The ECB Takes No Action…or Do They?
The past week was a roller coaster ride for U.S. Markets and the wider currency markets in general. ECB president Draghi managed to create a trading frenzy that resulted in the euro having triple digit moves.
When Draghi failed to present a plan to stave off defaults in countries like Greece, Spain, and Italy the euphoria evaporated and the nearly 300 pip move the euro had just days earlier evaporated.
As I’ve said many times over the past several weeks, the ECB has been managing this crisis, not in the arena of ideas, but in the media. They are attempting to control bond prices by sentiment rather than by action. This makes some logical sense. There is no magic number of debt and devaluation that causes bond prices to move. It is largely a product of sentiment. A country can spend and borrow its way into utter ruin and still see their bond prices fall and currency strengthen. (just look at Japan with a debt-to-GDP of 200%)
But at some point investors will lose faith in the governments ability to pay back it’s debt and the bond market will revolt. When that happens it’s usually swift and severe. (can you say double digit bond prices for Greece)
The ECB knows that the key to staving off the destruction of the euro is in providing hope. If Draghi can successfully create the illusion of a solution then he can control the rate of the sovereign debt collapse. The one thing you should keep in mind is that this is only a temporary solution. It will buy Europe time but without a solution the end is certain.
How to Create 163K New Jobs and Still Increase Unemployment
As we move over the the U.S. we saw a very nice move in equities as the Labor Department reported 163,000 new jobs were created in July. Doesn’t that sound terrific? It does, until you understand a few numbers that make Fridays report look a lot less exciting.
The first number is 150,000. That’s the number of jobs that the U.S. must create every single month just to meet the demand of new workers coming into the workforce. When you back out this number from the 163K you get a whopping 13,000 jobs. Not nearly as exciting as 163,000.
What you may find odd is the unemployment rate ticked up .1% to 8.3. So how do you get an increase in employment and still manage to increase the number of unemployed? Simple, you just fudge the numbers.
You see, the real unemployment rate in the U.S. is around 19%. The government doesn’t count anyone who’s stopped looking for a job or who as not looked for work in the last 4 weeks. They will also count workers as “employed” if they have worked at least “one hour in the past 4 weeks”. That means if you’re unemployed but manage to scrape up an hour of work handing out dominos pizza flyers on the Walmart parking lot guess what…you’re employed.
According to the BLS the long term unemployed stands at about 5.2 million. That’s about 40% of those currently unemployed. This is an important number that has a direct effect on the unemployment rate.
If you have 40% of the currently counted unemployed at over 27 weeks and you have another massive chunk of Americans not being counted you have a problem. The reason for the uptick in unemployment is due to workers who are not being counted as unemployed reentering the labor force and going back on the unemployment rolls. At some point the money runs out and you’ve got to start looking for a job. The 40% on long term unemployment will eventually have to get work. But with only 13,000 excess jobs available how likely is it that these workers will be able to find anything much less a job that will provide them a living?
The answer is, not much. John Mauldin calls this the “new normal” and unfortunately I think he’s right. The world has hit a tipping point and there’s no backing away from the cliff. The last twenty years, and the economy of the last fifty is gone. But with a little planning and a lot of hard work we will survive. “Winners Win” is a phrase I learned may years ago. It means that winners find a way. I know we will pull through this madness. Until then, we soldier on.
Until next time,
Jason
