by Tyler Durden
Submitted by David Stockman, author of The Great Deformation,
THE BORN AGAIN JOBS SCAM AND THE FED’S TERMINAL INCOHERENCE
No, last week’s jobs report was not “strong”. It was just another edition of the “born again” jobs scam that has been fueling the illusion of recovery during the entire post-crisis Bernanke Bubble. In fact, 120,000 or 62 percent of the June payroll gain consisted of part-time jobs in restaurants, bars, hotels, retail and temp agencies. The average pay check in this segment amounts to barely $20,000 per year, which is a sub-poverty level income for a family of four, and compares to upwards of $50,000 per year for goods producing jobs in the BLS survey.
Altogether, the government has reported 2.8 million of these part-time job gains since the Great Recession officially ended in June 2009, accounting for a predominant share of the ballyhooed pick-up of 5.3 million total jobs. It goes without saying, however, that the principal of one-job-one-vote does not apply in economics. What matters are aggregate dollar earnings. On that front, the Commerce Department figures for total private wage and salary income are just plain punk. Nearly six years on from the December 2007 peak, real payroll disbursements are still down by nearly 1 percent. What kind of “recovery” is that about?
Measured on an income equivalent basis, then, a majority of the big rebound in the BLS headline number has consisted of “40 percent jobs”. Granted, these fractional jobs do provide a monthly feed to headline stalking HFT algos and the gist for the moronic jobs number guessing game conducted by unemployable Wall Street executives otherwise known as “street economists”. But not by a long shot do they prove that the Fed’s money printing spree is beginning to bear fruit, as claimed by the cheerleading section of the Wall Street Journal shortly after the BLS release.
Indeed, once upon a time financial journalists actually worked for a living by digging for facts, rather than simply re-posting the spin issued by Washington’s various ministries of truth. In this instance, even a modicum of investigation by the WSJ would have revealed that the 2.8 million part-time jobs “created” since June 2009 reflect the rebirth of the very same 2.8 million jobs that were first generated between 2000 and 2007. That this obvious fact has been completely ignored is not surprising. After all, the reigning doctrine in the Keynesian puzzle palace inhabited by officialdom and financial journalists alike, calls for digging and refilling economic holes as the national policy of first resort.
The BLS data exhibit this syndrome with uncanny exactitude. In early 2000 there were 34.7 million jobs in the part-time economy. In response to the dotcom crash, the Fed ignited the housing and credit bubbles via Greenspan’s 1% money experiment, causing a consumption boom fueled by home ATM withdrawals and other consumer borrowings. Accordingly, activity rates in leisure and hospitality, retail and personal services (think yoga teachers and gardeners) temporarily soared, with the part-time job count climbing by the aforesaid 2.8 million by late 2007. But this peak of 37.2 million part time jobs was pure bubble economics--- attested to by the fact that every single one of these new jobs vanished during the 18 months of bubble liquidation otherwise known as the Great Recession. Indeed, when the NBER declared the bottom in June 2009, the part-time job count stood at 34.5 million, a hair under where it started at the turn of the century.
Now, after four years of money printing madness, the Russell 20000 has been reflated from 350 to 1000, junk bond yields have dropped from 20 percent to 5 percent, bombed-out housing markets like Southern California and Phoenix are on crawling with speculators and deader-than-a-doornail Fannie Mae preferreds are the new bonanza of the month. The con artists who run Fairholme Capital even claim to own $2.5 billion worth (face value) and are suing the Federal government to collect the vast windfall gain on these mummified securities that has been enabled by Uncle Ben’s free money casino. Needless to say, the massive asset reflation catalyzed by the Fed in these instances and throughout the financial markets has caused the affluent classes to start spending again, thereby reflating the part time jobs bubble as well.
Right on taper time eve, in fact, the June jobs report clocked-in at 37.5 million part-time jobs, that is, virtually dead-on the prior bubble peak level of December 2007. As shown below, however, no jobs have been “created” at all. These part-time jobs have simply been born again, courtesy of the Fed’s delusional belief that its frenzied bond-buying is causing the labor market to heal.
Some kind of faith healing, that! Set aside the serial bubble pumping cycles and examine the longer-term trend in the graph. During the last thirteen and one-half years the Fed’s balance sheet has expanded from $500 billion to $3.4 trillion, and the overwhelming rationalization for this 7X gain is that the nation’s central bank needed to prop-up the financial system and “stimulate” the GDP in order to generate new jobs.
But don’t start the drumroll on that score. On an FTE (full-time equivalent) basis, total growth in hospitality and leisure, retail, personal services and temp agencies, that is, the part-time economy, amounts to just 1.1 million job equivalents during the entirety of this century to date. That’s 7,000 per month. It’s a drop in the proverbial bucket.
The self-evident implication of this born again jobs saga is that the nation’s employment problem is structural and an enduring consequence of the end of the 30-year debt super-cycle, not a cyclical shortfall that can be fixed by juicing the speculative classes. Indeed, a brief glance at the horrid trend in “breadwinner” jobs demonstrates in spades that the problem is structural and therefore wholly outside of the Fed’s remit---even granted its spurious claim that it is printing money with reckless abandon because its “dual mandate” requires it.
The “breadwinner jobs” category includes construction, mining, manufacturing, the white collar professions, business management and support services, financial services, information and technology, government service excluding education, wholesale trade, transportation and warehousing and real estate agents, among others. This is the heart of the Main Street economy, where the average pay-rate is upwards of $50,000 annually---just enough to support a family, at least in some lower cost regions. Here the June BLS report clocked-in at 67.56 million jobs (50 percent of the NFP total), and there was nothing whatsoever impressive about the number. As shown below, breadwinner jobs have been shrinking at a stunning rate for the entire duration of the 21st century.
During the second Greenspan Bubble in housing and credit, which was celebrated to the bitter end by Wall Street touts as the “goldilocks economy”, a very telling trend unfolded: On a peak-to-peak basis, not a single new breadwinner job was created, even as the Fed’s measure of household net worth (flow-of-funds report) soared from $43 trillion to $67 trillion over this seven year period. All that gain in bubble wealth, yet the count of breadwinner jobs was static at 71.9 million!
And then the real carnage began. By the bottom of the Great Recession nearly 8 percent, or 5.7 million, of these breadwinner jobs had disappeared. Worse still, most of them are still gone, notwithstanding four years of furious money printing and month-after-month of “encouraging” headline job gains. All told, the 1.3 million pick-up in breadwinner jobs since June 2009 amounts to just 25 percent of the recession period collapse. Stated differently, at the anemic rate of breadwinner jobs recovery during the four-year Bernanke Bubble to date, it would take until 2025 to get back to the level that existed in January 2000---a time when the nightmare of a George W. Bush presidency was only a mote in Karl Rove’s politically myopic eye.
Unfortunately, in the vocabulary of late night TV, that’s not all. About 15 percent or 11.1 million of these breadwinner jobs are accounted for by local, state and Federal payrolls outside of education. And from an income viewpoint, these are the top tier because average government payroll disbursements (excluding benefits) amount to more than $65,000 per year. Yet a funny thing happened on the way to today’s taper-time-turmoil. Through June 2009 government payrolls grew by 10 percent from the turn of the century level. Only after the fiscal stimulus frenzy of 2008-2009 finally exhausted itself did the government job count finally roll-over during the last several years and begin an inexorable long-term decline, as the nation descended into permanent fiscal insolvency.
Thus, the miserable breadwinner job trend shown below actually understates the nation’s structural employment problem---even as that cardinal reality remains virtually unknown to our feckless monetary politburo. To be precise, there were 61.5 million full-time breadwinner jobs in the private sector during January 2000. Setting aside the shrinking government sector jobs embedded in the graph below, there were just 56.5 million private sector breadwinner jobs contained in the allegedly “robust” report for June 2013.
Indeed, we have been losing private sector breadwinner jobs at the rate of 31,000 per months for thirteen and one-half years running. Yet the Keynesian money printers who inhabit the Eccles Building insist that the problem is cyclical and that just a few more months of lunatic bond-buying will bring the labor market back to full employment health. If the Cramer noise machine had a “sell” button, it would be screaming at the top of its lungs.
Of course, it is no mystery as to why we have a structural employment problem and why the Fed’s monetary madness will only produce recurring cycles of boom and bust in both risk assets and born-again jobs. The fact is, two and one-half decades of Greenspan-Bernanke monetary profligacy have resulted in the off-shoring of much of America’s tradable goods sector—so the Main Street economy’s potential growth and productivity have been deeply impaired. Likewise, the Fed fueled an extended run of artificial GDP expansion via the buildup of massive credit market debt (from $10 trillion to $57 trillion during that 26-year period), but the America economy has now exhausted it capacity to take on more leverage. And during all that time the Fed’s interest rate repression and stock market coddling policies were generating countless growth and wealth destroying deformations and malinvestments throughout the nation’s economy.
For instance, the combination of Fed interest rate repression and fiscal subsidies through the tax code and the GSEs caused massive mis-allocation of capital to new housing and the related strip-mall infrastructure. But when the housing bubble finally collapsed and the market attempted to drastically mark-down inflated asset prices and drive capital out of the sector, the Fed crushed the pricing mechanism in mortgage and real estate markets, re-ignited the housing refi machine and caused capital to once again flow up-hill.
The sight of $5,000 suits riding into Scottsdale AZ on the back of John Deere lawnmowers while carrying brief-cases full of 2 percent wholesale money in order to become buy-to-rent-and-flip single family landlords says all that is necessary about the extent of growth and job-destroying resource mis-allocation that have been enabled by the nation’s monetary central planners. Likewise, until the taper scare slightly sobered-up fixed income markets during recent weeks, the LBO strip-mining machines were back at work substituting cheap debt for payrolls, that is, implementing endless rounds of job “restructurings” in order to pay the interest. And the stock buyback machines in the corporate sector were working over-time leveraging up balance sheets, not to acquire productive assets, but to fund record share buybacks---thereby goosing stock prices and the value of executive options.
Indeed, here the myth of deleveraging has reached its apotheosis. Business sector debt, according to the Fed’s Z1 report, is now just shy of $13 trillion. That’s up $2 trillion or nearly 20 percent from the 2007 pre-crisis peak, and represents an all-time record at 81 percent of GDP. By contrast, the fabled cash hoard of American business is up by less than $400 billion since December 2007----hardly evidence that there is massive corporate cash on the sidelines waiting for Bernanke to give the all-clear.
In short, Fed policies are mangling the Main Street economy by disabling the pricing mechanism in all financial markets, diverting capital to unproductive speculation and rent-seeking and leaving genuine entrepreneurs and businessmen adrift in a fog of financial disorder. Needless to say, the result is tepid growth of incomes and jobs----a lamentable condition that the Fed cannot fix with “moar” monetary stimulus because decades of the latter are what has caused the problem.
More importantly, the impossibility of fixing a structural problem with Keynesian cyclical medicine means that the monetary politburo will descend into an ever more incoherent babble as the “incoming data” fail to match its clueless forecasts. In this regard, not only were Wednesday’s minutes an embarrassing exercise in Washington pettifoggery, they were also self-evidently a fraud and lie-----spun well after the meeting in an attempt to undo Bernanke’s original message. It is bad enough that the nation’s vast, infinitely complex $16 trillion economy is being run by an unelected 12-person monetary politburo. But now the commissars have completely lost both their bearings and their credibility.
Under these circumstances healthy capitalist financial markets would be afraid---very afraid. But there are no honest markets left----just a big romper room where the boys and girls and algos endeavor to extract windfalls from central bank word clouds. Still, the magnitude of the deformation that the Fed has wrought in the financial system cannot be under-estimated: there remain even now tens of thousands of punters, fund managers and home gamers who do not see the Fed’s desperate incoherence, believing instead that “the market is cheap” and that buying the dips is a no loose proposition.
Let’s see. At the last bubble peak in early October 2007, the S&P 500 was only 100 points (or 5%) below today’s lofty peak, and it was deemed to be cheap by the 11th hour bulls at that moment because forward earnings were projected to be $110 per share, thereby trading at less than 16X. As it happened, 2008 earnings ex-items came in more than a tad lower---- at $55 per share to be precise and actually at only $15 on the basis of honestly reported GAAP earnings.
In truth, at that moment in time financial bubbles---subprime, CDOs, monster LBOs, a raging Russell 2000--- were evident everywhere in the financial system. So in late 2007 the market was not cheap even on a paint by the numbers basis. At the end of the day, the only honest and reliable earnings number in today’s deformed capital markets is 12 month trailing GAAP EPS. The billions that Washington wastes on financial cops each year policing corporate SEC filings at least accomplish that much. At the 2007 peak, therefore, the market was actually trading at 19X earnings on an honestly accounted basis.
So here we are again, and the LTM earnings number on a GAAP basis for the S&P 500 is $87.50 per share. We are back at 19X trailing profits. Too be sure, forward earnings ex-items are exactly as before---once again at $110 per share. So the market is purportedly “cheap” but here’s the skunk in the woodpile: honest LTM GAAP earnings have been stuck at $87 per S&P 500 share for seven quarters---since Q3 2011. In short, true earnings are not growing, China and the BRICs are rolling over, Europe is sinking into economic somnolence, Japan is a massive financial train-wreck waiting to happen, and based on the latest data it would appear that US GDP growth will average hardly 1% during the three-quarters thru June. That’s stall speed, yet the gambling machines which occupy Wall Street rage on because they believe that Bernanke has their back, that this business cycle will never end and that this latest and greatest financial bubble will never be allowed to collapse.
Why would they believe Bernanke when he has become so lost in his own intellectual fog that he can’t even give an honest number for the inflation rate, which he spuriously claimed to be 1 percent and therefore below target during yesterday’s conference in Boston. Even on the preposterous assumption that PCE less food and energy actually measures the cost of living for carbon-unit inhabitants of America, there is no 1% number to be found except on a fleeting short-term basis. The inflation rate under Bubbles Ben’s preferred measure, has been 1.7 percent, 2.1 percent and 1.9 percent on a two-, seven- and thirteen-year basis. The Fed is thus not furiously running the printing presses because it is under-shooting inflation. It is printing because it is scared to death of the raging gambling machines it has unleashed throughout the financial system.
So Bernanke promises to keep the money market and repo rates----that is, the poker chips for the casino----at zero until “well after” the unemployment rate drops below 6.5 percent. But it will never get there because the jobs market and Main Street economy are structurally broken. Indeed, measured on a consistent basis, the unemployment rate is still over 11 percent based in the labor force participation rate of late 2008 and is over 13 percent based on the labor force participation rate at the turn of the century.
And no, that can’t be explained away by the baby boomers going on Social Security. During January 2000 there were 75 million Americans over age 16 that did not hold a job. Today there are 102 million in that category---about 27 million more. Yet the number of participants in OASI (old age social security) is up by just 6 million during the same period. Moreover, there is no doubt about what happened the other 21 million citizens: they are on disability, food stamps, welfare or have moved in with friends and relatives or landed on the streets in destitution.
In short, the US economy is failing and the welfare state safety net is exploding. And that means that the true headwind in front of the allegedly “cheap” stock market is an insuperable fiscal crisis that will bring steadily higher taxes, lower spending and a gale-force of permanent anti-Keynesian austerity in the GDP accounts. And for that reason, the Fed’s strategy of printing money until the jobs market has returned to effective “full employment” is completely lunatic.
As shown in the graph below, the remaining jobs in the NFP report for June are accounted for by the HES Complex----that is, health, education and social services where the June job count clocked in at 30.8 million. The self-evident headwind here is that the HES complex is effectively a ward of our bankrupt state. Nearly all of the funding is attributable to massive tax subsidies for employer provided health insurance, the ballooning cost of Medicaid and Medicare, soaring subsidies which will soon be arriving under the Obamacare health exchanges, and the near total dependence of the education system on the public purse, most especially the runaway student loan program.
There are two powerful trends embedded in the graph that make a mockery of the labor market obsession of Fed governors like Evans, Dudley, Yellen and Rosengreen, to say nothing of the money-printer-in-chief. First, as the fiscal vice tightens, the rate of job growth even in this long-time bastion of employment gains has slowed sharply. The pick-up averaged 49,000 per month during the Greenspan Bubble, fell to 40,000 per month during the Great Recession and has cooled to only 24,000 per month during the Bernanke Bubble of the last four years.
But should job growth in the HES Complex grind even lower, which is a near fiscal certainty, the proverbial naked swimmers will get full exposure. That is to say, outside of the HES Complex, the count of non-farm payroll jobs has been shrinking on a net basis for this entire century! There were 106.5 million non-HES Complex jobs in January 2000 but more than 13 years later last month’s “strong” report sported only 105 million!
So what is happening at bottom is that Bernanke is printing money so that Uncle Sam can keep massively borrowing, and thereby fund a simulacrum of job growth in the HES Complex. Call it the Bed Pan Economy.
When it finally crashes, Ben Bernanke will be more reviled than Herbert Hoover. And deservedly so.
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