January 11, 2010

1) President Obama could not have looked more morose in reacting to the news that the December nonfarm payroll showed a further loss of 85,000 jobs, taking the unemployment rate to 10%. It's really tough to put lipstick on this pig. Some 4.2 million have lost jobs on Obama's watch, and 7.2 million since the recession began in December, 2007. Total unemployment now stands at 15.3 million, and 25 million if you used the U6 figure that includes discouraged workers. Some 661,000 dropped out of the workforce, the duration of unemployment lengthened, and what real hiring did occur, was only among temporary workers, who gained 47,000 jobs. These are not exactly the sort of numbers that are going to send you shooting out of the blocks in the sprint towards the midterm elections. It is screamingly obvious now that while big business has stopped large scale layoffs, they are just plain not hiring. Perhaps they see the same thing as me, the deadening impact of a slowdown in government spending, or worse, a double dip recession, that would kill them if they started adding overhead now. They have also probably figured out that starving, bankrupt consumers don't buy much. Perversely, this means that productivity will keep soaring, as will corporate profits, which is how the stock market was able to hold its own today, despite the dismal figures. There is no doubt that the administration will take the message home that not only was the last Keynesian inspired stimulus package too small, another one is needed immediately. But you can bet the next one will be far more jobs focused than the last, which had more pork than a Chicago slaughterhouse. How about a new interstate system? That would be nice. Conservatives will be outraged, insisting that the only way to economic salvation is to put more money in consumers' pockets though tax cuts. This will certainly mean bigger deficits, followed by more borrowing, and then higher taxes. It also makes the Fed's public discussion about winding down quantitative easing a bit awkward. Expect zero interest rates to take on a new lease on life. To support the piece I wrote on January 7 claiming that job growth has been zero (click here for the story)for the last decade, check out the table below.

2) I am the options whisperer. They talk to me, and I listen. At the end of 2009, enormous selling of near money calls and buying of out-of-the-money puts meant that the sophisticated investors who do this stuff, like hedge funds, were expecting the market to fall. To drill down further, REIT's saw some of the most bearish bets, a sector that inhabits my own list of short selling candidates. Unfortunately, they generated such a large short interest, they created a self fulfilling prophecy for the opposite. That's what's delivering the daily rises in the indexes so far this year. The dynamic hedging these positions demand might be just enough to squeeze the last ten percent out of this move up. The average bull market is 17 months, and we are 10 months into this one. But if last year is any guide, history is worthless and will only get you in trouble. Retail participation in this rally has been absolutely zip, all their money pouring into bond funds instead. No one yet knows what the 'new' normal is. I'd hold back before piling on any shorts of real size. Just thought you'd like the heads up.

3) Thanks to China's 'one child only' adopted 30 years ago, and a cultural preference for children who grow up to become family safety nets, there are now 32 million more boys under the age of 20 than girls. Large scale interference with the natural male:female ratio has been tracked with some fascination by demographers for years, and is constantly generating unintended consequences. Until early in this century, starving rural mothers abandoned unwanted female newborns in the hills to be taken away by 'spirits.'.Today pregnant women resort to the modern day equivalent by getting ultrasounds and undergoing abortions when they learn they are carrying girls. Today millions of children are 'little emperors,' spoiled male-only children who have been raised to expect the world to revolve around them. The resulting shortage of women has led to an epidemic of 'bride kidnapping' in surrounding countries. Stealing of male children is widespread. The end result has been a barbell shaped demographic curve unlike that seen in any other country. The Beijing government says the program has succeeded in bringing the fertility rate from 3.0 down to 1.8, well below the 2.1 replacement rate. As a result, the Middle Kingdom's population today is only 1.2 billion instead of 1.6 billion. Political scientists have long speculated that an excess of young men would lead to more bellicose foreign policies by the Middle Kingdom. But so far the choice has been for commerce'?to the detriment of America's trade balance. Economists now wonder if the practice will also understate China's long term growth rate. Parents with boys tend to be bigger savers, so they can help sons with the initial big ticket items in life, like an education, homes, and even cars. The end game for this policy has to be the Japan disease; a huge population of senior citizens with insufficient numbers of young workers to support them. The markets won't ignore this.