Why the Fed Will Cut and Cut Again
by John Mauldin
When a Positive 166,000 Jobs Number is Really a Negative 211,000
According to the household survey, there was no growth in jobs last month. "The labor force contracted by 211,000, total household employment fell by 250,000, and employment adjusted to match the payroll concept was off by 55,000. The year-to-year gain in adjusted household employment is 0.7%, compared to 1.2% for the establishment survey, a gap of 0.5 point; just six months ago, the household measure was 0.6 point ahead of the payroll number." (The Liscio Report)
Let's put aside the fact that 166,000 jobs is not enough to keep up with growth in the population, and certainly well below the average for the past four years. Let's look at how the establishment survey found 166,000 jobs when the household survey says we lost 211,000. To do that we need to go to the birth-death ratio. Below is the table from the BLS web site. (http://www.bls.gov/web/cesbd.htm)
In October, the BLS added 103,000 jobs as an estimate of the BD ratio. They added 14,000 jobs in the construction industry. Does anyone really think that we saw an increase in construction jobs last month? Supposedly we saw an increase of 25,000 jobs in the financial industry. The reality is that financial jobs, especially in the mortgage industry, are being shed left and right.
Round Two of the Credit Crunch
The credit crisis this summer ended up with the Fed and central banks worldwide adding massive amounts of liquidity into the system. This last two weeks have seen one bank after another make large write-downs of subprime debt on their books. Merrill found a few billion dollars more in losses than they had only a few weeks ago. My bet is that Citi will find a lot more as well.
The problem is that more and more CDOs and other forms of mortgage debts are being downgraded. It is highly doubtful that banks have written down assets in anticipation of future downgrades. As Dennis Gartman says, there is never just one cockroach. The Fed injected $42 billion into the system in the last few days. I believe that is the largest injection that has ever been made.
Take this to the bank: There are going to be more write-downs as more and more mortgages go into foreclosure, forcing more downgrades of mortgage asset-backed paper. Foreclosures are up over 200% in a number of states, and 800-900-1000% in some. Scary. Look at this list of the rise in foreclosures over the last year, from Greg Weldon (www.weldononline.com).
Arizona up + 201.7%, Arkansas up + 254.2%, Connecticut up + 920.7%, Delaware up + 389.4%, Florida up + 130.6%, Iowa up + 180.5%, Maryland up + 491.0%, Massachusetts up + 1,127.7%, Minnesota up + 124.9%, Nevada up + 212.2%, Ohio up + 136.0%, Vermont up + 400.0%, Virginia up + 516.4%, Wisconsin up +155.6%, Georgia up +84.5%, Michigan up + 78.6%, New Jersey up + 56.7%, New York up + 66.7%, North Carolina up + 99.0%, North Dakota up + 85.7%, Tennessee up + 57.3%. And on and on.
A Congressional report suggests that over 2,000,000 homes financed by subprime loans will go into foreclosure in the next 18 months. This means that more and more of the mortgage-backed assets on the books of banks, CDOs, and SIVs are going to become losses.
I think we should be getting ready for a second round of the credit crisis. And I would certainly be uncomfortable with owning any financial stock with exposure to the mortgage markets. We may not know the full exposure of many banks until the middle of next year.
The SIV Superfund is just one signal that this is serious. Last week I gave you charts that showed even AAA assets associated with recent-vintage subprime mortgages securities losing 20% of their value. That is going to bleed over into Alt-A mortgage assets, as home values drop 10 and then 15 and then 20 percent.
The asset-backed commercial paper market declined another $9 billion last week, down for the 12th straight week. It has dropped 26% since August 8, and there is no reason to think that trend will not continue for several months, as commercial paper linked to mortgage assets is simply not being rolled over. The Financial Times talks of one banker who is bartering his mortgage assets to avoid setting a price.
Bottom line? With rising unemployment, a credit crisis, and a housing bubble imploding, this is not a market or an economy where the Fed will be able to sit tight. We are going to see a Fed funds rate below 4% in two more meetings, at a minimum.
And yes, I did notice that gold went over $800 and oil almost hit $96 today. Neither are good signals. With oil jumping $2-3 up and down almost every day, the chiropractors must be doing good business with oil traders suffering from the whiplash they get almost every day.
And the dollar? It hit $1.45 on the Euro. I actually have a regulated financial entity in Canada for which I have to pay fees about this time each year, and they are of course denominated in Canadian dollars. This year the fee was 40% higher in US dollar terms than it was a few years ago. But then, my income from European-based funds is rising as well. My belief is that markets of all types are going to get ever more volatile. Stay tuned.
John Mauldin <wave@frontlinethoughts.com> |
