Can the Non-Farm Payrolls Report Show the Market Some Green Shoots on Friday'?

Ben and Timmy will be providing the Ho - Ho - Ho...

The Stock Market in Context with the Great Crash of 1929 - 1932

The US Stock Market Crash of 2007 - 2010 expressed in percent decline from the market top in October 2007.



A trading day by trading day comparison of the Great Crash of 1929 - 1932 with the current market decline from its October 2007 top.



The classic profile of a collapsing bubble.



The economic policy of the early post-Crash period was heavily influenced by what was later called Liquidationism epitomized by prevailing views of the Hoover Administration. The idea was that allowing companies and banks to fail as quickly as possible, in a relatively uncontrolled manner, was the appropriate response. This view is still held by the Austrian School of economics.

The flaw in this theory would seem to be that the decline of a crash is not like a natural decline in a business cycle or a severe demand contraction, but the result of a precipitous collapse from a Ponzi-like monetary and credit expansion.

One can argue this point, endlessly if they wish to ignore history and economic reality, but again we need to remember that the outcome in several other nations embracing this theory was the rise of militant, fascist political regimes in response to societal dislocations.

Obviously the best cure is prevention, in not allowing monetary bubbles in the first place. Duh. But one has to play with the cards in one's hand, and not the hand they wish to have.

But there is a lesson in this for our current 'cure' in that blowing yet another asset bubble from a monetary expansion, and little else, will not work. We ought to have learned this from the Fed's policy responses in 2003-2006 which led to the US housing bubble.

Systemic reform and rebalancing is absolutely essential to a sustained economy recovery, and needs to be measured by an increasing median wage and a reversion to manageable income - debt ratios.

The headwinds against this remedy from an outsized financial sector that in many cases has coopted the political process makes a sustained economic recovery less probable without a significant shock to the political and economic structures of the US at least.



Bernanke's wager

Being a student of economic history, Ben Bernanke believes that he can inflate the currency subtly without a formal devaluation, and avoid a second leg down to a deeper bottom.

The Fed is now confident, with the Volcker era inflation experience under their belts, that they do not need to replicate the NY Fed policy error of the 1931 by increasing nominal interest rates prematurely out of inflationary concerns.

Things ARE somewhat different today, in that there is no gold standard, and the world has relatively free flows of fiat capital under a US dollar reserve currency schema.

It should be noted, with no mistake, that the limiting factor on the Fed is the valuation of the US dollar and its sovereign. In 1931 the limiting factor was the gold standard which severely limited the Fed's options, and eventually caused a significant formal devaluation of the US dollar in a step-wise function.

In a fiat regime the devaluation can be done gradually without fanfare.



It is also easy to forget that in 1931 the business community and the leading economists were convinced that the worst was over and that a recovery was underway. Their concerns shifted to inflation, and dealing with the then unprecedented expansion of narrow money in the adjusted monetary base to ease short term credit problems.



The 'risk' is obviously that the analog with the Fed's experiment with subduing inflation in the 1970's under Volcker are not completely consistent to the environmental context today.

The levels of US debt to be absorbed by the rest of the World are without known precedent. And the degrees of freedom in the Fed's calculation are significantly impacted by the policy actions of countries that may be sympathetic but not completely consistent with their own national self-interest or inclinations.

From our own viewpoint, without signficant structural reforms to the US economy and political process, which at this time seem unlikely to overcome the resistance of the status quo, the Fed's actions will most likely result in another type of bubble, less obvious than the last two perhaps, and a stagflationary economic recovery of a sort combing some of the nastier aspects of the Japanese experience, but with a nasty dose of the post-Soviet / Argentinian slumps.

A deflationary envionrment with a stronger US dollar appears to be a fantasy in our opinion, although we have always held it to be possible. Of course it is possible. If the Fed raised short term rates to 22 percent tomorrow, we would see a serious deflation and a stronger dollar.

We would also see riots and civil insurrection in response. This is another limiting factor on the policy decisions of the Fed and the Administration, which people tend to underappreciate, again ignoring many of the social and political events of the 1930's.

The US dollar will continue to decline until there is a precipitating currency crisis that clears the market for US debt. Things will not be able to continue on this way forever. We estimate that the next bubble, if the Fed is able to get the rest of the world behind it, will be decisive.

However, we continue to degrade the probability of this happening as the weeks go by, and the rest of the world appears to be asserting its financial sovereignty from the Anglo-American banking cartel.

ADP: Department of Records Revision

"April’s reading was revised to show a reduction of 545,000 workers, up from a previous estimate of 491,000."

Is an 11% month over month change in an employment number a revision or a rewrite?

The ADP report is supposed to be based on actual reports from private industry.

This pervasive pattern of 'good numbers' that result in stock market rallies and the massaging of public opinion, only to be replaced by downward revisions thirty days later, with little notice or quote, is cynical manipulation of the media at best, and a dangerous slide into social engineering by an increasing distortion of 'reality' at worst.

If you have not read the novel or seen the movie lately, 1984 is worth a look.


Bloomberg
ADP Estimates U.S. Companies Cut Payrolls by 532,000
By Courtney Schlisserman

June 3 (Bloomberg) -- Companies in the U.S. cut an estimated 532,000 workers from payrolls in May as the labor market showed little sign of improving even as the recession abated, a private report showed today.

The drop in the ADP Employer Services gauge was bigger than economists forecast. April’s reading was revised to show a reduction of 545,000 workers, up from a previous estimate of 491,000.

Companies from General Motors Corp. and Chrysler LLC to American Express Co. continue to cut jobs to control costs even as the economy shows signs of stabilizing. Mounting unemployment will restrain consumer spending, muting any recovery.

“Still losing over half a million jobs a month is hard to get excited about,” Derek Holt, an economist at Scotia Capital Inc. in Toronto, said in a note to clients. “Steep job losses still signal a deeply troubled economy.”

...Economists forecast the ADP report would show a decline of 525,000 jobs, according to the median of 28 estimates in a Bloomberg News survey. Projections ranged from decreases of 425,000 to 580,000.

Economists’ Forecasts

A government report on June 5 may show payrolls at companies and government agencies shrank by 520,000 in May and unemployment rose to a 25-year high of 9.2 percent, according to a Bloomberg survey of economists.

Job-cut announcements last month showed the smallest increase in more than a year, Chicago-based placement firm Challenger, Gray & Christmas Inc. also said today. Planned firings rose to 111,182, up 7.4 percent from May 2008. The rise was the smallest since firings last dropped in February 2008.

Today’s ADP report showed a reduction of 267,000 workers in goods-producing industries including manufacturers and construction companies. Employment in manufacturing dropped by 149,000. Service providers cut 265,000 workers.

Companies employing more than 499 workers shrank their workforces by 100,000 jobs. Medium-sized businesses, with 50 to 499 employees, cut 223,000 jobs and small companies decreased payrolls by 209,000.

German Chancellor Strenuously Objects to Central Bank Monetization

This is important in its own right, but even moreso because it suggests that some rumours that have been going around the trading desks over the past two weeks might be true.

We will keep you informed as things progress.


Financial Times
Merkel mauls central banks
By Bertrand Benoit in Berlin and Ralph Atkins in Frankfurt
June 2 2009 17:25

Unconventional monetary policies being pursued by the world’s main central banks could aggravate rather than ease the economic crisis, Angela Merkel, Germany’s chancellor, suggested on Tuesday.

Her surprisingly strong attack on the US Federal Reserve, the Bank of England and the European Central Bank was remarkable coming from a leader who had so far scrupulously adhered to her country’s tradition of never commenting on monetary policy.

“What other central banks have been doing must be reversed. I am very sceptical about the extent of the Fed’s actions and the way the Bank of England has carved its own little line in Europe,” she told a conference in Berlin.

“Even the European Central Bank has somewhat bowed to international pressure with its purchase of covered bonds.”

She added: “We must return to independent and sensible monetary policies, otherwise we will be back to where we are now in 10 years’ time.”

Ms Merkel’s decision to ignore one of the cardinal rules of German politics – an unwritten ban on commenting on monetary policy out of respect for central bank independence – suggested Berlin is far more concerned about the ECB’s approach than has so far been apparent.

Meanwhile, Berlin is anxious that central banks will struggle to re-absorb the vast amount of liquidity they are pouring into the markets and fears the long-term inflationary potential of hyper-loose monetary policies.

The ECB’s efforts have been focused on pumping unlimited liquidity into the eurozone banking system for increasingly long periods. But last month, it followed the US Federal Reserve and Bank of England in announcing an an asset purchase programme to help a return to more normal market conditions.

The ECB announced it had agreed in principle to buy €60bn in “covered bonds”, which are issued by banks and backed by public-sector loans or mortgages. The purchases were only agreed after extensive discussions within the 22-strong ECB governing council. According to one version of May’s meeting, the council had discussed a €125bn asset purchase programme that would also have included other private sector assets, but only the purchase of covered bonds was agreed....