Stubborn Facts

“Facts are stubborn things; and whatever may be our wishes,
our inclinations, or the dictates of our passion, they
cannot alter the state of facts and evidence.”

—John Adams

A More Detailed and Realistic Look at Unemployment

We’ve long been skeptics of “official” government figures. And we leave it to John Williams at Shadow Government Statistics to paint a more detailed and accurate picture of the U.S. unemployment rate. As believers in the maxim “pictures paint a thousand words” – to us, the Shadow Government Statistics Chart below is an eye-opener.

Per Williams’ site the unemployment stats in the chart are explained as follows:

“The U-3 unemployment rate is the official monthly headline number.”[1]

“The U-6 unemployment rate is the Bureau of Labor Statistics’ (BLS) broadest unemployment measure, including short-term discouraged and other marginally-attached workers as well as those forced to work part-time because they cannot find full-time employment.”[2]

“The seasonally-adjusted SGS Alternate Unemployment Rate reflects current unemployment reporting methodology adjusted for SGS-estimated long-term discouraged workers, who were defined out of official existence in 1994 (our emphasis). That estimate is added to the BLS estimate of U-6 unemployment, which includes short-term discouraged workers.”[3]

In other words, the chart indicates the “real” unemployment rate is far higher than the headline 10% rate. When short-term discouraged and marginally-attached workers, those forced to work part-time because they cannot find full time employment, and long-term discouraged workers are added together – the U.S. unemployment rate hovers around 22%.[4]

A Sobering Assessment

In our January 8th commentary “Man of the Year” – we included a chart showing that we now may be in the “eye” of what could turn out to be a mortgage re-set hurricane.

In his January 10, 2010 commentary at www.telegraph.co.uk titled, “America slides deeper into depression as Wall Street revels” – Ambrose Evans-Pritchard writes:

“The labour force contracted by 661,000. This did not show up in the headline jobless rate because so many Americans dropped out of the system. The broad U6 category of unemployment rose to 17.3pc. That is the one that matters. Wall Street rallied. Bulls hope that weak jobs data will postpone monetary tightening: a silver lining in every catastrophe, or perhaps a further exhibit of market infantilism.

The home foreclosure guillotine usually drops a year or so after people lose their job, and exhaust their savings… Realtytrac says defaults and repossessions have been running at over 300,000 a month since February. One million American families lost their homes in the fourth quarter. Moody’s Economy.com expects another 2.4m homes to go this year. Taken together, this looks awfully like Steinbeck’s Grapes of Wrath… The home seizures are occurring despite frantic efforts by the Obama administration to delay the process… This policy is entirely justified given the scale of the social crisis. But it also masks the continued rot in the housing market, allows lenders to hide losses, and stores up an ever larger overhang of unsold properties. It takes heroic naivety to think the US housing market has turned the corner (apologies to Goldman Sachs, as always).

The fuse has yet to detonate on the next mortgage bomb, $134bn (£83bn) of “option ARM” contracts due to reset violently upwards this year and next. US house prices have eked out five months of gains on the Case-Shiller index, but momentum stalled in October in half the cities even before the latest surge of 40 basis points in mortgage rates. Karl Case (of the index) says prices may sink another 15pc. “If the 2008 and 2009 loans go bad, then we’re back where we were before – in a nightmare.” David Rosenberg from Gluskin Sheff said it is remarkable how little traction has been achieved by zero rates and the greatest fiscal blitz of all time. The US economy grew at a 2.2pc rate in the third quarter (entirely due to Obama stimulus). This compares to an average of 7.3pc in the first quarter of every recovery since the Second World War… For the record, manufacturing capacity use at 67.2pc, and “auto-buying intentions” are the lowest ever.

The Fed’s own Monetary Multiplier crashed to an all-time low of 0.809 in mid-December. Commercial paper has shrunk by $280bn ($175bn) since October. Bank credit has been racing down a hair-raising black run since June. It has dropped from $10.844 trillion to $9.013 trillion since November 25. The MZM money supply is contracting at a 3pc annual rate. Broad M3 money is contracting at over 5pc.

The stock market has become a lagging indicator. Tear up the textbooks.”[5]

Sobering words indeed. And while Mr. Pritchard’s commentary reflects his personal opinions – it’s also loaded with cold, hard, facts which, as unpleasant as they may be – are difficult for us to deny. And we’re in the fact business. Rather than denial – we’ve chosen to embrace the facts – because after all, they’re what reality is based on. And only in reality lies opportunity.

As we enter this critical time – now, more than ever – we believe investors need to focus on their investment strategies. Those readers who are clients are fully aware of the strategies we’re implementing in light of unfolding economic circumstances. Others may feel free to contact us to learn more.

Sincerely,

Stephan R. Ernharth, JD, AIFA
Vice President
Ernharth Group
www.ernharth.com

Go to www.ernharth.com/economic-commentaries to read past articles from our Economic Commentary series.

1.Shadow Government Statistics; Alternate Unemployment Charts; January 8, 2010
2.Ibid.
3.Ibid.
4.Ibid.
5.Telegraph.co.uk; “America Slides Deeper Into Depression as Wall Street Revels”; January 10, 2010