Fundmastery Blog

Kurt Brouwer February 14th, 2009

There is no question that unemployment is up — currently 7.6% — and there is little doubt it will keep going up for a while because unemployment is a lagging indicator that generally does not peak until after a recession ends.

Every day, we see headlines about the millions of jobs that have been lost and that sounds scary. Though we all need to be concerned about job losses, we also need to put losses in perspective. At 153,716,000, our civilian labor force is much bigger today than it was in 1981. For example, in 1981, the work force was only 106,768,000.

And, the labor force today is bigger than the entire population of the country was in the Great Depression. If you include Alaska and Hawaii, the 1930 Census Report put the entire population at 123,202,660. So, millions of job losses today are much less significant than they were back then.

At his Carpe Diem blog, University of Michigan economist Mark Perry posted this chart which displays job losses in a given year as a percentage of the labor force. This illustrates quite effectively that the current spate of job losses compares to 1981 and is far lower than job losses during the Depression.

Source: Carpe Diem

Here is another way to get a handle on how job losses in this recession compare to previous ones:

Graphic by Feilding Cage/TIME.com

The lighter blue line represents job losses in this decline. It is serious, yet it is not that different from a number of other recessions from the 1970s and 1980s. However, job losses this time are far more severe than they were in the two most recent recessions, which were quite mild by historical standards.

We do not yet know how bad job losses will be this time around, but we can estimate that losses will probably be as bad as they were in the 1981 downturn, if not a bit worse.

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Kurt Brouwer February 12th, 2009

As this piece from Bloomberg pointed out, we are going into uncharted territory on all these government bailouts:

The stimulus package the U.S. Congress is completing would raise the government’s commitment to solving the financial crisis to $9.7 trillion, enough to pay off more than 90 percent of the nation’s home mortgages.

The Federal Reserve, Treasury Department and Federal Deposit Insurance Corporation have lent or spent almost $3 trillion over the past two years and pledged up to $5.7 trillion more. The Senate is to vote this week on an economic-stimulus measure of at least $780 billion. It would need to be reconciled with an $819 billion plan the House approved last month.

Only the stimulus bill to be approved this week, the $700 billion Troubled Asset Relief Program passed four months ago and $168 billion in tax cuts and rebates enacted in 2008 have been voted on by lawmakers. The remaining $8 trillion is in lending programs and guarantees, almost all under the Fed and FDIC. Recipients’ names have not been disclosed.

“We’ve seen money go out the back door of this government unlike any time in the history of our country,” Senator Byron Dorgan, a North Dakota Democrat, said on the Senate floor Feb. 3. “Nobody knows what went out of the Federal Reserve Board, to whom and for what purpose. How much from the FDIC? How much from TARP? When? Why?”…

We are in the midst of a recession brought on by too much spending and too much borrowing. So, the brilliant folks in Washington D.C. figure the answer is to do more of the same. Somehow, I don’t think that makes much sense.

But, if we are going to do that, I think the first point raised indirectly in this Bloomberg piece is interesting. Instead of putting billions or trillions in defunct banks and insurance companies, perhaps the Feds should consider the source of the problem — mortgages.

This piece from Reuters gives a hint as to what may be coming [emphasis added]:

The Obama administration is considering spending taxpayer dollars to lower mortgage rates for borrowers on the verge of foreclosure, according to two people briefed on the proposals.

The deliberations came as lawmakers prepared to enact a new tax credit of up to $8,000 for first-time homebuyers that is intended to boost the ailing housing market.

Details of the plans to aid troubled borrowers were not final but were expected to be unveiled in the coming weeks, according to the people who declined to be identified because the details were not yet complete. The effort would be part of a plan to spend $50 billion on foreclosure prevention and establish national standards for modifying home loans.

Deciding who would qualify would be a challenge, especially as foreclosures continue to soar. More than 274,000 U.S. households received at least one foreclosure-related notice last month, according to RealtyTrac Inc…

Is the next step a Federal guarantee of all home mortgages in place as of a given date such as January 1, 2008? This would certainly solve the plight of all the troubled financial institutions that hold mortgages. Federal guarantee? Bang. Problem solved.

Instead of putting up $10 trillion in the hope of stabilizing these institutions and getting lending underway, guaranteeing all mortgages would make all the banks and others who hold mortgages and mortgage-backed securities whole again. Their capital would not be impaired anymore.

It is really almost unthinkable, but in light of everything we are looking such as nationalizing Citi and Bank of America, the unthinkable has become thinkable.

And, it’s not that big of a stretch because Fannie Mae and Freddie Mac are owned by the government and those two entities collectively hold almost half of all home mortgages already.

So, perhaps the Feds are about to go ‘all in’ as my poker-playing friends say.

• Business , Economy , Geopolitics , Investing , Personal Finance , income taxes
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Kurt Brouwer February 12th, 2009

This chart is from a piece in the New York Times by Bruce Bartlett. It gives the historical timing of government stimulus programs compared to the timing of a given recession:

Source: New York Times

The fine print of the various programs given above is a bit hard to read, but the point is pretty clear. In almost all cases, the government stimulus program was enacted at the tail end of the recession or even after it had ended.

In the piece linked above, Bartlett wrote [emphasis added]:

The history of anti-recession efforts is that they are almost always initiated too late to do any good. This chart, based on recession timelines from the National Bureau of Economic Research, shows the enactment of stimulus plans is a fairly accurate indicator that we have hit the bottom of the business cycle, meaning the economy will improve even if the government does nothing.

If Bartlett is correct, we are closer to the end of this recession than the beginning. Let’s hope he’s right.

• Economy , Geopolitics , Money
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Kurt Brouwer February 10th, 2009

Well, that did not go well. Today, Treasury Secretary Tim Geithner announced his much-anticipated big bank bailout proposal and the stock market voted with a resounding vote of no confidence and the S&P 500 and the Dow both plunged nearly 5%.

As my online buddy, James Pethokoukis of U.S. News & World Report’s Capital Commerce Blog, pointed out, the reaction on Wall Street evinced deep disappointment that Secretary Geithner took so long to say so little:

Geithner: From Indispensable to Indecipherable (U.S. News & World/Capital Commerce Blog, February 10, 2009, James Pethokoukis)

Treasury Secretary Timothy Geithner has gone from being the Indispensable Man to Indecipherable Man. With [the] global financial community watching closely, Geithner laid out a confusing rescue plan for the U.S. banking system that did little to stem the ongoing dissipation of investor confidence.

The reaction from Wall Street was withering. “The bottom line from the Geithner speech is that it was too general, and it lacked the specifics needed to it to be credible,” opined economist Brian Bethune of IHS Global Insight. Like many, economist Robert Brusca was perplexed about the plan to purchase toxic mortgage assets through some sort of sketchy public-partnership: “It is still not clear how this will work and how much cushion public money will provide and if it will involve any guarantees. I do not begin to understand how this private/public plan will work. Moreover, Fannie Mae and Freddie Mac failed precisely because of their public-private identity crisis.” Little wonder why stocks plunged and investors rushed to buy safe U.S. Treasuries.

Where was Geithner the Technocrat when you needed him?…In other words, “We have have concrete and high detailed plan to develop a concrete and highly detailed plan. We’ll get back to you.”

Oh, and it would be nice if he could do all that without painting such an unremittingly bleak picture of the economy…

And along with that change, how about embracing the private sector as the surest path back to prosperity? Cut corporate taxes. Suspend capital gains taxes. Indeed, one reason why Geithner may have been so vague about the bank rescue plan is that ultimately the plan may entail such high government borrowing that announcing it now would have derailed the current $800 billion Obama stimulus plan.

Speaking of that, the passage of the economic stimulus did not exactly boost confidence either. The economic stimulus plan passed the Senate on largely party line voting yesterday and, so far, the reaction has been muted at best.

• Business , Economy , Geopolitics , Personal Finance , income taxes
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Kurt Brouwer February 10th, 2009

There is no question that unemployment is up — currently 7.6% — and there is little doubt it will keep going up for a while. After all, unemployment is a lagging indicator so it generally does not peak until after the recession ends.

In order to get a handle on how job losses in this recession compare to previous ones, we thought this chart was excellent.

It’s from Justin Fox’s excellent Curious Capitalist blog:

Graphic by Feilding Cage/TIME.com

The lighter blue line represents job losses in this decline. It is serious, yet it is not that different from a number of other recessions from the 1970s and 1980s. However, job losses this time are more severe than the two most recent recessions, which were quite mild by historical standards. We do not yet know how bad job losses will be this time around, but we can estimate that losses will be as bad as they were in the 1981 downturn, if not worse.

Here is another chart from another fine blog, William Polley’s blog. This chart is much busier because it covers more recessions. The evidence is that same though. This is a tough downturn, but certainly not unprecedented in the post-World War II period.

Source: William Polley

The light orange line that is unfinished represents the current downturn. As you can see, it tracks — so far — the light green line from the 1981 downturn.

You can also see that earlier recessions had steeper declines than this recession. However, those declines also were followed by very steep increases in employment. Recent recessions had less steep downturns, but much slower recoveries.

The bad news on unemployment will continue for quite a while. In fact, I expect unemployment to increase to the 9-10% level and it will probably not peak until well after the recovery begins later this year or early next year:

Here is a good chart that shows several outlooks for economic growth — or lack thereof — this year.

Source: Calculated Risk

Most economists are forecasting a very weak economy in the first half of the year. After that, they all see some sort of upturn, however much of that optimism is based on the current economic stimulus legislation having some positive impact this year. David Rosenberg, Merrill’s chief economist, has forecast the biggest downturn as well as the biggest recovery.

Eventually, the economy will recover and begin moving up and I would agree that it is unlikely to do so until later this year. However, unemployment probably will not peak until well after the recession ends.

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