Thursday, July 2, 2009

It All Comes Down to DEBT and JOBS


Interesting day today eh? Stocks plunged as the jobs report came in much higher than expected. Unemployment rose to 9.5% as we lost another 467,000 jobs. Unemployment has basically doubled in the span of only one year.

Folks, I don't know how else to say this: The economy is collapsing at an unprecedented rate. I expect to see the unemployment rate at over 10% by the end of the summer. If you recall, the Fed's worse case scenario when they ran the stress tests on the banks was a 10.3% unemployment rate. I think we will easily be there by the fall. Perhaps this should have been their best case scenario? Idiots!

David Tice was just interviewed on Bloomberg. He predicts that unemployment will peak at somewhere between 12-15%. He also predicted that the US will enter into a depression. Yikes!


Nassim Taleb was on CNBC this morning talking about the failure of the financial system.
Taleb believes that between $40-70 TRILLION in debt must be cleared from the system in order ro recover.

He basically predicts that the system will fail because it has become too big and fragile. Like Fergusun said yesterday, he thinks that the Fed's solution to this debt problem is doomed.

Taleb and everyone else KNOWS that Bernanke's continued attempt to pump up the price of assets is not the solution and will result in a horrific failure. Nassim says Bernanke must accept and allow the inevitable deleveraging process of the financial system back down to what he calls "an equilibrium".

Ben will go down as a complete failure when the history books are written IMO.

Enjoy Nassim!

Debt Debt Debt!

In my view, almost all of the great thinkers that don't have a personal incentive to keep stocks propped up have all come to the same conclusion. Our debt burden will prevent any recovery until its cleared!

Sadly, the government currently refuses to clear most of the the debt thats clogging the system. Until they are willing to do so, this financial crisis will continue to worsen. The problem is I believe the Fed has isn't confident that our fragile financial system can survive a massive debt default.

I am beginning to fear that our financial system WILL fail no matter which way we exit this crisis. Perhaps we need to start working on creating a new system that will never allow this to happen again. We need a system that controls risk, has full transparency, and strong fundamental regulation.

We currently see none of this in our current system. Our system is currently filled with thieves, zero transparency, and companies that are deemed "too big to fail".

If we don't change what we are doing, we are risking a catastrophe that could take several generations to fix.

Take a look at the forecasted debt to GDP ratio's if we continue on this path:

My Take:

Ok, lets put this in perspective: Basically most of the ratings agencies declare a country bankrupt if their debt to GDP ratio hits 100%. The last time we hit these levels was after the massive run up in debt that was needed to fund WWII.

The chart above is conservative. Some believe that we may hit 100% of GDP within 5 or 10 years. Once this happens you can kiss our currency goodbye because no one will believe that we will ever pay be able this debt back at that point.

The real concern is a generation or two from now when the cost of health care and social security really start to ramp up to ridiculously unaffordable levels. The cost of supporting the retiring baby boomers is absolutely staggering, and it will haunt us for decades if we don't do something to fix it.

This model is totally UNSUSTAINABLE! We cannot survive as a country economically with 600% debt to GDP.

Bottom Line:

I think the jobs number today was a sobering wake up call for the bulls. We failed to see any follow through on last months promising improvement. The positive economic data seen in the past few months was nothing but a head fake. After a crash like we saw in Q4 '08 and Q1 of '09 we were bound to see some improvement in some areas. Nothing goes straight down.

The market was open an extra 15 minutes today due to technical glitches which was very bizarre. Stocks continued to sell off during this time.

Mole over at the Evil Speculator and others are much better sources for TA but let me give you my quick little take.

We firmly broke through 900 on the S&P. The next level of strong resistance is 880. I wouldn't be surprised to see us head down and test this. We closed at 896 today and sold off to 891 after hours.

If this doesn't hold things will get very interesting.

I have been getting more more bearish by the day the past two weeks as we continued to wander around in the low 900's. Today's break through could be significant. The bulls appear to now be on the defensive. Let's see if they decide to sell this rally and take profits.

If they do, things could turn real ugly fast.


Anonymous said...

Taleb is always interesting.

Jeff, Allow me to put in a plug for Niall Ferguson's PBS series beginning July 8 titled, Ascent of Money.

Barry Ritholtz posted a link to the first hour. It's here:

I just began watching it. Great!

jeff said...


Always feel free to share any information/links on here.

This is an open forum!

I will definately check it out.

jeff said...


7 bank failures were announced by the FDIC tonight.

Thats a record. We had 5 last week. The pigmen are starting to drop like flies:)

Minton Mckarkquey said...

Apparently if you include unemployment up to U6, it's more like 15% or so - obviously it's little harder to measure with the inclusions, but even anecdotally unemployment is starting to look like a much bigger number than 9.6%.

Taleb's number is an interesting one, since the level of fraud is so massive I wouldn't be surprised at $40-70tn. I'm more concerned at how it impacts the average person, since all the effort so far has been to insulate the rich. If this continues, there will be blood in the streets - whatever happened to government "by the people for the people"? When did it become "by the corporations for the rich"?

Things are starting to accelerate into the next dip now - just as you were saying weeks ago about the Great Depression pattern. It's seriously going to hit the fan. You cannot start talking about green shoots when unemployment shows no sign of stopping and our second largest state goes effectively bankrupt (btw, many friends of mine who have companies servicing the state are freaking out about the IOUs and think it could be the final straw for their companies). Can we just shut off CNBC and start talking about reality?

Well, folks, all the best for the 4th - I hope you and your families enjoy the festivities and take care.

CT-Hilltopper said...

Jeff, you are far too optimistic.

This already IS a depression.

I agree totally with that Harvard professor in the previous post. Only I have been calling this a depression almost from the first. I don't have the Harvard background, but I know a Depression when I see one. My parents lived through the first one, and my oldest brother and sister grew up while the Depression was resolving, and I heard all about it for most of my life.

When this started happening, and the stock market crashed, I was amazed at how uncanny the whole thing was, and how history does repeat itself.

The Harvard professor was right about another thing too. This Depression will affect us differently because of our being a debtor nation. We will pay a high price for that.

The economy has been collapsing around our heads for years, we just haven't been aware of the signs. There was too much irrational exuberance. But even during the periods of irrational exuberance, American jobs were disappearing. Middle class jobs were being outsourced to India, China, and other offshore countries. While these jobs were disappearing, the people being displaced in the job market could either go back to school and learn how to do jobs in different sectors which were considered "hot", work part-time or work for a temp agency for a cut in pay and no benefits, or go work in the service industry (Wal-Mart)and take a huge pay cut just to keep food in the table and pay the mortgage.

I won't hold my breath waiting for the government to call it a Depression. I don't hold my breath waiting for my government to do much of anything but screw up, to be quite honest. They're only in it for themselves. They're not in it for you and me anymore.

Anyone who thinks they are..I have some nice swampland I'd like to sell you. It only drains when it rains.

jeff said...


Great thoughts

That point around your friends is interesting.

I would imagine IOU's would suck if you work with the state.

Things are sooo crazy right now.

Enjoy your 4th as well!

jeff said...


Oh I agree!

We are in a depression.

There is no doubt in my mind. My grandfather also talks about the depression.

I have learned a lot from him. It affected him so much that he stuck in munies throughout the '90's even though stocks were booming.

I suspect future investors will seek high yields from their investments.