The $20 trillion of wealth in
America that has gone up in smoke from falling stock prices, real estate, and
other asset values, is being engulfed by rapid job loss. These combined
losses have dealt a catastrophic blow to the consumer whose willingness and
ability to spend has, in turn, caused the American and world economy to come
to a screeching halt.
Job destruction is a
relentless force behind this economic downturn. Unfortunately, real
unemployment is grossly underreported almost every month because of the
government's Birth Death Model (see: www.bls.gov),
which magically adds jobs for firms that are estimated to have been started.
For example, in the February 2009 job release, the Birth Death Model added
134,000 imaginary jobs. (How silly is that?) Therefore, the actual job
loss in February was 758,000 not the 651,000 reported.
The mainstream financial press
also fails to report that only 60 percent of people who lose their jobs are
eligible to file for unemployment. Many millions of workers are independent
contractors or private business owners who don't qualify for unemployment
benefits. Even if you're a real estate agent, mortgage banker, insurance
salesman, etc., good luck trying to file for unemployment. So, when initial
claims are reported as being 600,000 for a week, you can safely assume one
million people actually lost their jobs that week.
When it comes to forecasting
the unemployment rate, sophisticated modeling isn't necessary. All you need
to do is a little arithmetic: First, take out half a million
"imaginary" jobs created from the Birth Death Model, and add a
million or so a week to the unemployed number reported. Then, assume that
only two-thirds of the people searching for work will actually find a job
that pays any money.
Before the summer is in
full swing, the national unemployment rate (now at 8.1 percent) will top 10
percent by August, and may rise to 12 percent or higher by early 2010. That
means that the number of people officially unemployed will rise from 12 and a
half million in February, to 15 million in August.
The unemployment data in our
country is designed to keep the reported number as low as possible (our
government likes to show the rest of the world how much better off we are).
In Europe, for instance, workers are counted as unemployed if they are
discouraged, working a menial part-time job, or otherwise marginally attached
to the labor force. The closest thing we have to a normal measure of
unemployment is the Bureau of Labor Statistics U-6, which shows an
unemployment rate of 14 percent in January, or 16 million non-workers on an
actual and non-seasonally adjusted basis. This could top 20 million by the
fall. There are also currently 32 million people on food stamps, and that
number could increase to 37 million by the end of 2010.
Not only are workers being
pounded by the loss of jobs and falling incomes, as the downward spiral
continues the newly-unemployed will deplete their meager savings, stop
shopping all together, and struggle to pay their credit cards, auto loans,
and mortgages. Adding insult to injury, banks and other lending institutions
are slashing credit card spending limits, closing accounts, slashing rewards,
raising interest rates, and increasing fees. In other words, America is being
forced to live on cash, not credit.
Why should we be concerned
about these pesky numbers? Well, the popular press is finally reporting that
lending on mortgages to sub-prime individuals has brought the financial
system of America and the world to its knees. The press is also willing to
remind us that home prices are down about 19 percent in the past year, and
the value of stock portfolios have been cut in half in just 16 months. But we
rarely read about the turmoil in the lives of the 20 million people with no
real job prospects, assets or income, or the shame felt by the 32 million
people collecting food stamps, or the 16 million (and climbing) homeowners on
the brink of foreclosure living in houses worth less than the mortgage. In
America, if you combine massive unemployment with household stock portfolios
cut in half and home equity virtually eliminated, and add to that a desire to
save and pay down debt, what do you get? To start, a major fall in retail
sales, corporate profits, and declining cash flow to service debt. The
affects of this recession on consumer businesses from restaurants, clothing
stores, casinos, to taxis, are already profound. We are facing a gargantuan
national tragedy that, sadly, could have been avoided if our country had
honest corporate management and a responsible government.
A client of mine in Las
Vegas who leases gaming equipment to the casinos there expects that every casino
in Las Vegas will need to "restructure", which is a euphemism for
bankruptcy. In York City recently a cabby mentioned his earnings were down by
at least 30 percent compared to a few months ago and as we zigzagged along
the avenue, traffic was much lighter than usual. The press has already
reported that between November 2008 and March 2009, price expectations for
commercial and high-end residential real estate in New York City have dropped
30 to 40 percent.
I do believe the reason that
Citibank was only partially nationalized in its third but not last bailout,
and 20 of the largest banks are going through "stress testing", is
because the government is attempting to hide the magnitude of the bankruptcy
problem. The U.S. Treasury wants to buy some time as they try and handle
crisis after crisis sequentially, rather than all at once. So, by the time
the Treasury finishes doing the stress tests, it will be clear that
unemployment will exceed the worst case scenario used in the test. It will
also be obvious that the rest of the major insurance companies - besides the
criminally negligent AIG - will need government bailouts. In 2009, the
bankruptcies of corporations and major property owners will be filling the
news and, in the end, consumer and corporate bad debts will destroy more
wealth than financial de-leveraging has.
So, what will mark the bottom
of the chasm? The recovery plan will not be enough to sustain the economy and
more stimulus will be needed. It will take at least six months for the world
to realize how bad the world economy really is, even though many investors
want to play the recent bounce in stock prices as a testament that the worst
is over. But with so much uncertainly in the stock market, we don't want to
touch the stock market or risk credit markets with a ten foot pole until the
intensity of this storm is clearly understood. Living in Florida we have been
in the inside of the eye of a hurricane and for a brief period everything
seemed fine, until the storm came back and blew the roof off of our
neighbor's house.
But not everyone is at risk.
If you have lived modestly and saved money, have no debt and actually own
your home, you can sit back and watch the show without being asked to get up
on stage and play a role in the tragedy. However, it won't be easy avoiding
getting stuck with the bill as a result of your neighbor's mortgage fraud, or
from the Wall Street criminals who stole bonuses, or from the proposed tax
increases and lower interest rates you'll be receiving on your savings
accounts for months to come. Screwing the prudent saver and sticking it to
the taxpayer is becoming the new national sport. I wouldn't be surprised if
the government's actions led to a taxpayer and saver revolt down the road.