Archive for February, 2012

The Fragility of the US and Global Economy in Six Charts

The state of the “recovery” in six compelling charts. After the recessions that began in 1990 and 2001, it took 30 months and 45 months, respectively, to regain the number of jobs lost. It’s been forty-five months since the start of the Great Recession, and  the US is not even close to regaining all the lost jobs.

The number of US civilians dropping out of the labor force is rising at an increasing rate.

 Four years after the start of the Great Recession and the number of Americans on Foodstamps continues rising.


Home prices in the vast majority of the cities most affected by the housing depression continue to fall.

Unemployment rates are soaring in Spain, Greece, Ireland and Italy, despite the fact that these countries have accomplished next to nothing regarding their crushing debt problems thus far. What will unemployment in these countries look like after a few years of austerity?

 The chart below shows that fixed income returns were positively related to credit quality in 2011 (which ended the year in “risk-off” mode). Thus far in 2012, fixed income returns have been negatively related to credit quality (suggesting an abrupt shift to “risk-on” mode).

Is it time to take some profits from the overbought US stock market and play a little defense? Note that equity markets started 2011 with a similar risk-on surge, only to correct sharply in the spring and even more sharply in late summer and early fall.

Categories: Market Commentary

US Equity Markets Remain in “Risk-On” Mode

Despite a slow start to the week, US equity markets remain in “risk-on” mode thus far in 2012. The performance of the top sectors (Financials, Technology and Telecom) are shown in the graph below. These sectors have posted total returns of 9-10% in the first 6 trading weeks of 2012.

The next set of sectors, Consumer Discretionary, Industrials and Materials, have averaged about 8% over the same period:

Lagging behind for the year are Energy, Health Care, Consumer Staples and Utilities, with those last 3 being the classic “risk-off” defensive sectors.

Will the market’s preference for the risk-on trade be the story for 2012, or will 2012 repeat the pattern seen in 2011, where the risk-on sectors led the way early, with the defensive sectors taking control in the second half of the year?

Categories: Market Commentary

The US Economy Lost 2.7 Million Jobs in January

Markets were elated over the higher-than-expected gain in Total Nonfarm Payrolls in January. That large gain, of course, was only discernible after a “seasonal adjustment,” made at the discretion of government statisticians. Below I’ve charted Total Nonfarm Payrolls since 2005 without any seasonal adjustments (NSA):

The graph shows that there are predictable declines in total employment in July and January, due to abrupt changes in summer and holiday jobs. These abrupt changes are easier to see if we look at the change in Nonfarm Payrolls NSA:

Minus the discretionary “seasonal adjustment,” the economy actually shed 2.7 million jobs in January. The seasonally-adjusted (SA) Nonfarm Payrolls number does not measure the actual number of jobs created or destroyed. The SA number instead measures what total employment WOULD BE if it weren’t July or January. And it’s important to note that much of the seasonal adjustment process occurs based on the discretion of government statisticians. Who couldn’t possibly be under pressure to produce evidence of a stronger economy during a presidential election year. No way.

To help reconcile the large difference between the seasonally-adjusted and non-adjusted data, I also graphed Total Tax Collections and Income Tax Collections by the States:

If the economy were adding jobs and more people were working again . . . shouldn’t the states be collecting MORE total taxes, especially income taxes? Maybe we should start seasonally adjusting more data, so these annoying divergences — that make absolutely no sense — would be harder to document. Further notice in the above graph how Total State Income Taxes are falling faster than Total Taxes, which suggests FEWER people are working and paying Income Taxes, not more.

“Ladies and gentlemen, boys and girls — in the blue corner, we have the non-seasonally adjusted data. In the red corner, we have the discretion of government statisticians. The referee has explained the rules to each fighter.”

But my question is: Does the “audience” that trades and invests based on the discretion of government statisticians understand the rules? Do they even pay attention to the rules? And if they could only choose one, would they choose a.) accurate data or b.) the increasingly-addictive rush of dopamine associated with another triple-digit gain in the Dow?

Categories: Market Commentary