Saturday, December 6, 2008

Sometimes the devil is in the headlines...

..and the angels hide in the details

Jobs? What are jobs?
It's not exactly like remembering where you were the day the 9/11 attacks occurred or on Pearl Harbor day but to economists the Friday massacre will be remembered. There is a good lesson here about data revision out of the BLUE. We now have three months of job losses at -403K, -320K and at -533K. Who would have forecast -500K jobs on Friday without the revisions in hand? Houdini? or maybe Gary Schilling.

Got Jobs?
Job losses in this recession at the 12month mark are now greater than in any recession since 1960. Even the proportionate drop in jobs is severe. The proportionate drop in the services sector is also a record. MFG jobs have held up better that in most recessions (all but one) but that series is now taking a serious dive lower. The slope is slippery and we are on it. No telling how long this lasts...

It is said that every cloud has a silver lining. But I guess whoever said that never heard of thermonuclear warfare. Fortunately this was only a jobs report. Its silver lining is essentially clarity. The economy is now in recession, it look like it's in recession, and the NBER says it is in recession. So we can now compare it to past recessions. That does not mean that we are limited to that experience, but that we can learn from it. The past long post-war recessions in 1973 and 1981 last 16-months. This one is already 13 months (12 months of job data). That does not mean it can only last three months more, but it suggests that maybe since it is already long there is not that much of it left. The severity of the jobs losses suggests that too. And the good news is that STOCKS tend to rise before the recession ends. Stocks often rise in the midst of the gloom - out of the ashes of pessimism, and in the face of horrific corporate earnings. Does this description of reality sound familiar? That's the silver lining.

SEVERE job losses - a good sign?
The jobs numbers are seriously negative. Indeed this THREE MONTH stretch of job losses is the worst in absolute terms except for two of the three the final months of the extremely severe 1973-75 recession. But as a percentage of job levels at the start of the recession this three month stretch ranks as the THIRD WORST since 1960 - still bad enough. The job losses at the end of the 1973 recession were worse in proportionate terms and so were those at the very end of the 198o recessionette. But in three month loss terms 2007-2008 at its worst is still worse that the worst of 1981-82. What is interesting that the worst of the job losses tends to come at or near the ends of recessions not at the start or at the middle. Of course since this one is not over we can't yet call these the worst losses of the recession. But episodes of losses this severe have not persisted for long in past recessions. So we have some reason either to be very happy or very disturbed with this recent news. Stocks have chosen to take heart, pushing aside the bad news of the moment looking ahead to the grandeur of recovery that lies ahead. Are they premature...again?

SEVERE job losses: the end of the world?
Of course, if you are prone to pessimism the numbers are not only worse but extremely bad. The banks are in trouble. The Fed is pumping in reserves like a drunk downing drinks on dollar night and yet nothing is happening. Stocks are still chaotic and bond yields are lower than the criminal slime in a "B' movie. Surely more bad news lies ahead? Housing, the root of all that is evil, is still crashing with prices lower and activity slower than a factory assembly line in the old USSR where the commies pretended to pay the workers and workers pretended to work.

A Choice: The biggest guessing game in town
So its a choice as to what you think. The facts siding with optimism are reasonable. The facts supporting pessimism require dysfunctionality to take over. I am not convinced of the pessimistic bent but I will admit that it might be a bit early to don that equity party hat. While stocks have been crushed and seem to have a huge upside, there are new factors in the mix that may put a ceiling on prices well short of past highs for some time to come. Not the least of it are the government capital injections. Ironically if you want upside I think THOSE are the stocks to stay away from. . I still think because the recession is now so sharp it will have more of a jackrabbit recovery associated with it. But it may not have lasting power. The tortoise of pessimism is persistent and may come back to reign in a strong recovery and damp the power of expansion fueled by a huge GDP gap (output well below potential). Still, getting back on the growth track of any sort would be good news and I still think that it is where we are headed by around mid year 2009. Enough equity strategists have lost their congenital bullish bent to convince me that we could have a persisting halting rally that bears will continue to sell into and will never create enough push to be the flag that says IT'S OVER! But some day we may look back at the day we leaned over the abyss, looked in, then headed for the light. We might decide that day was last Friday. The beauty of markets is that THIS COULD BE IT. Only hindsight is 20/20. So welcome to the biggest guessing game in town.