Markets take the unemployment rate decline more seriously than warranted

The unemployment rate is still likely to reach a new high, probably at or at least approaching 11.0%. The economy will reveal new signs of profound weakness amidst the evidence of economic recovery. Indeed, there is a risk of a return to at least one quarter of negative real GDP growth next year, most likely in the second half. That was the pattern in most post World War ll recessions. Moreover, the Dubai world credit default is just an early indication of a broadly developing commercial real estate debacle encompassing hotels, apartments, offices, retail space and gaming facilities. Employment connected to stimulus construction projects is already topping out and will soon be waning. The January, February retreat in retail sales, after the holiday shopping season, will be more pronounced than typical. That and other economic negatives are implicit in a recent decline in instalment credit and other evidence of continuing or tightening availability of credit to consumers. There is still a new wave of home foreclosures developing, despite the signs of a housing recovery. Treasury yields will decline anew. Commodity and equity prices in such an economic environment will more likely retreat than advance further, even with a continued low cost of financing.

The decline in the November unemployment rate to 10.0% from 10.2% in October and the relatively miniscule 11,000 November decline in nonfarm payrolls does not mark the beginning of a sustained rise in employment or a quickening in the still sluggish pace of economic recovery. And it is certainly not an indication that the economy is no longer vulnerable to a relapse or that the Fed will be firming any time soon. Instead, it is more than likely that the November unemployment rate decline is due to improper seasonal adjustment, partly as a result of a large cyclical decline in employment a year earlier as well as in the prior month. The rise in the unemployment rate to 10.2% in October 2009 from 9.8% in September may well have overstated the actual rise. Thus, the November unemployment decline may have been a form of partial correction of the prior unemployment overstatement. There is also insufficient reason to believe that the unemployment rate has cyclically topped out. The decline in service sector employment suggested by the puchasing managers report is just the latest suggestion of more employment problems ahead, even with the recent moderation in the pace of initial claims for unemployment benefits.

Despite serious questions over the significance of the November employment report the markets responded as if there were no doubt over its meaning. The dollar strengthened as if the economy was vigorously rebounding. It is not. But the dollar rise led to a decline in gold prices and a further rise in equity prices. Treasury prices retreated as if it were now a foregone conclusion that the Fed would soon be firming. Instead Fed policy will continue accommodative for an extended period, probably all through 2010 at the very least. There is no immediate or even near-term inflation risk, not with current massive unemployment as well as a huge volume of idle industrial production and service capacity restraining both wage and price increases.

At current levels of unemployment and capacity utilization rates, the US economy is as far from wage and "Bottle neck" price pressures as it has been at any time since the great Depression of the 1930's. Indeed, though the overall official unemployment rate at 10.0% in November is under the previous post-World war ll peak of 10.8% in November and December 1982, the official unemployment rate by education levels is significantly higher currently than at the peak in 1982. For example, for high school drop-outs the current unemployment rate is 14.9% versus 13.6% at the peak in 1982. For college graduates the unemployment rate is now 4.9% versus 3.6% in 1982. In addition, counting discouraged workers (who have given up looking for work because there are no jobs to be had) and those who have taken part-time work because they could not find full-time employment, the U-6 unemployment rate, at 17.2%, is still near a record high. That will keep both inflation and the Fed at bay.

Treasury yields rose sharply after release of the deceptive Friday unemployment report. The 10-year note yield, for example, reached 3.48% from 3.38% the day before, and 3.20% just days before amidst the Dubai credit fright. However, the yield on the Treasury 10-year note had approached 4.00% as recently as August. The pressure of new supply of Treasury borrowing coming next week and relentlessly thereafter, for as far as the eye can see, is of course also an important factor in the rate rise. Despite all that, the outlook is still favorable for a renewed and significant decline in Treasury yields, as it becomes clear that deflation pressures persist and an upsurge of inflation is only a distant threat. That was the pattern in most previous economic recoveries. Contrary to preconceived notions, the cyclical lows in Treasury yields came well into economic recoveries, not in the midst of the recession as is widely, but mistakenly, believed.


Philip Braverman, President
Braverman Economic and Financial Consulting
One Hewitt Square #249
East Northport, New York 11731

This and earlier reports can be accessed by going to Internet Explorer and typing the following:philipbraverman.blogspot.com

I can be reached at philipbraverman@gmail.com

The rise in equities, commodities and the economy remain vulnerable

Equity and commodity prices only appear to be on a relentless rise. They remain vulnerable to dissapointments ahead. But, that vulnerability was certainly not evident on Friday. Both equity and commodity markets even managed to take the Friday report of a jump in the unemployment rate to 10.2% in October (from 9.8% in September) in its stride. After initially declining, the equity market moved back above 10,000 on the Dow and gold prices strengthened. The equity market was partially boosted by a rise in GE shares, spurred by analysts upgrading the company on a perceived improvement in their investment portfolio.

While it is true that employment is a lagging economic indicator, the pronounced weakness in the October employment suggests, at a minimum, economic sluggishness ahead. But, the potential for major adverse surprises does not end there. The 3.5% growth in third quarter real GDP growth could well be the strongest experienced in the next five quarters. Indeed a return to a decline in real GDP can not be ruled out in one or more quarters next year. That was the pattern in most prior post World War 11 recessions. There were one or more postive quarters of real GDP growth followed by one or more quarters of renewed declines of real GDP before the recession ended. This time renewed economic weakness will have as potential catalysts a new wave of home mortgage foreclosures, credit card cutbacks, commercial real estate foreclosures, state and local credit distress, and the end of Federal stimulus.

The details of the October employment report are far from reassuring. The 190,000 decline in nonfarm payrolls, though larger than the consensus estimate is, perhaps, the most market-friendly aspect of the report. While this nonfarm payroll decline is almost identical to the 188,000 average the past three months, it is down sharply from a 357,000 monthly average the prior three months and especially from a 645,000 monthly average from November 2008 to April 2009. But other aspects of the employment report are dire.

The Bureau of Labor Statistics household survey(from which the unemployment rate is derived) is both more reliable and accurate, especially in recessions. This survey posted a horrendous 558,000 October drop in employment, raising the official total of those unemployed to a frightening 15.7 million. But wait, it gets worse. In addition to those officially unemployed there were 9.3 million individuals who were only able to find part-time work despite seeking and preferring to work full time. Furthermore, some 2.4 million others have dropped out of the labor force because they have become discouraged at the lack of job prospects, though they have sought work in the past 12 months. That brings the number of individuals in employment distress to over 27 million. There is no imminent economic recovery for this huge portion of the consumer sector.

Without a significant rebound in consumer spending, a sustained economic recovery is highly questionable. Consumers remain overleveraged, deeply in debt and overburdened with financial obligations even at reduced interest rates. That has led not only to a continuing rise in home mortgage foreclosures but also a rising trend of personal bankruptcies. Consumer spending will of necessity be forced lower as a trend percentage of GDP from above 70% to perhaps below 68% as consumers repay debt and increase their savings rate from essentially zero to 5% more more.

Other details of the employment report are also ominous. The index of aggregate hours worked, which is used by economists to forecast real GDP, declined further in October to 98.3, from 98.5 in September and 98.9 in the third quarter. This performance suggests less economic strength in the fourth quarter than widely expected.

The weakness or sluggishness of real GDP growth projected is not likely to sustain the rise in the prices of many commodities. That would be all the more so if there is actually a decline in real GDP for even one quarter next year. Natural gas prices are low, while oil prices are rebounding, a seeming inconsistancy. The outlook is for continued deflation. There is far too much excess capacity of production and labor to produce sustainable bottleneck or shortage price pressures and/or pricing power. It is only temporary speculative pressures and long-term inflation fears that can produce such price spikes as we have experienced. That realty will alone keep the Fed's policy accomodative for an extended period, probably through all of 2010. And deflation, or at best low inflation, will keep bond yields low or even declining through next year. Low borrowing costs are a positive for the equity markets, but they do not seem sufficient to outweigh the clear negatives of disappointing economic growth, more sluggish than anticipated earnings performance and already fully priced market levels. The price-earnings levels are already far too high and the dividend returns, at 2.1%, far too low. Thus, it is only prudent to anticipate an equity market price retrenchment.

Philip Braverman, Preesident
Braverman Econonomic and Financial Consulting
One Hewitt Square, #249
East Northport, New York 11731

This and prior reports can be accessed by going to Internet Explorer and typing the following: philipbraverman.blogspot.com

I can be reached at philipbraverman@Gmail.com

Treasury yields and equites will fall with economic weakness and deflation fears

Friday's further declines in Treasury yields and equity prices was in response to disappointment with a weaker than expected September employment report and other evidence that the economic recovery may be faltering. But, this is just a hint of the declines in yields and equities to come as employment continues to deteriorate, accompanied by other evidence that the widely presumed rapid economic recovery will not be sustained or is at the very least highly vulnerable. That increasingly recognized reality will keep the Fed's near zero Federal funds rate policy on hold for an extended period, probably throughout 2010 at least, as well as dissipating overblown concerns over impending inflation and renewing fears of outright deflation. It will take some four or five years, if not longer, to close the gap of excess labor and capacity to produce created by the recession, which acts to deter inflation and pressure prices and wages lower. Moreover, the CPI will likely continue to decline as the homeowners rent category, accounting for 24% of the CPI and 31% of the core, drifts lower with a projected renewed decline in home prices,reversing its recent rise, spurred by a coming wave of forclosures.

As weak as the headline September employment report may seem, the underlying detals are far more worrisome. As has been widely reported, September nonfarm payrolls declined 263,000, versus a 201,000 August drop, the 21st consecutive monthly decline. At the same time the official unemployment rate rose to 9.8% from 9.7% in August. Since the recession began in December 2007, the official number of unemployed has soared by 7.6 million to reach 15.1 million by September 2009.

As bad as these employment headlines are, the underlying data paint a much worse employment picture. The more reliable household survey, from which the unemployment rate is derived, showed an horrendous 785,000 September employment plunge. That is far from suggesting a sustainable economic recovery in the consumer sector, which typically accounts for some 70% of GDP growth. The civilian labor force, which in economic expansions typically rises, suffered a 571,000 precipitous drop in September as discouraged workers gave up looking for work or felt forced to take early retirement or went back to school. Applications for Social security benefits have been soaring.

As this analyst has repeated observed, the monthly nonfarm payroll declines reported would have been far worse if they had not been artificially boosted by an estimate of phantom hiring by new firms that had not been surveyed. Now, in benchmark revisions, the BLS is only beginning to recognize this mistake. It reported, on a preliminary basis, that March 2009 nonfarm payrolls were actually 824,000 lower than it previously reported.

The U6 measure of unemployment, which includes discouraged workers and those who took part-time work because they could not find full-time employment, reached 17.0% in September, seasonally adjusted, up from 16.8% in August. By this measure, there are more than 25 million unemployed in this country. But, this is a pervasive global problem. In China, even with its own massive stimulus program there are conservatively an estimated 40 million unemployed. Yes, you read that right. While the US unemployment rate began droppinf with the cyclical business recoveries from the 1973-75 and 1981-82 recessions, there were extended lags before unemployment dropped following the 1990 and 2001 recessions. This time the lag before employment recovers is likely to be particularly long.

There are adverse economic consequences from the continuing and perhaps even newly accelerating decline in US employment. The Bureau Labor Statistics reported that the index of aggregate hours worked fell 0.5% in September, following an already significant 0.2% August drop. The third quarter average of this seies is down 0.8% from the second quarter, arguing against the liklihood of the upper ranges of 3.5% to 5.0% estimates of a sharp rebound in third quarter real GDP growth. Moreover, the accelerating declines in aggregate hours worked toward the end of the third quarter indicate that whatever the third quarter rise actually is in real GDP, it is unlikely to be sustaned in the fourth quarter. That prospect is reinforced by other
data. Though weekly earnings rose in the third quarter, they fell in September. Car sales plunged with the end of the cash for clunkers program, a precedent for the impact of the end of Federal stimulus for other sectors of the US economy. That is why Congress is considering extending stimulus.

This prospect of persistent or renewed weakness in consumer spending and the econmy, especially after the Federal stimulus runs its course limits the potential for a rise in corprate earnings. And that in turn places a cap, at the very least, on the rise in equity prices, which are already inflated judging by a number of measures. Equity price levels are already pricey based price-earnings ratios, above 20, well above the 15 times earnings long-term average. Moreover, equity prices are still well above their 200-day moving average, an indication of potentially unsustainable levels. This and the continuing severe credit problems besetting lenders and all but the largest firms that can borrow dirctly in the credit markets point to further near-term declines in equity prices. The proposed special additional one-time FDIC assessment on banks to help replenish the insurance fund would only further crimp bank lending. The efforts of CIT, the largest private lender to small and medium sized companies, to stave off bankruptcy,will keep their lending retrained. Even US exporters will not be exempt from strained earnings as the speculative commodity buying and inventory building in general runs its course.

The risks to equity prices and/or the potential for persistent deflation must now be widely recognized, judging by the rally in long-term Treasuries, corporates and municipal bonds. Municipal yields are by some measures at a 40-year low, down by half a percentage point in September, even with concerns over municipal finance. This is only partly due to a low volume of new isses. As long-time readers will note, this is just as I have been forecasting. Though much of the prospective rally has already taken place, there is still more to come. The ten-year Treasury note yield, 3.22% on Friday, down from a recent high of 4.0%, is likely to fall to between 2.75% to 3.0% by or before year-end. Still lower yields are possible. Even a return close to the previous 2.0% low can not be ruled out. Also, the maturity yield spread between the Treasury 10-year and the Treasury 30-year, which has already been narrowing, is likely to narrow further, perhaps to 50 basis points (one-half of a percentage point). The end of the Fed purchases of Treasuries may actually bolster confidence that the decline in Treasury yields is a market phenomenon and not artificially induced by the Fed.


Philip Braverman, President
Braverman Economic and Financial Consulting
One Hewitt Square #249
East Northport, New York 11731

I can be reached at: philipbraverman@Gmail.com

This and prior reports can be accessed by going to internet explorer and typing the following:philipbraverman.blogspot.com

The next Braverman report will released in early November following release of the October BLS employment report. Until then it remains wise to continue cautious.

Equities and Treasury yields will decline in anticipation of an unsustainable recovery

There is a significant risk of a major decline in equity prices and Treasury yields before long. Indeed, the process of decline in both may have already begun, especially for Treasury yields. The Treasury 10-year note yield, at 3.44%, though up in recent days ahead of next week's auctions of new Treasury debt, is still down from its highs of 4% earlier this year and 5% in 2007. And this 10-year yield is still twice the yield on 10-year Japanese bonds, which tend to lead US Treasury yields downwards, despite Japan's gross debt as a percentage of GDP at more 200% versus less than 100% for the US.

That prospect of lower Treasury yields and equity prices may seem out of step with the signs of a bottoming in the recession and advance indications of recovery. Moreover, the consensus view of economists is that the economic recovery will be sustained, producing a continued rise in equity prices and an extended rise in Treasury yields, as well as an early step-up in inflation.

However, I do not share those forecasts. Instead, in my view, there is a prospect of a renewed weakening in the economy after the various forms of economic stimulus run their course. That, in turn, will produce a disappointing corporate profit performance and renewed concerns over a continuation of deflation, already down more than 1.5% year-over-year for consumer prices. Together,those fears will likely lead to a significant anticipatory decline in both equity prices and Treasury yields. These views are not just mine alone. Though it does not alter the probability of the outcome, these views are shared by a few notable economists, as well as a consensus of major hedge fund managers. This is despite the the continued reltively low level of the Chicago Board of Options VIX, or volitility index, the so called equity market "fear index" which continues under 30,versus levels above 50 earlier this year and near 80 at its highs late last year. Why then the disparity in views? One contarian warning sign is that there has been a compete reversal in bullish and bearish sentiment. Over 50% of investors now have bullish views, up from near 20% at their lowslate last year, while only 20% of investors are now bearish, versus more than 50% with that view late last year. Sentiment follows the crowd and trend when it should be forewarned by it to consider the opposite.

Look at the seemingly moderate decline in nonfarm payrolls in the September employment report that led to a Friday rebound in equities and a selloff in Treasuries that pushed the 10-year yield to 3.44% from 3.35% the day before. And the futures market indicates that equities will extend their price advance on Tuesday, while the pressure of new Treasury supply next week may add to the backup in Treasury yields over coming days.

But, the reality is that markets completely misread the significance of the employment report. On balance, the September employment report was far more negative than positive, even with the relatively moderate 216,000 August decline in nonfarm payrolls, versus declines of 276,000 the month before,463,000 in June and 741,000 in January. Because the Bureau of Labor Statistics does not sample all new companies, it tries to compensate by artificially boosting the nonfarm payroll sample results each month even though in the midst of a recession there are generally layoffs not hiring at such unsampled firms. Without this fictional increase for August the actual decline in nonfarm payrolls would have been 118,000 larger or 334,000. But, even that larger nonfarm payroll decline almost certainly understates the actual August employment loss. That is because in the more reliable household survey, employment declined 392,000 in August, while unemployment rose 466,000. This was sufficient to push the August unemployment rate to 9.7% from 9.4% the month before. But, the still more realistic u-6 unemployment rate, which includes discouraged workers and those employed only part-time because they can not find full time employment, surged to 16.8% in August from 16.3% in July. That brings the number of Americans affected by some form of unemployment to more than 26 million. That horrendous number of desperate under-employed Americans is hardly the stuff of which a sustainable consumer-led economic recovery is made. When a sustainable economic recovery does eventually come, it is likely to prove essentially jobless. That is signaled by an even smaller percentage of unemployed on temporary layoff than in past recessions.

Though real GDP is likely to be up in the third quarter, perhaps by an annual rate of some 3%, the growth rate will likely weaken from there, and almost certainly by early next year as the impact of the stimulus recedes. Speculative inventory building will subside after restocking. The Baltic dry cargo index is already falling, down 44% in the past three months, indicating a drop in the demand for bulk shipping and a lessening in speculative commodity stockpiling. There will be a new wave of mortgage foreclosures pressuring home prices and sales lower again. Prime home mortgage loan borrowers, not just sub-prime borrowers, are increasingly delinquent. Such prime loan borrowers now account for more than half the mortgage delinquencies. It turns out that negative home equity is the major driving force prompting foreclosures. And nothing has changed that widespread realty that many homeowners, at least 22%, owe more on their mortgage than their home is worth. Commercial real estate is also in increasing distress as more and more of these properties are similarly worth less than their outstanding mortgage balance. Over 15% of offices are already vacant, with the prospect of more to come.Given these trends it is not surprising that banks are rapidly increasing their write-off of such mortgages in default. It follows that bank lending caution is also increasing, reducing credit availability to consumers and small-to-medium sized businesses. Consumers are increasing their savings rate at the expense of consumer spending. States and local governments are being forced to retrench as their tax revenues subside. Though some economic measures suggest recovery, underlying and long-range trends are still recessionary and deflationary.

The next economic report will be published in early October.

Philip Braverman, Chief Economist and CEO
Braverman Economic and Financial Consulting
One Hewitt Square #249
East Northport, NY 11731

My e-mail address follows: philipbraverman@Gmail.com

This and earlier reports can be accessed by going to internet explorer and typing the following:philipbraverman.blogspot.com

It's not a green light for equities or a red light for bonds that the recession is bottoming

There is increasing evidence that the recession is winding down. But that does not imply anything but a rocky road ahead for the economy, even if there is likely to be real economic growth in the second half of the year. Next year the outlook is clouded anew.

The sluggish recovery will be vulnerable to new or continuing major threats to the economy. These threats include a protracted rise in unemployment next year, continuing debt overburdened consumers, rising personal debt delinquecies, defaults and bankruptcies, little or no consumer income growth, and a significant rise in the consumer savings rate, with sluggish consumer spending relative to income. As a result of the constraints on consumer spending, retailing will continue to suffer disappointing sales. After the cash for clunkers stimulus runs its course,car sales will plunge anew. Housing will remain depressed by a further rise in foreclosures, continuing mortgage lender caution and the end of the tax incentive for first time home buyers this November. Commercial real estate and commercial mortgage lenders will experience serious losses. Commodity prices and business sales will decline sharply once speculative inventories are rebuilt. Inflation fears will dissipate, followed by renewed concerns over pervasive deflation. Lending institutions remain saddled with some $1 trillion in inadequately recognized losses that constrain their capital and lending. Similar problems in Japan led to an extended period of sluggish economic growth,repeated bouts of deflation and an equity market at less than one- third its highs. As if all of this were not enough, there should also be concern over the economic consequences of a return of a more virulent form of the swine flu.

The evidence of a moderation in the intensity of the US recession and hopes for an early rebound in economic activity has fueled a continuation of the rally in US equities, a retreat in Treasury bond prices and expectations of a rise in commodity prices. However, there are important reasons to doubt that such consensus views will be sustained. Indeed, there are ample reasons to expect that these seeming market trends will be reversed. To the extent that corporate profits have improved, it is largely due to cost cutting, not an increase in sales. This cost cutting is a "one trick pony" that cannot continue to be endlessly repeated. Accordingly, dissapointing corporate earnings performance is unlikely to sustain current equity price levels, let alone extend the current rally for very long. Take profits, while enjoying the rally while it lasts. But remain cautious. The inevitable decline in equity prices and renewed deflation will reignite safe haven buying of Treasuries.

Looking ahead, third quarter real GDP is likely to be up, at least marginally, perhaps at a 2% annual rate. That rise would partly reflect the positive impact of the Federal cash for clunkers stimulus program, which could account for up to 1%, or half of projected third real GDP expansion. Regardless of the source of the third quarter real GDP expansion, that rise would be a marked change in direction for the economy after a 1% annual rate of decline in the second quarter and a 6.4% rate of plunge in the first quarter.

The equity market was sharply boosted by Friday's report of a slight decline in the July unemployment rate to 9.4% from 9.5% in June. Unfounded optimism that the rise in unemployment is over was seemingly reinforced by the less than feared 247,000 July decline in nonfarm payrolls, well under the 645,000 monthly average starting November last year through April this year. But, the July decline in the unemployment rate was entirely due to a 422,000 plunge in the labor force, undoubtedly a reflection of a sharp rise in discouraged workers who just gave up looking for a job. If this rise in discouraged workers had not occurred the unemployment rate would have increased to 9.6%. The unemployment rate is still likely to keep rising to above 10%, and may yet touch 11%. Though the pace of layoffs is slowing, much of that relative improvement is due to the temporary and unsustainable effects of the stimulus package. It is ironic that when there really is a realistic increase in hope of employment, discouraged workers will come flooding back to the labor force, sharply boosting the unemployment rate. But that time has not yet arrived.

In the meantime, there is a rapid improvement in the prices of bonds of many stressed corporates as their financial position gradually improves. The Admistration has drawn a line in the sand. It will save those firms whose failure would, in their opinion, create systemic risk to the economy. But it will not save those firms whose failure does not appear to pose such a systemic risk. That,for example, explains the Federal assistance to GE, and the decision not to assist CIT. Unfortunately, the failure of CIT would create a systemic risk with cascading losses for hundreds of thousands of midsized to large companies. GE capital, the financing arm of GE, is likely to be exempted from a requirement that firms would have to be financial to continue to avail themselves of Federal commercial paper guarantees. GE capital alone uses some one-fourth of the facility. The decision to grandfather GE capital lifts a cloud over its future that had been resposible for much of the higher bond yields available on its credits. The general narrowing in the yield spread between high grade corporates and Treasuries is typical as the economy appears to be bottoming out. But that narrowing in yield spread still has further to go, at least for those under the Federal umbrella or benefitting from any lessening in economic distress.

The next report will be in early September.
Until then do not be taken in by fears of inflation or expectations of early Fed firming.
The Fed will not dare to firm until late 2010 or 2011, at the earliest, and inflation will not materialize anew for years longer. Deflation remains the real next concern.

Philip Braverman, President
Braverman Economic and Financial Consulting
One Hewitt Square #249
East Northport, New York 11731

I can be reached at: philipbraverman@gmail.com

This and earlier reports can be accessed at internet explorer by
typing in the following: philipbraverman.blogspot.com

Bond yields and equity prices will drop further on unemployment and related economic distress

The weaker than anticipated employment report and other developments point to a still further decline in Treasury, corporate and municipal bond yields, as well as a deeper drop in equity prices. This will be an extension of the fall in Treasury 10-year yields to 3.50% from 4.0% in early June and the parallel decrease in equity prices the past three weeks, both developments which emerged despite some "green shoots" signs of moderation in the pace of economic decline.

Though in some respects the recent pace of economic decline may not be quite as steep as previously, the economy is still in a significant recession decline. And even when the economic recovery does eventually emerge, whether in the second half this year or next year, the expansion is destined to be extremely sluggish and fragile. That will keep the markets and policy makers uncertain and deeply worried over an economic relapse. For example, the offical and grossly understated unemployment rate will be unlikely to stop rising until it reaches or exceeds the 1982 recession high of 10.8%. That topping out of the unemployment rate this time is unlikely to occur until 2010 and possibly even 2011. And the Fed will not begin its slow methodical firming exit strategy from easing until well after it is able to confim that the employment situation is sustainably improving. That suggests no rise in the Federal funds rate until 2011. More to the point, there is an increasing realization that there is no realistic near-term inflation risk. That latest realization has begun an unwinding of much of the precautionary speculative inflation fear buying of commodities, commodity-related equities and even the selloff in Treasury bonds that until very recently had dominated market sentiment.

The process of equity market price retreat could be slow to fully develop. But, it is likely to lead to an eventual retreat in the S&P 500 back to at least the 800 area from its 896 level on Thursday. That would merely represent a roughly 50% typical retracement of the rally from 666 to its recent high. But, the decline in equity prices could well go further than that, in a retest of the 666 S&P 500 early March low. Much will depend on the extent of the market's disappointment with the soon to be released second quarter corporate earnings performance, to be followed three months later with the third quarter earnings reports. Both sets of reports are likely to continue weak, and vitually certain to be down sharply from year earlier levels amidst an absence of any meaningful pick-up in demand or business pricing power. Though the percentage declines in earnings are unlikely to be as steep as in the first quarter, the declines will still be significant.

There were ominous elements to the July 2 release of the June employment report that were far more worrisome than the headline details. But, even the headlines understate the seriosness of the problem. For example, the 467,000 June decline in nonfarm payrolls was artificially modified from a 652,000 decline because of a fictitous 185,000 rise in employment attributed to new firms that were not sampled.

Also, consider the June unemployment rate, which was reported to have risen to 9.5% from 9.4% the month before. The official number of those unemployed is now 14.7 million. But, the number of those in extreme employment distress is far larger than that. Including those considered as discouraged workers, who gave up looking for employment because of a lack of jobs, and those working only part-time because they could not find full time work, the U-6 unemployment rate is now 16.5%, up from 16.4% the month before. Including these categories, the number functionally unemployed is now roughly some 25 million, an horrendous total. For an economy dependent on consumer spending, as is the US, that indicates continued sluggishness or stagnation at best, and continued recession at worst. For the global economy, dependant on the US consumer as the engine of recovery, that promises a delayed pick up.

But, there were other especially adverse economic elements in the June employment report. The average work-week declined significantly, to 33.0 hours, the lowest level on record since 1964 when the data series started. And the index of aggregate hours worked was also down, falling a steep 0.8%. Together, these data indicate another appreciable decline in real GDP in the second quarter, perhaps 4.0%, to be reported at the end of July, only moderately less severe than the 5.5% first quarter drop. Also, while hourly earning were unchanged in June, average weekly earnings declined $1.85, more than reversing the $0.99 rise the month before. It is not surprising that the consumer also experienced a renewed weakening in confidence. In concert these data help explain the jump in consumer savings. That pattern of constrained consumer spending, repayment of debt and increased consumer savings is likely to persist for an extended period, keeping the economy weak and stuggling.

The absence of inflation, persistant deflation concerns, an unchanged Fed policy and Fed buying of Treasuries together with declines in equity prices will keep Treasury bond yields low and declining. But, what about corporate and muni yields? The decline in Treasury yields and a narrowing of the still excessively wide quality
yield spreads, the gradual reentry of corporations into the debt market and less onerous earnings prospects will help improve distressed corporate bond prices. Despite the current deep financial distress of California and other states, the Federal assistance to the muni market through 2010 (such as the build America financing) will keep the volume of tax-exempt muni offerings low, ultimately further enhancing their value, especially as the economy eventually begins to improve and the outlook for state finances recovers as well.

Philip Braverman, President
Braverman Economic and Financial Consulting
One Hewitt Square #249
East Northport, New York 11731

Email Address: philipbraverma@Gmail.com

This and prior reports can be accessed by going to Internet Explorer and typing in:
philipbraverman.blogspot.com

The next report is scheduled for early August. Until then be wary of reports suggesting imminent recovery, inflation and Fed firming.

Smaller nonfarm payroll decline than feared is misread as prelude to recovery

The employment situation and the economy continue to rapidly worsen. That is clearly evident from anything more than a superficial reading of the Bureau of Labor Statistics May nonfarm payroll report.

Many in the markets, however, were misled by the shallower 345,000 official decline in May nonfarm payrolls, versus a 504,000 April decline, into erroneously believing that the economic recovery is so close that spiraling inflation and Fed firming are imminent, perhaps as early as September and many think almost certainly before year end, That view seems to be a classic misreading of the data. Nevertheless, it is a forewarning of the markets continued willingness count its chickens long before they hatch.

For many reasons the nonfarm payrolls data grossly understates the still dire and deteriorating employment situation at this stage of recession. May nonfarm payrolls were actually down at least 565,000, not the 345,000 decline officially reported, at least, before a highly questionable estimated 220,000 phantom hiring boost was added to the data. This difference reflects the Bureau of Labor Statistics estimate that the new firms that it does not sample hired 220,000. That 220,000 estimate is inexplicably 27% above the comparable estimate of hiring by new unsampled firms a year ago. Given the pattern of firing across the economy, it seems more reasonable that the BLS should instead have increased the size of the May nonfarm payroll plunge beyond 565,000, not reduced it. One of the major problems with
nonfarm payrolls is that it does not include the large number graduates and others that are newly entereing the labor force, but are unable to find employment. That is why the household survey of employment, which does include new entrants to the labor force is a better measure of the true state of the employment picture.

The unemployment rate, which is derived from the household survey, soared to an horrendous 9.4% in May, from 8.9% in April. The uptrend in the unemployment rate will continue, probably reaching or exceeding 10% percent this year and next year matching or exceeding the 10.8% 1981-82 recession high.

The May surge in the unemployment rate reflects a huge 787,000 spike in household survey unemployment, more than twice the 345,000 official but undoubtedly understated May rise in nonfarm payroll unemployment.

While the 9.4% May unemployment rate is bad enough, even this measure is an understatement of the dire employment situation. The U-6 unemployment rate includes discouraged workers who have given up looking for work and those who have taken part-time work because they can not find full time work they seek. By this measure, the May unemployment rate was 16.4%, a spectacular jump from 15.8% the prior month. These details make the contention that the economy is mending seem rediculous.

Perhaps most significant, the index of aggregate weekly hours worked declined 0.7% in May. This measure closly tracks real GDP, Accordingly, the drop in hours worked portends another sizable drop in real GDP for the second quarter of some 5%. But,that is not the end of the recessionary decines in GDP. The housing sector is far from recovery. The foreclosure wave is still spreading, depressing home prices and adding to financial pain for individuals, financial institutions and holders of the toxic mortgage debt. Other real estate is also in deep distress. Until real estate turns around, the reccessionary pressures will persist. State and local governments, individuals and much of the business sector are still struggling mightily with the recession. Even with the massive stimulus, there is still no clear end to the recession in sight.

Despite this reality, Treasury market yields soared Friday on the 345,000 nonfarm payroll decline, reflecting fears of both inflation and Fed firming. The ten-year note yield, for example, reached 3.84%, helping boost 30-year mortgage rates toward 5.5%. This stepup in Treasury yields, like much or all of the rally in equities, will be reversed. The economy remains far from recovery. When the recovery does come, probably next year, it is likely to be both sluggish and protracted. That will keep a large volume of excess capacity of production and labor in place as a retardent to inflation. Indeed, outright deflation remains a major threat. Though the market's continuing heightened fear of inflation is disquieting to the Fed, the Federal Open Market Commmittee, which decides on Fed policy, will be reluctant to begin firming too early for fear of plunging the economy back into recession. That and subdued inflation will most likely keep Fed policy unchanged through much or all of 2010. If the Fed were to indeed firm prematurely after recovery, the economy would be likely to merely slip back into recession, forcing the Fed to ease anew.




Philip Braverman, President
Braverman Economic and Financial Consulting
One Hewitt Square #249
East Northport, New York 11731

Email address:philipbraverman@Gmail.com

You can access this and earlier Economic and Financial reports by going to Internet Explorer and typing the following address: philipbraverman.blogspot.com

I am switching from a weekly report to a monthly for the Summer.The next report will be dated July 4.

Seemingly positive factors postpone the inevitable equity market retreat

The equity market ended the week on a particularly strong note. It reached 919 for the S&P 500, up 3.6% for the week, just under its recent high. There were near comparable increases for other equity market indices. Moreover, the futures market indicates an additional equity price advance on Monday. This is an especially bullish indication for a Friday, especially after the strongest three month rally in at least a decade and in some respects the strongest since 1938.

This equity market performance suggests pronounced confidence in the prospect of further significant equity price advances. That sign of momentum makes my recommendation for setting shorts made two weeks ago seem grossly premature. It is more appropriate to be cautious in the face of the market's pronounced confidence, at least until that confidence begins to fade or reaches higher actionable contrarian extremes of overconfidence. For the momement it appears likely that the market will break out of its recent narrow price range decisively to the upside, perhaps for an extended run of a number of months. Nevertheless, it is still appropriate to ask, is the equity markets optimism justified? My answer remains a resounding no.

The paniced short covering that accounted for much of the equity market price rise the past three months has now been exhausted. Short positions are now much smaller.

The price-earnings ratio remains grossly excessive given the current economic environment and far from indicating current bargain equity price levels. For the S&P 500, the p/e ratio is now roughly 20 for this year. But some others calculate it at a more moderate 15. But, even by that more conservative measurement the p/e is still only close to its long term average. Consumer stocks, at more than twice that average, appear particularly vulnerable, while energy and commodity stocks, with a p/e ratio in the single digits, appear less so.

Much of the equity markets' advance reflects a presumed recovery in the global economy that is spurring buying of energy, commodity and emerging market related stocks. For example, oil futures were up 30% for the month, reaching $66 a barrel. But, that is still under the likely $75 marginal cost of production. The global economy remains in retreat. The snap back in commodity buying is both precautionary and speculative. If, as I expect, the phantom strength of the global recovery proves bitterly disappointing, there will be a new retreat in commodity prices and related equities.

Some US economic reports are admitedly stronger than the previous monthly reports, suggesting to many that the worst of the recessio is over. But, even if so, that is hardly a justification for unbridled optimism that the economic recovery is at hand. Indeed,there is unlikely to be a V shaped recovery. It could well be a W shape, with yet another leg down or more likely a sluggish shallow saucer shaped recovery when it does come. April durable goods orders rose to 161.5 from 158.4 the prior month. But, that is still far under the 213.6 level a year ago. Moreover, that rise has to be considered an anomally considering that April durable goods purchases were down, March factory shipments declined and both consumer and business spending are still falling.

Similarly, the Conference Board May consumer confidence at 54.9, is up from 40.8 the month before. But, that is far from a mark of exhuberant consumer confidence. It may reflect nothing more than the rise in the equity market and the absence of another mega financial firm bankruptcy. Moreover, that confidence rise does not auger an imminent parallel rise in consumer spending. The two series are not highly correlated.

Mortgage delinquency rates continue to soar for both sub-prime and conventional borrowers, suggesting that a further escalation of foreclosures is not far behind. That will put further downward pressure on home prices, the market value of mortgage-related paper at the heart of the global financial mess and financial institutions holding the toxic debt. Thus, there is little basis for concluding, as many have repeatedly, that the housing debacle and related financial institution distress is ending or has already done so.

Next week's monthly employment report for May is likely to be down some 525,000, just under the 539,000 decline in April, but well under the over 600,000 peak declines of prior months. But, that would hardly mark a significant turnaround in the economy let alone in the lagging labor market. Initial claims for unemployment benefits, 623,000 in the latest week, continue to exceed 600,000, far from the 400,000 threshold of recovery. That points to a May unemployment rate of over 9.0%, probably 9.2%, up from 8.9% in April and 8.5% in March. The outlook still favors the official unemployment rate still topping 10.0% and possibly even reaching 11.0%. The u6 unemployment rate, which includes discouraged unemployed that have given up looking for work and workers only martginally employed, is a better measure of the pronounced employment distress experienced in the US. By that measure, the unemployment rate is already approaching 16%. That does not justify confidence.

Philip Braverman, President
Braverman Economic and Financial Consulting
One Hewitt Square #249
East Northport, New York 11731

Email Address:philipbravermar@Gmail.com

This and prior reports can be accessed by going to Internet Explorer and typing the following:
philipbraverman.blogspot.com

Treasury yields rise on excessive fears of a US downgrade, borrowing and inflation

US Treasury note and bond yields rose sharply this past week. The Treasury ten-year note yield, for example, reached 3.46% Friday, up from 3.12% a week ago. But this yield rise is not only unlikely to be sustained, it will almost certainly be reversed. That is because its root causes will be, for the most part, inevitably seen as either exaggerated or unwarranted. And if the Fed is not to preside over a significant deepening in the housing sector decline and a reversal of the few feint signs of economic improvement, it will have to not only expand but quicken its pace of Treasury buying. Otherwise, mortgage rates and bond yields will sooner or later rise enough to choke off any hope of an early economic recovery.

The Treasury yield rise this week came despite a deterioration in equity prices from Tuesday through Friday, which might normally be expected to create safe-haven buying of governments. Even after their roughly 30% rise from their March 9 lows, equity prices not only remain below their recent bear-market rally peak, they are still well under their two-hundred day moving average downtrend, suggesting the cyclical decline in equity prices remains intact. However, despite this equity market negative to lean on, the Treasury market was instead focused on its own set of worries, some real some imagined. These include worries over where the buyers for the new Treasury borrowing would come from, a decline in the dollar, fears of an imminent upsurge in inflation amidst a resurgence of economic growth, and anxiety that US Treasury debt might soon be downgraded.

US Treasuries were adversely affected merely through guilt by association this week when Standard & Poors put United Kingdom debt on negative credit watch. That action implied that S&P saw signs of a potential or impending rise in UK debt risk. Attention was focused on a projected multi-year increase in the volume of UK sovereign debt as a percentage of GDP. If this warning goes unheeded, S&P may eventually act, but perhaps not for years. And even then, S&P would almost certainly only downgrade UK debt to AA from its current AAA rating. Virtually every major nation is in roughly the same financially stressed position as it attempts to borrow its way out of the deep recession/depression by both stimulating its economy and forstalling the failure of its key financial institutions. But the prospective debt to GDP percentage of the UK appears higher than the comparable percentage for its principal trading partners, including the US.

The dollar plunged this week. But, that is likely to prove temporary. The economies of Germany, Japan and Mexico, major US trading partners, are all falling at a faster pace than the US. While the GDP of the US declined at a 6.1% annual rate in the first quarter, GDP in germany fell 14.4%, Japan was down at a 15.2% rate and Mexican GDP plunged at an horrendous 21.5% rate.

Optimism on the outlook for the US economy was bolstered by a 1.0% rise in the April Index of leading indicators. This is the first rise after a string of declines. Though it is welcome, forecasters are aware that it takes three consecutive increases in this data series to confirm an impending bottoming out in the economy, typically some six months hence. Thus, a single month's rise should not be the basis for more than hope. The index of coincident indicators confirmed that the economy is still dropping. Similarly. initial claims for unemployment benefits, at 631,000 in the latest week are down only slightly from the prior week and from their highs, but that signifies nothing. The latest initial claims pace remains far from the 400,000 threshold of recovery. Indeed, unemployment is still rising sharply. The Confernce Board's measure of consumer confidence, at 39.2 for April, is up from 26.9 the previous month, but still well below even 62.8 a year earlier. This is far from signaling a recovery in consumer confidence, consumer spending or the economy.

Oil prices were up in recent days. But, that does not signal an imminent resurgence of inflation. Indeed,current prices are still below the probable $75 or so marginal cost of production. Even with speculative and precautionary stockpiling, oil demand is down due to the global recession and it is likely to take years of economic recovery before inflation pressures re-emerge. There is too much excessive capacity of production and labor to sustain any meaningful inflation stepup. on the contrary, deflation remains a threat. The May 22 Jounal of Commerce-ECRI industrial price index,at 78.18, is up slightly from the previous week, but stil down 42% from a year ago.

Safe haven buying of Treasuries will re-emerge as the equity market resumes or extends its price decline. As the dollar resumes its relative strength, the incentive to buy Treasuries will be enhanced. Despite the question of where Treasury buyers will come from repeated in every recession, Treasury yields declined cyclically in almost every recent recession. Treasury yields do rise initially in recovery. But, to the markets repeated surprise, the pace of recent economic recoveries has typically been so disappointing and inflation fears so overblown, that Treasury yields almost invariably reach their cyclical low in that economic recovery period. When the recovery from this recession does eventually emerge, it is likely to be even more feeble and protracted than most, with far less inflation than typical. That is likely to be true even with the Fed's substantial money expansion, because it is credit not money that matters. And the credit deleveraging process still has far to go, curtailing the inflation threat.


Philip Braverman,President
Braverman Economic and Financial Consulting
One Hewitt Square #249
East Northport, New York 11731

Email address: philipbraverman@Gmail.com

This and prior weekly reports can be accessed by going to Internet Explorer and typing the following: philipbraverman.blogspot.com

Time to take profits in equities and reset shorts

Amost nothing in life is certain. But, the high for this bear market rally has most likely been reached or very soon will be. The outlook is for a renewed trend decline in equities beginning in coming weeks to at least retest their March 9 lows, and possibly even establish new index lows. That equity market price retreat will reawaken the safe-harbor attraction of US Treasuries, producing lower Treasury bond yields. And that will further reduce bond yields on medium through high-grade corporate credits. Indeed, that process of improvement in corporate bond prices has been underway, even while Treasury yields were rising, reflecting the improved corporate access to market funds and the lightening in percieved underlying default risk.

There are many reasons for the equity market's likely coming change of direction from rally to decline. These include a lessening in the unwarranted "green shoots" euphoria that the recession is already ending and that the economy is actually on the mend. There is an increasing recognition that the recession will persist, even if the rate of decline is not quite as headlong.

The earnings season is coming to an end. And the results suggest that at current price levels the equity markets are overbought. The per share earnings for the S&P 500 at just over $10 for the first quarter, suggests some $45 or less for the year. That equates with a relatively rich 20-times earnings price level, well above the 15 times price-earnings ratio long-term average and the far lower p-e ratio levels amidst past long wave p-e ratio cyclical declines.

While the Federal government assessment of the bank stress test reports were less worrisome than had been feared, there is an increasing realization that to a considerable extent the banks were given a free ride. The economic stress that was built into the bank loss picture is by no means extreme and the presumed loss under the supposed worst case scenario is far smaller than a worst case scenario would actually create.

The upsurge in new equity offerings is bolstering the financial position of the companies involved, but it is also watering down the equity position of current stockholders. The latter is a clearly percieved market negative.

The same mixed message for the markets can be discerned from the Federal governments intrusion in corporate affairs. While the prevention of a domino chain of simultaneous failures is certainly welcome, the unintended consequences are adverse for those firms that did not benefit from the Federal governments largesse. For example, small and medium sized banks have had their FDIC insurance premiums so sizably raised to help pay for the bailout of the larger banks that there will be little or no net earnings benefits from the low cost of their deposit funds. Similarly, Ford, which received no Federal assistance, will bear the competitive cost of the bailout of GM that keeps them in business despite GM's past inefficiencies. Perhaps even more onerous from the equity markets point of view is the degree of control of corporate affairs that is being implied by recent comments by Federal officials. These include references to limitations on corporate pay and bonuses, performance related pay schemes, replacement of boards of directors and CEOs and especially efforts to limit profits for health related firms and others. Even though some of these changes may be long overdue, the upshot is a percieved encroachment on capitalism that is anathema to equity markets.

Recent inflation reports keep the prospect of a quick resumption of inflation at bay. There is outright deflation in the CPI year over year, even with the overstated so called "imputed rent" component. The huge excess capacity of production and labor in the US and globally precludes any meaningful step-up of inflation literally for years. The massive expansion in the money supply means nothing so long as credit is not expanding. And it is not. A massive deleveraging of the past credit expansion of business and the consumer is still required. The point of this is that there will be little or no pricing power in the hands of corporations sufficient to significantly boost earnings for years to come.

The conclusion to be drawn from the forgoing is that there are far more near term risks than are generally recognized in investing in equities at this juncture and more opportunity than is widely percieved in investing in investment-grade corporate bonds.

Philip Braverman, President
Braverman Economic and Financial Consulting
One Hewitt Square #249
East Northport, New York 11731

Email address:philipbraverman@Gmail.com

This and prior reports can be accessed by going to internet explorer and typing in the following internet address: philipbraverman.blogspot.com

Is the worst of the recession over?

No! Not if that means means an end to declines in real GDP, increasing consumer spending, a rebound in retail sales, rising production, advancing business investment, an end to bank problems, a rise in real estate prices or rising employment. None of those welcome development are at hand or even discernable on some distant horizon. That reality raises serious questions over the sustainability of both the equity market rally and the six week rise in Treasury bond yields beyond the sizable Treasury quarterly refunding next week. Equity prices will soon decline anew, helping drive Treasury bond yields lower as well.

It would be nice to believe that we have not only seen the worse of the recession, but that the first feint signs of recovery are emerging. But, just because we hunger for it is no reason to misinterpret the evidence as many, if not most, appear to be doing. One prime example of this misreading was the positive market reaction to the report of first quarter real GDP, which was down an horendous 6.1%, following a 6.3% plunge in the fourth quarter last year. That is the economy's worst two quarter performance in half a century. (Incidently, I forecast a 6% first quarter real GDP decline.) But, the optimists saw a positive sign in the 6.1% first quarter GDP decline because among the components of the report there was a rise in consumer spending and a drop in inventories. They mistakenly interpreted this disparity as laying the groundwork for an imminent economic recovery. If consumer spending were to continue rising, a mighty big if, a sustained reduction in inventories might be viewed as unlikely. In that event, the assumption is that business would restock inventories, leading to a pickup in orders, production and employment. That is likely to be the eventual sequence of developmements. But, certainly not now.

Let us look a little closer. The consumer spending component of real GDP was up at a2.2% annual rate in the first quarter, after having been down sharply in the fourth quarter, when sharply curtailed credit availability crimped spending. And for the circumstances, even that relatively modest rebound is likely to be shaved in the revisions and its bullish significance dismissed. Unfortunately, the first quarter real GDP report is preliminary, based on partial reports, before much of the March data was available. The March report for consumer spending showed a decline, suggesting a downward revision for the consumer spending component of first quarter real GDP and potenially for the overall series itself. Furthermore, consumer spending was temporarily boosted at the beginning of the year by the desperate retail post Christmas price slashing, reduced tax witholding and a seasonal adjustment that did not recognize the extraordinary nature of these developments. Even with a slight improvement in consumer confidence to dismal levels from prior even more bleak sentiment levels and tax stimulus, the rising trend of unemployment and reductions in credit will continue to keep consumer spending extremely constrained. Moreover, though business inventories are down from a year ago, at 1.43, the February business inventory-to-sales ratio remains well above the 1.25 level a year ago. Thus, such inventories have not fallen as much as sales, probably reflecting a misguided overconcern that an upsurge of inflation is looming just around thge corner. Instead, deflation remains the far more immediate prospect.

Reinforcing this general point of view on the lack of support for an early turn in the economy, Warren Buffet indicated that he sees no evidence of recovery in housing or retail sales. That view will be further supported by coming negative economic reports. For example, Next Friday, the April employment report should reveal a 600,000 or larger decline in nonfarm payrolls and a rise in the unemployment rate to 8.8%.

There are also more problems ahead in finance, banks and insurance companies.

Virtually every major bank will require additional capital. And the required capital injections will be huge so as to cover the vast additional loan losses yet to be realized, which will come on top of the huge losses already recognized. That may seem hard to believe given the extensive Federal support already provided the troubled financial sector, the prospect of additional assistance and especially the seemingly much improved first quarter profit performance reported by most banks. As I reported last week, those improved earnings admitedly reflect both sustainable and unsustainable components. There is a wide earnings spread between the near zero cost of funds and earnings on loans and investments that is likely to persist. But, first quarter bank earnings also undoubtedly reflected one-time events, including temporary trading profits on the preannounced Federal purchase of Agency securities from the banks and the imposition of less stringent mark-to-market writedown accounting rules. Thus, the bank earnings performance is likely to darken again reflecting narrowing trading profits as well as worsening losses.

Despite massive mortgage refinancing and other stimulus efforts, home price declines will continue. Together with the new acceleration in foreclosures, that will lead to further losses on residential mortgages and mortgage-backed debt. In addition, there will be a wave of substantial bank losses on credit card debt, student loans, personal loans and commercial real estate mortgage debt.

The results of the bank stress tests are not scheduled to be released until next Thursday. And the release date may be a further delayed. However, there have already been official advance indications that some 14 of the 19 banks reviewed will be required to substantially boost their capital. These most notably include Citibank and Bank of America. The plan reportedly is to pressure those banks cited to raise additional capital in the private sector, though that is likely to prove both difficult and very costly. If they are unable to do so, the Federal government will provide it, bringing bank nationalization that much closer. According to Time magazine, Citigroup will experience some $106 billion in losses through the end of 2010 that will require it to obtain some $22 billion in additional capital. Other banks among the 19 reviewed may require smaller infusions of capital or, in the case of Chase, perhaps none at all.


In honor of Mother's day, there will be no report next week.

Philip Braverman, President
Braverman Economic and Financial Consulting
One Hewitt Square #249
East Northport, New York 11731

Email address: philipbraverman@Gmail.com

This and prior reports can be accessed by going to Internet Exporer and typing in the following: philipbraverman.blogspot.com

False dawn of recovery prematurely boosts market optimism

I remain pessimistic over economic and equity market prospects. And with ample reason. But, through Friday, the markets thought otherwise. That will soon change.

Though the Dow and S&P 500 were down slightly for the week, the equity markets nevertheless closed the week on a strong note. This is typically a sign of optimism because of the potential for adverse surprises over the weekend. This is an upbeat indication, as was the decline in the VIX volitilty index. Taken together these measures suggest more market confidence (even if misplaced), that the balance of forces will lift equity prices higher. In reality, the bear-market rally has relatively little room left on the upside. It will soon be time to reset short positions in ETFs, and not just because of the potential adverse consequences of the swine flu. Next week first quarter real GDP is likely to be reported down 6%, with more bad news to follow. The month of May begins a period of market vulnerability. One straw in the wind is a step-up in insider selling, typically an advance indicator of impending equity market declines. Similarly, a reported decline in equity market short positions undermines the market's potential to move higher or just maintain current market price levels.

Also significant was last week's rise in gold prices back above 900, with a current spot price of 913, and a jump in Treasury yields, with the ten-year yield back at 3.0%, the highest level since the Fed indicated its plan to buy Treasury bonds. These developments reflect a number of reports, events and beliefs. There was a report that China has substantially more official gold holdings (76% more)than previously thought. That bullish report on gold helped mitigate the market fear of impending gold sales by other central banks and official institutions to fund their assistance programs and stimulus efforts. Treasury yields are being boosted by the the coming sizable Treasury quarterly auctions usually slated for the second week in May. The so called "Duke of York effect" in which Treasury portfolio holders raise cash for the auction by selling nearby maturities. This raises yields on the new auction issues which effectively makes them more enticing to potential buyers. The reference is to the old English nursery rhyme that I believe goes "The Duke of York had 10,000 men. He marched them up to the top of a hill. Then he marched them down again." That process could push Treasury bond yields higher before they more than reverse the yield rise after the coming auctions. But, there are also likely other important and misleading forces at work in these latest developments.

Among these are erroneous market expectations of an early economic recovery and renewed inflation. These various misguided beliefs were influenced by outright official boosterism and a smattering of seemingly less dire economic reports. Some of these recent economic reports were the result of questionable seasonal adjustments that had the effect of artificially inflating the reports so they appeared less dire or even actually improved. However, if the seasonal adjustments for recent data merely borrowed strength from the presumed recovery later in the year, reports for that later period will only look worse than they deserve. Fed Chairman Bernanke's reference to spotting "green shoots" of recovery and Treasury Secretay Geithner's comparable remarks raised excessively optimistic expectations that had to be subsequently watered down. Secretary Geithner followed with a comment that it is "too early" to say risks have receded and that indeed more action needs to be taken to counter the worst financial crisis in generations. But, not everyone grasped the deliberately mixed message.

The banking system faces major financial distress that will be the source of new profound and deep declines for the US and global economy. Nevertheless, the markets' worries over the still to be released report of the bank stress tests were deceptively lightened by Treasury Secretary Geithner's seemingly offhand remark that all the 19 tested banks have adequate capital. They do not. Also the details of the stress test themselves suggested a low hurdle that all the major banks can pass.

The Administration is trying to have it both ways. They want to be credible. But, that objective can be at odds with their attempt to encourage spending, lending and investing. That explains their efforts to bolster more than warranted confidence in the stability of financial institutions and foster the mistaken belief that the worst of the recession is over and that we are in an economic bottoming process. To those ends the concept of the bank stress test was created. It was hoped that the clean bill of health given to those banks that passed (and all would) could be as effective as the restoration of confidence at the Depression era reopening of banks after the Bank Holiday.

Before you buy into that potential fiction let's look at some of the bank developments that do not get adequate press and their decidedly adverse financial and economic implications. Major banks are rapidly cutting their customers credit card and other lines of credit in their own deleveraging process. By some measures such lines have been cut in half. That critically reduces the availability of credit on which strapped consumers and businesses depend. Indeed, many consumers depend on their unused credit lines as their only emergency funds and reserves. Without access to such funds they will either turn far more cautious in their spending or default on their obligations. It is credit, not money, that is the driving force of the economy. If credit declines and it is, the expansion of the money supply will not make up for it or prevent deflation and economic contraction.

Banks are at the beginning of a new wave of delinquencies and defaults of credit card debt and non-residential commercial real estate debt. Commercial real estate prices are already down some 35%, wiping out owner equity and creating losses for even prudent lenders and certainly for those that lent 80% to 90% or more on overly generous appraised value. The home mortgage forclosure rate at many banks is rising at an accelerating pace after their self imposed moritorium on foreclosures ended. That only adds to downward pressure on home prices, already burdened by a 10-month overhang of unsold homes. Existing home sales fell an additional 3% in March, suggesting the residential market is not stabilizing. It is not likely to do so until next Spring.

Recent bank loss reports only appear less burdensome for many banks because of the favorable change in mark-to-market accounting rules. The improvement in banks' earnings from securites trading was partly due to a preannounced Federal decision to buy Federal Agency securities which allowed banks to stock up on them before reselling at a profit. There were other special factors that helped to artificially boost bank earnings, including a shift in fiscal year that in some instances reportedly omitted a month of unfavorable earnings. The increased yield spead between banks' cost of funds and lending rates is a source of profit. But it will take an extended period before such earnings are sufficient to allow adequate writedowns of losses against even enhanced capital.

Far too many banks missed the opportunity afforded by their exceptionally inflated earnings reports to raise new capital. They will regret it. The IMF estimates US banks will require $275 billion in additional common equity capital to meet or maintain its 4% of assets floor. At the same time the IMF estimates European banks require $600 billion more equity. In aggregate, Eurpean and US banks, it is estimated, will not turn a profit after projected writedowns until 2011. That presumably is consistent with the IMF expectation of a 1.3% GDP contraction in the global economy this year, a significant turnaround from a 0.5% increase previously predicted. Moreover, it does not expect a global recovery until next year. For the US, the IMF forecasts a 2.8% GDP decline this year and no growth next year. In my opinion the IMF could well be optimistic. In either case there is more pain to come.


Philip Braverman, President
Braverman Economic and Financial Consulting
One Hewitt Square #249
East Northport, N.Y. 11731

Email address: philipbraverman@Gmail.com

This and earlier weekly reports can be accessed by going to internet explorer and typing the following: philipbraverman.blogspot.com

The deep recession will produce further deflation and other economic woes

Be forewarned. There will be major disappoinments ahead. I gave you a timely advance warning of this recession, as well as its pernicious nature and, most recently, an advance indication of the current bear market rally from its 666 S&P 500March 9 low point. I also indicated the probable size of the rally, to 875, just shy of the 879 level indicated by a 32% rise to roughly return that S&P 500 index back to its 200-day trend moving average. Now, with the S&P-500 index closing up at 869.60 on Friday, I am giving you an advance warning of an imminent new bear market nosedive that will at least retest the early March lows or, more likely, set new equity market lows. That will prompt new buying of Treasuries and renewed significant declines in yields. For example, the Treasury ten-year note yield at 2.95% on Friday, should decline to at least 2.5%.

These are far from consensus views. Instead, there is unjustified market confidence that the equity market is in a sustainable rally. For example, Ken Fisher, Chairman of Fisher investments expects the S&P 500 rally the past six weeks to be extended, from 870 currently to 1130, another 30% rise, by March 2010. Such views typically stem from an unwarranted hope that the economy is bottoming out, that the credit crisis has been resolved, that the banking system has been mended and that inflation is about to emerge, producing a renewed surge in commodity prices. In German there is an expression which to my way of thinking aptly applies to such views. It loosely translates into living on cloud nine cookooland. In other words, in my opinion, such views are nonsense.

The reality, as I see it, is that the equity market is vulnerable to a renewed and very steep decline. The economy remains mired in a deep recession. Despite the various Fed and Federal government efforts to provide assistance to the credit market and financial institutions,the credit crunch continues in full swing. Banks are still beset by pronounced losses that compomise their capital and restrain their lending. Deflation is already in evidence and is likely to worsen for an extended period. further undermining corporate profitability. That ever more onerous deflation pattern will, of course, keep the threat of inflation from being realized any time soon, most likely for years. A closer look at the forces at work should make the reasons for my views in each of these areas self evident.

The equity market has moved from being oversold at its early March low to being more than fully priced currently. The S&P 500 for example, has a projected income per share of some $40 this year. Even that level could yet prove optimistic. But, at $40 per share, current S&P 500 price levels translate into a price-earnings ratio level of almost 22, an excessively high level at any time and especially in the midst of the worst recession since the 1930s. One of the major driving forces of the rally the past six weeks was undoubtedly short covering, not a projected or realized recovery in earnings. But, now the sizable short position underpining of the rally has been substantially reduced. April is a seasonal period of rising equity prices, while May often ushers in a period of lackluster or disappointing equity price performance. That pattern even in more normal times helped create the dictum of sell in May and go away. That is likely to prove even more prescient than usual coming off a spectacular but unsustainable March-April equity market rally.

It was precisely the various market factors that caused me to predict a major bear-market rally before it ocurred in early March, that, having flip-flopped, now incline me to warn of an imminent reversal of the rally, probably beginning in May, if not before. Extremes of equity market overbearishness has reverted to overconfidence, unjustified overconfidence. The trigger for a renewed decline could be the 6% or so plunge in first quarter real GDP, to be released later this month. Other potential adverse market catalysts include a near 700,000 drop in April nonfarm payrolls and another sharp rise in the unemployment rate to be reported in early May, as well as disappointing corporate or financial institution earnings or the results of the bank stress tests, also to be released in early May, despite the rumored Treasury intention of giving them all a favorable review.

I am not alone in my negative view. A Morgan Stanley analyst went so far as to recommend selling "before it is too late" and Goldman Sachs' decision to issue stock this past week can be seen as a vote of no confidence in an extention of the rally.

The various presumed postive signs of impending or actual economic recovery are fanciful or due to inappropriate seasonal adjustments. This week, for example, initial claims for unemployment benefits fell 53,000 to 610,000 in the week ended April 11. But, that improvement may reflect nothing more than a good Friday holiday shortened week in a volitile series. Other presumed signs of recovery are equally misinterpreted. That is certainly true of supposedly favorable data for housing, which continues in deep distress.

Indeed, a new speed-up of home mortgage forclosures has begun. How can this be happening, especially when a rise in forclosures is not only counterproductive to the effort to stem the drop in home prices, it is contrary to the thrust of the Administration's intentions? It arises because a number of financial institutions have terminated their self-imposed temporary moritorium on forclosures. For example, J.P.Morgan Chase, Wells Fargo & Co., Fannie Mae and Freddie Mac have all reported an increase in foreclosures as their foreclosure moritoriums ended. Though there is still an array of different approches to delinquecies by mortgage holders, on balance, forclosure filings are up sharply. In February, the latest month for which data are available, foreclosure filings were up almost 6% from January and 30% from February 2008. Moreover, foreclosure sales are also rising, as are long-term delinquencies 120 days or longer, a precurser to foreclosure. To make matters worse, mortgage problems are increasingly cropping up in FHA conforming loans, not just in sub-prime loans, as the recession widens its depressing grip. The process of rising delinquencies, foreclosures and forclosure sales will continue to depress home prices as the overhang of unsold homes available for sale not only remains excessive but is destined to rise further. Given persistent housing distress, it is not surprising that housing construction fell 10.8% to an annual rate of 510,000 units, less than one quarter of the more than 2 million peak pace in 2006.

This past week the CPI was down 0.4% in the 12 months ended in March. This is the first such year over year decline in more than a half century. The decline in consumer prices now joins the declines in producer and commodity prices. This deflation pattern is likely to persist in view of the US and global excess of labor and productive capacity, which tends to keep prices for goods, services and commodities under downward pressure.

Despite some favorable bank and financial institution earnings reports, credit losses will persist. The wide yield spread on loans will have to persist for an extended period of time to create earnings sufficient to offset the losses on mortgage related paper, as well as the increasing problems with commercial real estate and consumer and credit card debt.

The bottom line is that there is still a distressing array of economic and financial negatives to contend with that will take a considerable length of time to resolve.

Philip Braverman, President
Braverman Economic and Financial Consulting
One Hewitt Square #249
East Northport, New York 11731

My email address is philipbraverman@Gmail.com

You can access this and prior weekly reports by going to internet explorer and typing the following internet address: philipbraverman.blogspot.com

March's surge in unemployment and other indicators point to a far deeper recession

With the global economy likely to have retreated in the first quarter, as well as for quarters to come, the extended outlook for US and global equities is far more pessimistic than this past week's continuation of the bear market rally might seem to suggest. The rally will soon end, to be most likely followed by a renewed decline amidst disappointing corporate earnings reports and persistent economic declines and financial problems. Expect at least a retest of the previous cyclical lows in both equities and Treasuries. And, hard as it may be to believe, given this weeks rise in equities and sell-off in Treasury prices, new lows in both equity prices and Treasury yields can not be ruled out.

Such views may be percieved as incredible amidst the seeming market positives of recent days. The cut in the European Central Bank's lending rate to 1.25%, rather than the 1.0% widely anticipated, is still considered a market positive. Similarly, the seeming agreement of the G-20 to paper over their differences and promise to implement initiatives to stimulate the global economy out of its Depression (though few as yet recognize the growing threat of that coming realty). It is no small matter that the initiatives are far from being fully funded and are likely to fail even if and when funded. The markets were instead favorably focused on the benefits to financial instutions of the appropriate softening in the needlessly harsh mark-to-market accounting rules. But, that is no panacea for banking's ills. Nor will the alphabet soup of Federal initiatives rescue the banking system and the economy any time soon and without the requisite pain that massive deleveraging will impose. Nor will the initiatives adequately spur renewed lending by institutions still attempting to rebuild their capital in order to survive. Moreover, the economy is far from bottoming out, not withstanding the recent smattering of slight improvement in some fictionalized seasonally-adjusted data. Housing, the hub of the recession-Depression's central cause, is destined to continue to worsen even with low mortgage rates,at least for those with pristine credit, and other incentives. Employment, a critical leading indicator of housing, is still getting worse and is likely to continue to do so until 2010 at the earliest.

The jump to an 8.5% March official unemployment rate from 8.1% in February and 7.6% in January indicates that even by this understated measure, the recession is deepening rapidly. That 0.9% pace of rise every two months in this unemployment rate rise in just the past two months would carry this official unemployment rate into the 10% territory by summer's end. That unemployment rate would be highly significant considering that the preceding post-world war II peak unemployment rate was 10.8% in 1982. But,that prior post-war peak level is likely to be exceeeded this recession, if that is still the appropriate term for it.

If not for the surprise drop in the labor force in March, contrary to the typical trend labor force rise, the March unemployment rate would have been at least 8.6%. And without the fictional, make that imaginary, 114,000 rise in employment attributed to companies that the Bureau of Labor statistics does not sample, the official unemployment would actually be 8.7%.

As if these varients on the official unemployment rate are not already high enough, by other realistic measures, the unemployment rate is in reality already far, far, higher, well into the teens, and well above 15%. Such alternative measures include as unemployed those who are employed only part-time, are in temporary jobs because they can not find the permanent full-time jobs they seek, or have become so discouraged at the lack of employment opportunities that they are no longer actively seeking employment. This unpleasant realty strongly suggests that the official unemployment rate grossly understates the economic and financial pain that the recession is imposing on workers and consumers.

Nonfarm payrolls fell 663,000 in March, after a 651,000 decline in February and a revised 741,000 drop in January. Except for an 8,000 rise in Education and health services employment, every major employment category, including government, declined in March. But the bad employment news is far from over. Weekly initial claims for unemployment benefits jumped to 669,000 in the week ended March 28, from 657,000 the prior week. This data came too late to be reflected in the March monthly employment report. That and a further rise in long-term unemployment suggests the April employment report will be as bad or worse than March.

Even more worrisome than the 663,000 decline in March nonfarm payrolls, the decline in March employment in the household survey, which is typically more reliable in recessions and from which the unemployment rate is derived, was a deep 861,000 for the month.

Still more significant, aggregate weekly hours worked declined 1.0% in March after a 0.6% decline in February. This indicator serves as a prime basis for forcasting real GDP. Its performance implies a steep drop in real GDP in the first quarter. The real GDP decline is likely to at least match or exceed the 6.3% fourth quarter drop.

There are other significant adverse elements in the economic and financial picture that also indicate a deeper and prolonged recession ahead, even with the increasingly expensive global economic stimulus and financial salvage operation. For example, there may be a further $1 trillion in loss charge-offs yet to be taken by financial institutions despite the huge volume of charge-offs of losses already taken by these institutions and the moderation of the mark-to-market accounting requirements. There is as yet relatively little advance fall-out from the losses still to be realized in consumer credit and commercial real estate, in addition to the persistent losses in residential real estate related paper.

In view of the coming holidays, the next weekly report will be dated Apri 17. Given that I was among the first to call this a bear market rally, even before it developed, as I was among the first anticipate this recession, as well as earlier recessions, keep my bearishness in mind. The rally will not persist. The economy and profits have much further to fall.

Philip Braverman, President
Braverman Economic and Financial Consulting
One Hewitt Square #249
East Northport, New York 11731

Email address: philipbraverman@Gmail.com

Access this and earlier reports by going to internet explorer and typing the following: philipbraverman.blogspot.com

Warning: The bear market rally in equities is running out of breathing room

The equity market rally still has has some room to extend its gains, but not a great deal.

As I indicated in my weekend report before this bear market rally began, the equity market's prior oversold condition, some 32% below the 200-day trailing price average, indicated a rise back to that downtrend line. For example, the S%P 500 stock index hit a low of 666, which indicated a 32% potential rise back to the area of 875 to return the index back to its 200-day average price downtrend. As of this Friday, the S%P 500 stock index closed at 814, after a Friday decline of 17 points. While a bear market rally can overshoot on the high side, it can also undershoot.

Based on the tendency of the market to return to its 200-day moving average (after moving more than 30% above or below that average), there are only some 60 points or some 9% comfortably left in the bear market rally before the overwhelming risk of a renewal of the cyclical decline swamps the market's new-found bullishness. Can I be wrong? Of course. But, the broad array of market and economic evidence suggests otherwise.

Among the most serious risks to the sustained extension of the rally is the prospect of a continued deepening of the recession. The very few positive economic signs of late are highly suspect. That is certainly true of retail sales, home sales and durable goods orders, which are either the product of inflated seasonal adjustments far beyond those appropriate or unsustainable, temporary aberrations. The continuing decline in the economy is reflected in the decline in consumer confidence, personal income, both nonresidential and residential investment,industrial production, the capacity utilization rate, as well as the high level of initial claims for unemployment benefits. Real GDP plunged 6.3% in the fourth quarter, with declines as large or larger virtually assured in both the first and second quarters. Coming reports will create strong headwinds for the rally. The March employment report to be released next Friday is likely to include a drop in nonfarm payrolls as large or larger than the 651,000 February decline and a rise in the unemployment rate to an horrendous 8.5% or higher from 8.1%.

Perhaps even a greater threat to the equity market rally is the prospect of disappointing first quarter corporate earnings reports. Expect surprise declines in earnings from a number of key companies that will force dividend reductions and an erosion of stock prices.

The volitility index, the VIX, remains above the danger level of 40, suggesting equity market vulnerability. And while market sentiment was overwhemingly bearish before the rally began, a contrarian market positive, much of that bearishness has since been replaced with optmism, a contrarian market negative.

The equity market has already priced in a number of potential market positives that are anticipated to begin in April. These include the expected reintroduction of a form of the uptick rule and a modification of the mark-to-market requirement, giving institutions with losses the opportunity to substitute an alternative to extreme distress prices on problem assets. Thus, the announcement of those changes is unlikely to be a spur to buying.

There are unlikely to be any further Federal government announcements ahead that match the stock market positives of the details of the stimulus program, the various efforts to bail out the financial system, the Fed purchase of Treasuries and the consequent reduction of mortgage rates. These are all already in the market. Unfortunately, even with all these efforts and proposed spending, it remains an open question as to whether these efforts will be effective in stemming the recession and the credit crunch any time soon.

The equity market has benefited both from the covering of short positions (leaving a smaller underpinning of shorts still to be covered)and a shift from the bond market.That has not prevented an improvement in the bond market, in Treasuries as well as corporates. For example, Moody's cut the rating on GE Capital bonds to Aa2 from Aaa, a two grade ratings reduction, versus S&P's one grade reduction to AA+ from AAA. But, the rating reductions had been previouly reflected in the exceptionally wide quality yield spreads from Treasuries. That helps explain
why even with the ratings cut and the shift to equities, the yields on long term GE bonds have been declining from a high of 9.5% just a few weeks back to 8.125% currently. This and other distressed corporate bonds remain attractive buys with a view to declines in the excessive default risk reflected in their yields at the first realistic sign of eventual economic recovery.

A growing positive for the bond market, especially distressed credits, is a growing recognition that the rise in the price of credit default swaps, the insurance against debt default, has been partially manipulated higher by short sellers with an eye to driving equity and bond prices lower. It requires only a relatively modest cost to drive the price of a credit default swap higher, thereby creating an exaggerated impression that there is substanially more risk in that company's bonds and stocks than warranted.


Philip Braverman, President
Braverman Economic and Financial Consulting
One Hewitt Square #249
East Northport, New York 11731

Email Address: philipbraverman@Gmail.com

To access this and earlier reports go to internet explorer and type in the following: philipbraverman.blogspot.com

Fed steps up efforts to spur economy

The Fed plan to buy at least $300 billion in Treasury bonds (forecast in earlier blogs)and its increased support for the mortgage market, along with the wide array of Federal government stimulus efforts, will eventually soften the economic and financial pain. But, unfortunately, not for some time. The recession will probably not end until next year or even 2011. The recession is still worsening faster than government efforts to buoy the economy.

The Fed induced decline in Treasury bond yields will help bring mortgage rates down, thereby shortening the length of the housing recession. But there is no end to any aspect of the recession in sight.

Even the new three part Federal program now reportedly being prepared for announcement to buy bank toxic assets in conjunction with the private sector is not likely to be sufficient to turn the tide of progressive recession and financial strain. The new plan presumably will involve an FDIC backed fund to invest in a portfolio of loans along with public-private partnerships. The major problem in buying toxic assets from financial institutions remains deciding on their price. Too low a price that may be sufficient to eventually generate a profit for the new entity would create a loss for the selling institution that would reduce their capital and even put their survival in jeopardy. Too high a price that insures survival of the selling instution would produce losses for the new Federal buying institution. Mortgage-backed debts are threatened by the continuing and prospective decline in home prices. The rising unemployment rate, destined to top 10% or even 11%will create more housing distress, and much lower home prices, as will the continuing rise in foreclosures and huge overhang of unsold and unoccupied homes.

Until the plunge in home prices is arrested, there will be no end to the pronounced financial distress. The primary answer to the decline home prices is to find new buyers for the available overhang of unsold homes. A Federal program to buy vacant the homes, refurbish them and make them available on favorable terms to would be home buyers would help. Offering fast track citizenship to foreign investors who purchase homes would also help stabilize the housing plunge. These approaches would add new home buyers. A moritorium on foreclosures and an end to required bank sales of foreclosed properties would slow the rise in the inventory of unsold homes. As if the continuing residential real estate crisis were not enough, there is a rapidly deepening problem developing in commercial real estate, both in offices and retailing, that together with increasing credit card delinquencies and defaults, will significantly worsen and widen the credit crunch.

Despite the harsh economic and financial reality, the bear-market equity rally still has further to go. But it is not the beginning of a cyclical rise in equity prices. The recession is still deepening, inevitably bringing with it more reductions in earnings, more losses, and more cuts in dividends than the market expects.

Though stock market prices retreated on Friday, they still rose marginally for the week, not only keeping their strong prior week rally intact, but slightly adding to it. The equity market has been up for six of the past nine days. It is not surprising that the market gave up ground on Friday. There is always the risk of adverse market surprises over the weekend, which still far exceeds the potential for surprise gains. However, the market should add to its temporary rise over coming weeks,reversing its still oversold and excessively bearish extremes. But, once it returns to its 200-day moving average, with its decided downward slope, the rally is likely to end amid continuing negative market, economic and financial news. While individual investors put money into the equity market the past two weeks,it is a decided market negative that there is no parallel rise in companies buying their own stock.

The rise in near-term inflation concerns related to the broadening Federal deficit (stemming from the Federal stimulus)and Fed expansion is grossly overblown. Even with a US Federal budget deficit currently estimated at an astronomical 13.7% of 2009GDP and expected to rise further (versus 11.3% for the UK, 3.6% for China and 5.6% for Japan),the major near-term US and global threat is deflation. Inflation will eventially return as an over-riding concern. But not for a number of years. Timing in investment is everything. Despite bouts of inflation concerns, US Treasury bond yields will stay low for years to come. Though it is not sufficient, it is a necessary prerequisite to economic recovery. Thus, it is far too early to expect a recovery in commodities, the main focus and benefit of rising inflation concerns. There is a massive overhang of excess global productive capacity and labor that precludes it.


Philip Braverman, President
Braverman Economic and Financial Consulting
One Hewitt Square #249
East Northport, New York 11731

Email address: philipbraverman@Gmail.com

Access this and earlier reports at the following internet explorer address:
philipbraverman.blogspot.com