By Mike Whitney
A poor jobs report, higher than expected inflation in China, and another flare-up in the Eurozone sent stocks tumbling on Monday. US Treasuries rallied on news from the Labor Department that employers added just 120,000 non-farm payrolls in March, far below analysts most pessimistic predictions. The Dow Jones lost 130 points on the day, while 10-year Treasury yields slipped to Depression era levels of 2.03 percent. After three-and-a-half years of zero rates, $2.3 trillion in quantitative easing, and $4.4 trillion in additional bond sales (USTs), a “sustainable” recovery is still nowhere in sight.
Friday’s BLS report was not entirely unexpected. TrimTabs analyst Madeline Schnapp explains what’s behind the sudden drop in new jobs from 200,000 per month (for 3 months) to just 120,000 on Friday:
“For months now we have been harping on the fact that the reason behind the big BLS job numbers in January and February was huge seasonal adjustments. Seasonal adjustments in January were nearly 2.2 million jobs, almost ten times the BLS January employment estimate and in February, the seasonal adjustment was 1.5 million jobs, more than six times the BLS February estimate. So now we come to March and the BLS seasonal adjustment is nearly half the February adjustment, actually 811,000 to be precise, and lo-and-behold the BLS employment estimate has come down out of the stratosphere to a more reasonable 120,000.” (“Jobs Grow 172K Monthly January through March”, TrimTabs)
Schnapp’s explanation is consistent with many other reports that show gradual, but not stellar, improvement in the job’s market. She believes that the average employment gain in January, February and March was roughly 172,000 jobs per month.
“Economic growth is positive,” she added, “but remains sluggish…… (and will) remain sluggish because of high unemployment, weak wage and salary growth barely above inflation, elevated fuel and energy prices, a lackluster housing market, and a European debt crisis that continues to simmer overseas with no end in sight.” (TrimTabs)
Surely the most shocking statistic in Friday’s report had to do with older people that are returning to the workforce en masse, presumably because their retirement and home equity have been ravaged by the Fed’s misguided policies. Take a look at this clip from John Hussman’s latest newsletter:
“Since the recession “ended” in June 2009, total non-farm payrolls in the U.S. have grown by 1.84 million jobs. However, if we look at workers 55 years of age and over, we find that employment in that group has increased by 2.96 million jobs. In contrast, employment among workers under age 55 has actually contracted by 1.12 million jobs. Even over the past year, the vast majority of job creation has been in the 55-and-over group, while employment has been sluggish for all other workers, and has already turned down.” (“Is the Fed Promoting Recovery or Desperation?”, John P. Hussman, Ph.D., Hussman Funds)
What does it mean?
It means that Sonny and Susie are moving back in with Mom and Pop while Dad trundles off to Wal-Mart for a day of greeting shoppers and fetching candy wrappers in the parking lot. Such is the American Dream after 15-years of easy money pump-priming and low interest Ponzinomics. Housing prices have plunged 35 percent while the average retirement package is down roughly 40 percent. Baby Boomers face a future that is more uncertain and fraught than anytime in the last century. Thanks, Maestro.
Meanwhile, in the Eurozone, the news is equally bleak. Italian and Spanish bonds nosedived last week after a failed Spanish bond auction prompted rightwing PM Mariano Rajoy to admit that his country is in “extreme difficulty.” Surging yields on Spain’s 10-year bond indicate that the European Central Bank’s 1 trillion euro loan program (Long-Term Refinancing Operation) to underwater EU banks has not restored investor confidence in the ability of struggling sovereigns to meet their obligations. Spain has been devastated by sky-high unemployment (now at 23 percent) a burst housing bubble, and a banking system that is drowning in red ink. Rajoy’s stubborn commitment to austerity–which has been applauded by policymakers in Frankfurt, Brussels and Berlin– has left investors skittish about Spain’s ability to grow its way out of its deepest depression in 80 years.
Contagion from Spain has spread to Italy as yields have inched higher despite aggressive reforms by the country’s technocratic leader Mario Monti. Once again, the evidence suggests that the LTRO has not been the panacea that ex-Goldman Sachs managing director and ECB chief Mario Draghi thought it would be. CDS spreads continue to widen in all of the afflicted countries where the early signs of a severe credit crunch are already visible. Take a look at this clip from International Financing Review (IFR) which focuses on lending in the EZ:
“Syndicated lending in Europe, the Middle East and Africa reached a paltry US $129 billion in the first quarter of 2012, according to Thomson Reuters data, as banks shrank their balance sheets and companies remained wary of debt.
It was the lowest first-quarter loan volume in EMEA since 2002, down 47% from the same period last year, and the deal count of just 193 loans was the lowest for a first quarter for 18 years and 49% lower than the 378 loans completed in the first three months of 2011.
The implications of the drop in volume for banks‚ revenue and headcount are frightening if low levels of activity persist, bankers said.” (“Shipping is a leading credit indicator – A follow up”, macronomy.blogspot.com)
And here’s a more concise summary from Bloomberg:
“The ECB’s survey of corporate loan demand has fallen significantly since late 2010. During the 2008 banking crisis, this survey proved a useful leading indicator (by two to three quarters) of the direction of GDP evolution. Should the relationship hold true, significant further GDP downgrades for the euro zone can be expected in the coming months.” (Bloomberg)
It’s a simple formula, really. If banks don’t lend, the economy doesn’t grow. The ECB’s 1 trillion euro handout helped banks roll over their debt, but–other than that–it’s been a flop.. The economy is still shrinking as credit tightens and businesses and consumers begin to hunker down.
And, don’t think that Europe’s second biggest economy will be spared from the chopping block either. France is directly in the path of a Force 5 hurricane that will batter labor unions and critical social programs while putting new strains on the frayed alliance that holds together the 17-member states. Here’s a clip from Rcube Global Macro Research that helps to explain:
“With the French corporate financing gap so high, it is highly likely that bank’s lending standards will continue to be tightened in coming quarters. The risk of a credit crunch of epic proportion in France is now quite high. French corporate credit spreads will widen significantly. The following back test shows that when non-financial French corporate™’s financing needs are that large, forward equity returns become negative, and inversely, when they decrease, forward returns tend to rise.” (“Markets update – Credit – France’s “Grand Illusion”, macronomy.blogspot.com)
I had a chance to talk to the author of this blogpost (Martin) via e mail and he added a few things about the French economy that readers might find interesting. Here’s part of what he said:
“Mortgage approvals in France are down 40% plus in France….Real Estate sales are frozen…. People don’t want to commit themselves before they know more about the fiscal tightening and new excruciating laws which are about to hit them like a ton of bricks…
France car sales were down 23.5 percent in March (Down 26 percent in Italy, down 45 percent in Greece and down 48 percent in Portugal for cumulated two months in February)
One of my close friend is working for a “leading” Japanese car manufacturing company. Car sales in peripheral countries in Europe are back to levels they were 30 years ago…
Make no mistake, we are living through a modern day depression.” (Martin, macronomy.blogspot.com)
Draghi’s LTRO is a band-aid on a sucking chest wound. Europe is still in the throes of a major financial crisis exacerbated by policymakers who insist on implementing strategies which short-circuit spending and increase systemic instability. Fiscal belt-tightening has failed to produce a recovery in any of the countries where it’s been tried.
And then there’s China, although we could just as easily add Japan. Here’s a quick blurb on Japan that provides a window on its deteriorating energy situation:
“Fourteen months ago Japan had 54 operating nukes.(power plants) Today it has one. By the end of May, it will have none….
There are two significant consequences of the shutdowns: (A) soaring imports of expensive hydrocarbons (LNG, oil and coal), and (B) this summer, there will be as much as a 12 percent shortfall in electricity to to cool homes and run factories.
The shutdown of the nukes has already led to a major turnaround of Japan‚s external trade position. In 2011 Japan reported its first annual trade deficit in over 30 years….
The shortage of “juice” this summer will cause cut backs in supply to big industry. As a result, industrial production will fall. Depending on the severity of the summer slump, Japan could face negative GDP growth for the full year.” (“Betting on the race to the bottom,” Bruce Krasting, zero hedge)
While we support the closing of Japan’s nuclear power plants, the transition to other forms of energy is going to be painful and expensive. It’s a situation that’s worth watching as the effects on Japan’s export-driven economy could be catastrophic.
As for China, stocks have been falling for more than a week in anticipation that the government will tighten credit to fight rising inflation which rose to 3.6 percent in March. While tighter policy will help to keep consumer prices in line, it will also dampen investment which will lead to slower growth.
The inflation news comes at a particularly bad time for Chinese leaders who are already dealing with a burst real estate bubble, (March was the seventh straight month of declining housing prices) massive overinvestment in state-owned enterprises (SOEs), and hundreds of billions in non performing loans that have piled up on bank balance sheets. And, while most analysts still expect China to grow at a healthy 7.5 percent clip in 2012, policymakers will have to shift quickly from an investment-driven growth-model to one that’s based on personal consumption. That won’t be easy in a country where more than half of all the household wealth is owned by one percent of the population. In other words, droopy housing prices and rising inflation are just two of the many speed bumps China is likely to encounter on its path to development.
While the troubles in China, Japan and the United States are serious, they don’t compare to the Eurozone’s existential crisis. The implementation of short-sighted, pro-cyclical policies have pushed the weaker members to the brink. Absent a dramatic reversal in policy, we expect one or more of the Club Med countries to exit the union within the next 2 years. That will touch-off another Lehman Brothers-type event.