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
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