Bill Fleckenstein | Contrarian Chronicles
Contrarian Chronicles
By Bill Fleckenstein
MSN
Thursday 18 March 2004
The jobs picture is even worse than it seems.
The closer you look at the numbers, the more you realize unemployment is higher than the headlines tell you. And despite what the experts say, inflation is out there, and we're feeling it already.
Given my contention over the last year that our economic "recovery" would not be self-sustaining -- because it would be incapable of generating jobs -- I'd like to spend a minute on the February employment report.
This report, released March 5, is the third consecutive employment report that has disappointed nearly everyone. And it puts an exclamation point behind the idea that we are not creating jobs in this country.
A look under the hood is not pretty. In fact, if you take a peek beneath the surface of the employment report, it's far worse than the headline number. (The supporting data are available here.)
Using the seasonally adjusted total unemployment rate of 5.6% and adding to it "discouraged" workers, the rate grows to 5.9%. Factor in other groups of people who are underutilized in the work force, you can ratchet the number all the way up to 9.6%. And, for the sake of comprehensiveness, if you use the non-seasonally adjusted numbers, that rate would swell to 10.9%. So, those are the numbers, and I'll leave readers to draw their own conclusions.
The larger view of unemployment
Category % of civilian work force
Persons unemployed 15 weeks or longer. 2.2%
Job losers and persons who completed temporary jobs. 3.0
Total unemployed. (Official unemployment rate.) 5.6
Total unemployed plus discouraged workers. 5.9
Total unemployed, plus discouraged workers, plus all other marginally attached workers. 6.7
Total unemployed, plus all marginally attached workers, plus total employed part-time for economic reasons, plus all marginally attached workers. 9.6
Marginally attached workers are neither working nor looking for work. But they want to work and have looked for jobs.
Discouraged workers have given up looking for jobs.
Workers employed part-time for economic reasons want full-time jobs but have to settle for part-time.
Source: Bureau of Labor Statistics employment situation report for February
The inescapable conclusions for me, therefore, are:
True unemployment in this country is not 5.6% but something a fair bit higher.
There are many people who are under-employed.
There’s a big block of people who have given up.
What's particularly scary is how pathetic job growth has been, despite all the interest-rate cuts (nominal rates are near zero, and real rates are essentially below zero), the two Bush tax cuts and now the refunds from the last cut. Despite it all, we still can't get enough jobs created.
Of course, we're not creating jobs, not just because of outsourcing (which is an issue) but due to the real problem -- the core of what's behind much of our troubles today. That’s the misallocation of capital that occurred in the late 1990s mania, and the response to it. That has created wild times in housing and drunkenness in borrowing.
The Fed's inflation awareness: running on empty
Speaking of the body that's landed us in this predicament, it is remarkable to watch the Federal Reserve governors still fret about deflation. I guess they haven't pulled up to the gas pump lately on their way to work. Or read this recent Wall Street Journal story, "Companies Fight Rising Steel Prices." It illustrates how a declining currency winds up costing you money in ways that may surprise you.
As a lead-in to the story, let me state the obvious: While America's central bankers discuss falling prices, America's consumers are dealing with exactly the opposite problem. Apparently, the "experts" have forgotten that it takes a while for price increases to penetrate the inflation indices in a major way. Prices are already up in many areas, and this only portends more inflation in the immediate future.
Now to share a few useful observations from the article, in the name of provoking thought: "Indeed, a handful of companies -- among them makers of mattresses and gym equipment -- already have or are preparing to ask shoppers to pay more to cover their rising steel costs. But most other manufacturers are trying to push steel-price jumps of up to 30% to 50% to other companies along the supply chain, creating tension between steel producers, their biggest customers and numerous smaller suppliers between them."
The story notes that a declining currency (the real culprit) takes money out of your wallet, even if you don't buy high-end European goods: "With the weak dollar discouraging imported steel, steelmakers have successfully passed on price increases to many of their customers."
And that's how it works. This is a global environment, as everyone is so fond of saying. When foreigners' prices go up, domestic manufacturers can raise their prices, just like the steel companies are doing.
It's been a long time since we've had to grapple with any serious inflation problems. Mostly, we've seen garden-variety 3% to 4% inflation, though the government and the Fed claim it's been less. It sure feels higher than that. I don't pretend to know exactly what the real rate is, but it's not the government's headline number. In any case, while some middlemen have absorbed price hikes, as the Journal story notes, it's important to understand that going forward, we'll see less absorbed and more passed on to us.
For wine, a loftier price sticker
To cite just one example of how the process works, I'd like to share an e-mail from someone I know in the restaurant business who buys wine for a decent-sized chain. (He was responding to my Feb. 23 Contrarian Chronicles column, in which I said that due to the declining dollar, we would see a price hike for wine.)
"I have met with all of my suppliers, and you are right on. The middleman took up the euro slack for quite a while, but all of my prices are going up 6% to 15%, and I am in the process of passing this on to the guest, via menu-price increase. The distributors are tacking more on the high-end wines, trying to keep the value wines cheap to move the volume (glut) of juice. For the restaurant business, there is more. This does not include the impact of inflation-indexed minimum wage in Washington State (servers make $20 per hour easily with tips), or any imported food from Europe, i.e., cheese and meats that also are going up in price."
Saying goodbye to an old friend … for now
Finally, a housekeeping note: Recently, I decided to sell my Annaly Mortgage Management (NLY, news, msgs) stock. Let me be clear: This is not because of anything at Annaly Mortgage. I still think the people in charge are absolutely terrific. To the extent that I want to have my money managed in the fixed-income arena, they're the people I want to do it.
I am, however, increasingly concerned about the collateral behind the real estate market. As chronicled on my Web site's "Housing Hot Potato" series, there are a lot of people who have taken on a lot of debt who maybe shouldn't have. I am just shocked at the aggressive trolling that finance companies are doing to try to get people to take out money against their houses, or to buy houses. I think the credit structure in this country is as bad as it's ever been -- by some huge factor. That, of course, doesn't mean that something bad is about to happen. But if something bad does happen, it could get really ugly, and fast.
If things get bad (and I don’t know if they will get bad), I don't believe that the mortgage debt backed by Fannie Mae (FNM, news, msgs) and Freddie Mac (FRE, news, msgs) will be welched on. Rather, I believe the government will step up and make it all good. If my concerns are valid, there will be questions at some point about the value of the paper that's collateralized by real estate. I fear that in such an environment, Annaly stock might get beaten up.
If I am wrong, I’ll forfeit the chance to keep getting that nice, fat dividend and any appreciation from here. But I am willing to accept that risk. I am not advocating that anyone else do as I have done, and I might change my mind about this decision later.
Again, this is in no way a reflection of anything that I know that is going on at Annaly. It is just a macro concern of mine that anything associated with the real estate market could come in for a drubbing down the road, especially something that has a fair amount of leverage associated with it.
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Bill Fleckenstein is president of Fleckenstein Capital, which manages a hedge fund based in Seattle. He also writes a daily Market Rap column on his Fleckensteincapital.com site. His investment positions can change at any time. Under no circumstances does the information in this column represent a recommendation to buy, sell or hold any security. At the time of publication, he did not own or control any of the equities mentioned in this column. The views and opinions expressed in Bill Fleckenstein's columns are his own and not necessarily those of CNBC on MSN Money.
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In Awkward Dance, GOP Embraces Both Deficit Reduction and Tax Cut
By Alan Fram
The Associated Press
Wednesday 17 March 2004
WASHINGTON (AP) - Congressional Republicans are engaged in a complicated political two-step, pursuing both tax cuts and deficit reduction in an election year when record federal shortfalls are starting to draw the public's attention.
Ignoring Democrats and deficit hawks who said the two policies are contradictory, the GOP-run House Budget Committee embraced both goals Wednesday through approval of a pair of measures.
The panel by voice vote approved a bill making it harder for lawmakers to expand benefits for programs like Medicare unless they are paid for with spending cuts. Unlike the Senate-passed version, the tax cuts would not have to be paid for, protecting a prime priority that President Bush and GOP lawmakers have retained even as this year's deficit nears an unprecedented $500 billion.
"New spending and new tax cuts are not equivalent. New spending does not help maximize economic growth and tax cuts do," said Rep. Patrick Toomey, R-Pa.
The committee neared passage of a $2.41 trillion budget for 2005. It largely follows the fiscal outline Bush proposed last month, but it differs from his proposal in that it seeks faster deficit reduction, smaller tax cuts and lower spending.
The conflicting strains - erasing red ink yet reducing federal revenues, endorsing Bush priorities while recasting them - underscore the tricky terrain Republicans must tread as they try to retain the White House, House and Senate in November's elections.
The loss of 2.2 million jobs since Bush took office in 2001 means they need a plan for invigorating the economy. Their chief answer has been tax cuts which appeal to the GOP's conservative and business supporters.
Yet many Republicans have become disenchanted as deficits have spun out of control. Many in the party like the idea of clamping down on spending, but omitting tax cuts from the requirement for budget savings has rankled GOP deficit hawks, raising questions about whether it will garner enough votes to pass the narrowly divided Congress.
"I'm not sure reducing taxes and cutting deficits are necessarily corollaries of each other," said moderate Rep. Michael Castle, R-Del.
Democrats hope to use the red ink as a sign of Bush's inability to manage the economy and create jobs. They mock the GOP proposal to require savings for expanded spending, but not tax cuts, as a half-measure aimed more at protecting Bush's tax agenda than reducing red ink.
"What you're doing is ignoring the elephant in the room," said Rep. John Spratt, D-S.C., referring to the exemption of tax cuts. "This is a dodge."
"They've created a mess, and now they're trying to cover their flanks," said Rep. Rahm Emanuel, D-Ill., a budget committee member.
Until they expired in 2002 after a dozen years, budget controls required lawmakers to find savings for any tax cuts or expanded benefit payments.
But that was a compromise from an era when the White House and Congress were held by different parties. With the GOP controlling both branches of government, most of its members - including Bush, House Speaker Dennis Hastert, R-Ill., and Senate Majority Leader Bill Frist, R-Tenn. - have no interest in renewing those strictures for tax cuts.
The House budget panel rejected a Democratic effort to impose the restrictions on tax cuts also by a party-line, 24-18 vote.
Last week, Democrats teamed with GOP moderates to force through the Senate a measure applying the requirement to spending boosts and tax reductions. It would let tax cuts or spending increases go unpaid for if 60 of the 100 senators would vote accordingly.
Under the House plan, most benefit programs - excluding Social Security - would be automatically cut if increases for those programs were enacted but not paid for.
The prospects for a final House-Senate compromise are uncertain.
The House committee's budget would hold most domestic programs to the same levels as last year and give Bush the boosts he wants for defense and domestic security. Republicans defeated Democratic efforts to add spending for emergency workers and veterans while trimming tax cuts.
The budget would allow $138 billion in five-year tax cuts - including renewals of popular, expiring breaks for married couples and families with children and the expanded 10 percent tax bracket. But it would ignore Bush's effort to make permanent other tax cuts expiring later this decade, the bulk of the $1.3 trillion in 10-year tax reductions he proposed last month.
The House plan also claims to halve this year's expected record $477 billion deficit in four years, a year sooner than Bush proposed.
Like Bush's budget and a similar plan approved by the Senate last week, most deficit reduction comes not from budget cuts; rather, an assumption that a strengthening economy will produce extra federal revenue.
The budget sets guidelines for spending and taxes for the year and leaves actual changes in revenues and expenditures for later legislation.
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