with liquidity.

Recession or Depression?

What was before unthinkable is now being whispered steadily more loudly and clearly. Is this a garden variety recession which will blow over within a year ... or is it something much, much worse?

The global nature of this meltdown hints at the latter. After all, an unprecedented leveraged credit bubble is now bursting and our "leaders" seem to think that more credit will magically make the monster go back into its box.

All these "solutions" have done in the past is put off the day of reckoning and make the bubble even bigger and scarier. It's a bit like getting an infected cut on your finger due to inane stupidity on your part, taping it over with a bandage, and then refusing to see a doctor because your pride won't allow it. The infection spreads into your hand, and you merely apply more bandages to hide the evidence ("See, everything's fine now!"). Then it's up to your arm and threatening the critical functions of your body. At what point do you see the doctor and take your medicine?

This is the crossroads at which the economy now stands and it seems that the so-called experts are no longer able to bandage over the evidence of their own incompetence and stupidity.

At best, we're at the beginning of a hard landing that will last a couple of years. At worst, the pain will last for the better part of a decade. Invest accordingly and keep your powder dry. This will get ugly!

Disclosure: No positions.