Wednesday, May 6, 2009

The donut and the hole

As you travel though life, my friend
where ever you may go
keep your eye upon the donut
and not upon the hole

Good advice.

To all you 'hole watchers' out there Swine flu is the wrong issue. Stress tests are irrelevant unless you own 'that' bank's stock. ADP is where the action is at.

Threats that don't threaten
Swine flu may have the potential to become a threatening pandemic but for now, IT'S THE FLU. Yes it can kill people, especially those with other maladies, but its the flu. Could it mutate? Yes. Has it? No. But then it would be something else if it mutated. Heath officials should be worried, not the rest of us. Let them do their job and worry about the 'what ifs' and stop blowing things out of proportion. Let others worry about asteroids hitting earth and Martians landing. These are other 'threats' that do not threaten. 

Stress tests: much ado about nothing 
The stress test is all about how bad off banks are. If they need more capital they will raise it. Until then, they are bolstered by the government and guess what? That worst case scenario that the tests test for is not on our door step and it is probably at least one more business cycle away if not much more than that. So why should anyone worry about it? It is hypothetical and the tests are a jury-rigged joke. It's the economy's slide that is decelerating not accelerating. We are perched on the precipice of better times, not worse times. What better time to assess banks against much worse times than when things are improving! Sounds like government in action to me. Not only are the stress tests impossible to do but they are in all likelihood, meaningless.

The business cycle: the MAIN EVENT
ADP on the other hand has made a sharp turn for the better. The original ADP assessment of losses from March has been cut by about 40K.  That is an early sign that things are not worsening as much as we thought- but a small one. The mo/mo change in the ADP from a loss of 708K to loss of 491K is an important signal. It is the second largest positive shift in the mo/mo ADP change  since 2001. In Dec 2001 just as the last recession was ending a slightly larger shift occurred as the ADP went from a change of -428 in November to -186 in December. December marked the start of the recovery from that recession.  Actual private job losses shifted from a reading of -343K in November to -207K in December, -154K in January, -160K in February and to  -65K in March. AND that was a poor jobs recovery.  

While we don't know what the real nonfarm number will do yet, we will on Friday. But all sorts of indicators are lining up on the side of 'better,' and much 'better.' 

At the end of past long deep recessions: 
At the end of the 1982 recession private sector job losses were at -310K in October two months later the recession ended and private job losses were cut to -18K. By March, a set of steady increases was in train, with March at +172 K and the following months even stronger; July gains were +427K. 

Private job losses were at -629K in December 1974. That recession ended By March of 1975. May of 1975  showed the first monthly increase in jobs and by July increases were at a steady stream of positives +172K, +372K and so on. 

What Paradigm? 
Too many economists (and the Fed) take their paradigm of job gains in the recoveries from the 1990 and 2001 recessions as the right one.  In fact those two recessions were mild. This recession is not mild. Neither were 1973-75 or 1981-82 downturns. These recoveries were strong job producing machines. The ADP was not around for those cycles but the strong shift of the ADP in this cycle is an interesting tid bit. Will it be more than that?   

Is a real strong recovery about to start?
Many indicators point to a recovering economy. This is the first of these signals that is also a strong signal. The strong tilt in the ADP potentially is a statement about the strength of the recovery ahead.  More emphasis should be put on this since a stronger recovery is an event that will have wide- ranging repercussions. The marked shift in job losses signaled by the ADP result is not just about April but about what we are going to be seeing over a series of months. So open your mind beyond the consensus and consider the possibilities.



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