 | | The Daily Reckoning | Monday, June 6, 2011 |
- One troubling bull market for you to keep a careful eye on,
- What becomes of the BLS when you subtract the "L"?
- Plus, Bill Bonner on a triple, quadruple and maybe even quintuple dip...
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The Beginning of the End For Money-Grubbing OPEC
Israel just discovered what could be the 2nd largest oil basin in the world - officially giving OPEC the middle finger.
Watch this urgent briefing for your chance to profit from Israel's world-changing $27 trillion discovery.
|  | | | The Return of the Downgrade Cycle | | When Sovereign Credit Loses its Struggle to Remain Creditworthy | |  | | Eric Fry |
Reporting from Laguna Beach, California...
"Downgrading" is in a bull market.
If you google the phrase "credit downgrade," your query returns 264,000 responses. But when you google "credit upgrade," you get only 52,600 responses. Clearly, downgrading is in an uptrend.
The downgrade craze emerged slowly in the summer of 2007, as the housing boom was shifting into bust mode. By September of 2007, the ratings agencies had downgraded only $85 billion worth of mortgage- backed securities (MBS). But within one year, that number would soar to nearly $2 trillion.
And these weren't your run-of-the-mill downgrades from AA to A, or some such. These were epic downgrades unlike anything the financial world had ever seen. More than half the nation's 32,000 asset-backed securities (ABS) with credit ratings received downgrades. Thousands of ABS plummeted from AAA to "junk."
The credit crisis of 2008-9 ensued. But then the Fed and Treasury joined hands to fix the whole mess. At least that's the official storyline.
Unfortunately, the Federal Reserve and Treasury did not vanquish the downgrade cycle; they merely swept the downgrades into a different venue, like San Francisco cops sweeping the homeless from the Financial District to Market Street.
Over the last few months, the ratings agencies have been working overtime to downgrade everything from corporate credits to state governments to foreign governments. Even the US government itself, is "under review for possible downgrade."
Clearly, something is out of whack. When so many participants in the global economy possess so little ability to repay their debts, something is clearly broken.
But maybe there's a way to break this cycle - not with austerity and repayments, of course. That path is hopeless. Perhaps we could break the cycle by downgrading the metrics, rather than the borrowers.
Why not begin rating credit risk "on the curve?" Absolute standards are so...well...absolute. Based on absolute accounting standards, for example, the Greek government fully deserves its "junk credit" status. But surely there are other credits around the globe that are even worse than Greece. If Moody's and S&P were rating on the curve, Greece might receive a "D," rather than a failing grade. Imagine how much better Greek bondholders would feel...until the day of Greece's inevitable default.
But that's just our perspective...as glass-half-full guys. Back in the real world, where absolute standards - and a wee bit of politics - determine credit ratings, the trends are disconcerting, if not downright alarming.
"Rating activity during the first three months of 2011 marked the ninth consecutive quarter in which downgrades in the municipal sector exceeded upgrades," a recent report from Moody's observes. "With negative outlooks assigned to all major municipal sectors, the trend is likely to prevail for all of 2011."
According to the report, the first quarter saw 66 municipal downgrades and 17 upgrades, a ratio of 3.9 to 1 - the second highest downgrade-to- upgrade ratio since the first quarter of 2002, trailing only the fourth quarter of 2010 when the ratio measured 4.6 to 1.
"We expect downgrades to continue to exceed upgrades throughout 2011 for states and local governments and school districts as states cope with the effects of weak revenue growth, significant spending obligations, and the loss of federal stimulus funding," Moody's concluded. "Local municipalities will struggle to maintain structural balance in an environment of declining state aid, lower assessed valuations, and fewer budgetary options."
Meanwhile, sovereign credits are capturing most of the downgrade headlines - Greece's Icarus-like plunge into "junk" status being the most conspicuous example. Based on top-down data, sovereign credits remain healthy, as upgrades continue to exceed downgrades. But theoretical credit-worthiness cannot conceal actual credit-unworthiness forever. Sovereign credits worldwide are struggling to maintain a semblance of creditworthiness, at least in appearance, if not in fact.
They are losing their struggle.
A Daily Reckoning prediction: The sovereign downgrade/upgrade ratio will deteriorate over the next several quarters.
But don't get us wrong. We are not throwing stones at sovereign credits or municipal credits. We are throwing stones at credit, itself. No asset in the financial world illustrates the Second Law of Thermodynamics better than bonds. They degrade toward a chaotic condition faster - and more reliably - than any other asset class.
Bonds are a promise to pay. But the history of the bond market is a history of broken promises. That's because borrowing is easy. Re- payment is difficult. The near-extinction of the American AAA credit illustrates the point.
In the early 1970s, about 60 US companies possessed a AAA rating. A decade later, that number had tumbled to 30. By the early 1990s, the ranks of AAA credits had dwindled to nearly 20, and when the new millennium dawned, only nine AAA companies remained. Seven companies managed to retain this prestigious ranking until 2009, when Berkshire Hathaway and GE slipped into the AA ranks.
Today, only five US companies can boast a AAA rating:
- Automatic Data Processing (ADP)
- Exxon Mobil (XOM)
- Johnson & Johnson (JNJ)
- Microsoft (MSFT)
- Pfizer (PFE)
The downgrade cycle is still gathering momentum. Bond buyers beware.
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Will we face an American Apocalypse in 2011?
Top analyst warns:
"In the next 11 months, the American way of life will END FOREVER."
Is he right? View the video for free, then decide for yourself.
Warning: Content may be too disturbing for some viewers.
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| | The Daily Reckoning Presents | | Playing Old Maid | |  | | Frederick J. Sheehan |
When my youngest sister was four-years-old, we taught her how to play Old Maid. She learned quickly but played the game like - a four-year- old. When she was dealt the Old Maid, her little thumb would push it a couple of inches above the others in her hand. She did this with a giggle since her maneuver was tricking us (in her 4-year-old mind) into taking the Old Maid. She succeeded; someone would remove it from her hand so that she could say: "Ha, Ha, you have the Old Maid!"
Today, the Bureau of Labor Statistics (BLS) has a four-year-old mind. On the morning of June 3, 2011, it released its monthly Employment Situation Report. The very first words were: "Non-farm employment changed little (+54,000) in May..." Nowhere in the 38-page report does the BLS state that the addition of 54,000 jobs was actually a loss of 152,000 jobs.
The BLS invented 206,000 jobs. The Bureau has constructed an equation called the "Net Birth/Death Model." Its purpose is to count "Business births." That is, new jobs in new businesses net the number of lost jobs in "Business deaths": companies that went out of business.
This figure plays a large role in how Americans are told to think about the economy. CNBC did not look beyond the first sentence that morning when it announced The Number: +54,000. It did not mention the 206,000 net birth-death jobs. The Wall Street talking heads who were then interviewed were also ignorant. Last month, on May 6, 2011, the BLS April Employment Situation Report opened: "Non-farm payroll employment rose by 244,000 in April..." The +175,000 net birth/death jobs were not mentioned by Bubble TV and maybe not by any other major media outlet.
There are those who say the net birth/death (NBD) figure is a sophisticated calculation. No doubt it is; but is it accurate? If it is, why does the BLS never mention that NBD jobs were added when it manufactured The Number? Why does it so diligently hide it?
The initiative for the NBD calculation addressed a real problem. The BLS is not equipped to include "business births" in its monthly Employment Situation Report. It makes sense to adjust The Number, but the BLS, like most of Washington, is detached from the economy.
In June 2011, it is ridiculous to conclude the US economy is adding more jobs than it is losing. On June 2, 2011, the National Federation of Independent Business (NFIB), a trade group of smaller businesses, released its latest survey results. (I have found the direction of the trendin the monthly NFIB survey offers a good indication of the direction of the economy.)
Some of the highlights from the June 2, 2011, NFIB release:
"Chief economist for the National Federation of Independent Business (NFIB) William C. Dunkelberg, issued the following statement on May job numbers, based on NFIB's monthly economic survey: "After solid job gains early in the year, progress has slowed to a trickle. The two NFIB indicators - job openings and hiring plans - that predict the unemployment rate both fell, suggesting that the rate itself will rise. "Meaningful job creation on Main Street has collapsed." With one in four owners still reporting 'weak sales' as their No. 1 business problem, there is little need to add employees, especially with the uncertainty about future labor costs arising from new regulation and legislation." The Bureau of Labor Statistics pushes the Old Maid above the other cards in its hand each month. It takes five seconds to type "net birth death" into the BLS website's search engine and read this month's NBD number. Yet, it is not mentioned by the media or by Wall Street talking heads. The Bureau of Labor Statistics has every reason to look at America and proclaim: "Ha, Ha, you have the Old Maid!"
Regards,
Frederick J. Sheehan,
for The Daily Reckoning
Joel's Note: Mr. Sheehan is the author of Panderer to Power: The Untold Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession (McGraw-Hill, 2009) and The Coming Collapse of the Municipal Bond Market (Aucontrarian.com, 2009)
No doubt the problems facing the American "middle class" are many and varied, from the bamboozling slew of questionable statistics that Mr. Sheehan points out to the ever-increasing threat of major sovereign downgrade for the world's largest economy. But did you know there's another, secret threat that lurks off camera, one that wreaks serious havoc on your retirement plans. For a closer look at what our own Chris Mayer sees as the biggest threat to your wealth, check out his latest presentation here.
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| | | | Bill Bonner | | The Once and Future Dips of the US Economy | |  | | Bill Bonner |
Reckoning from Farmington, Pennsylvania...
Last week, it looked as though a tide might have turned. The Dow fell another 97 points on Friday. And the 10-year US Treasury note rose to yield less than 3%.
What will happen next? We don't know. But it wouldn't be a bad thing if investors took a beating. At least, the rest of the country would probably like to watch.
Yes, dear reader, pity the proletariat!
While investors have recovered most of their '08-'09 losses, the poor working stiff is still getting it in the chops. He doesn't own stocks. He owns a house. And housing just keeps going down.
His earnings have been going down too.
He'd better get used to it. If we're right, he won't have to worry about just a 'double-dip' but about a triple-dip...a quadruple dip...and maybe even a quintuple-dip. Forget recovery. What we're talking about is an on-again, off-again slump that will last for a decade or more. Heck, it's already in its fifth year!
Why so?
Everything that has happened over the last 4 years confirms that our "Great Correction" hypothesis was right. This economy is going through major adaptations, adjustments and rehabilitation. And by the look of things, it's going to be in an out of rehab for a long time.
The latest reports show:
1) No real growth
2) No real recovery
3) No end to the unemployment problem
4) No bottom in the real estate crisis
5) No benefit from QE2 The numbers that came out on Friday were just more bullets shot into a corpse. We knew the recovery was dead. But the non-farm payroll numbers killed it again anyway.
The Labor Department reported 54,000 new jobs in May. If this were a real recovery, the number would be over 150,000. Instead, this number shows that the actual number of people with jobs is increasing, not decreasing.
So, the people who live by the sweat of their brow are left idling on the seats of their pants. They have no jobs. And the hope of finding a decent job is receding.
Not only are there few jobs, real wages are going down too. And never before have American working classes taken home such a small portion of national income.
Here's more from USA Today:
Squeezed on both sides by stagnant wages and rising prices, consumers believe the chances of bringing home more money one year from now are at their lowest in 25 years, according to analysis of survey data by Goldman Sachs.
Goldman's economist Jan Hatzius looked at the University of Michigan and Thomson Reuters poll, which asks consumers whether they believe their family income will rise more than inflation in the next 12 months. Hatzius applied a six-month moving average to smooth out the data and found that wage pessimism is at its lowest in more than two decades.
"Households are already very pessimistic about future real income growth," wrote Goldman's economist to clients. "A slowdown in job growth would presumably translate into a further deterioration in (expected and actual) real income growth. This would heighten the downside risks to our current forecast that real consumer spending will grow 2.5 percent to 3 percent over the next year and might call for another downward revision to our forecast for US GDP growth in 2011 and 2012."
Real hourly wages have dropped 2.1 percent on an annualized basis over the past six months, a rate of decline not seen in 20 years, according to Goldman. This analysis is backed up by the other most-watched consumer survey from the Conference Board, which indicated earlier this week that the proportion of consumers expecting their incomes to increase was below 15 percent in May.
"The crawl out of this economic ditch is going to be long and slow," said Patty Edwards, chief investment officer at Trutina. "Even if they're employed, many consumers aren't earning what they were two years ago, either because they're in lower-paying jobs or not getting as many hours." And more thoughts...
We're not going to get carried away by envy and stuff-lust. Not here at The Daily Reckoning.
But what about other people? The base emotions are always present. Once in a while they get the better of us.
Walking to our pick-up after work yesterday, we saw a bumper sticker on a parked car:
90% of the wealth is owned by 10% of the people
When will you get your share? Who knows what it meant? We hoped the driver would show up so we could ask.
But the germs of jealousy and class hatred must be growing. And you can hardly blame the poor proles. They haven't had a real pay raise since the Carter Administration. They're getting a little tired of waiting. And now their earnings are going down rapidly.
And it's not going to get better anytime soon. Because, if we're right, we're already in a double-dip recession. That is, properly adjusted for first quarter consumer price inflation, the economy is not growing at a 1.8% annual rate; it's shrinking at 1.8%.
And if we're right, this double-dip will be followed by a period of weak growth...followed by a triple dip. And then a quadruple dip. And then a quintuple dip.
Why all the dips?
Stay tuned.
Regards,
Bill Bonner
for The Daily Reckoning
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