China announced a half trillion dollar stimulus plan over the weekend (November 9th) – and naturally – stock markets rally in China and Europe - and the DJIA is expected to rise as well. Countries around the world continue their attempts to revive the world’s economy using the same methods that are destined to fail. Stock markets rally on this news because they see more cheap money flowing into the system and they ignore the underlying economic data – even though all of the economic data is pointing to a deep, global recession. The following headlines (all published over the past couple of days) are telling us what’s happening in the real economy – and sooner rather than later – stock investors are going to realize this.
“General Motors Corp. and Ford Motor Co. posted steep losses in their core operations and together burned through a staggering $14.6 billion in cash in the third quarter, raising the possibility that Washington may have to step in to finance a historic downsizing of the U.S. auto industry.”
“Regulators seized a $5.1 billion Houston bank led by mortgage-bond-pioneer Lewis Ranieri and a small bank in Los Angeles Friday, raising the number of bank failures this year to 19 and showing how even the most experienced financial executives are struggling to survive the financial crisis. Prosperity Bank, of El Campo, Texas, agreed to assume the $3.7 billion in deposits held by Franklin Bank, of Houston, and purchase $850 million in assets, leaving the Federal Deposit Insurance Corp. to dispose of the remaining $4.25 billion. (Nov 10, 2008)”
“Troubled electronics retailer Circuit City Stores Inc. filed for Chapter 11 bankruptcy Monday in an effort to stay ahead of lenders owed $898 million.”
“Nortel Networks swung to a $3.41 billion third-quarter loss and said it plans to eliminate 1,300 jobs as the economic slowdown hurt its financial performance. The Toronto-based company also plans to introduce salary and hiring freezes, cut or consolidation of executive and management positions and suspend certain preferred-share dividends.”
“Dish Network Corp. posted a 54% decrease in third-quarter net income on an investment-related charge and a second-straight quarterly reduction in subscribership while sister company EchoStar Corp.'s net loss widened on a similar charge.”
“Silicon Valley is drowning in "underwater" options. But with the stock market in turmoil, investors might be uneasy bailing out high-tech employees. Employees at scores of companies, including Yahoo Inc. and Google Inc., are holding stock options, the right to buy shares at a preset price, that have been rendered virtually worthless because those companies' shares have fallen below the exercise prices.”
“The global financial crisis claimed a high-profile casualty in the former Soviet Union over the weekend when Latvia's biggest home-grown bank was effectively nationalized by the Baltic nation's government.”
“Mail and logistics company Deutsche Post AG said it will cut 9,500 jobs and close all of its DHL express service centers in the U.S. amid heavy losses in the market there. In a statement released Monday, the German company said that new round of cuts are on top of 4,500 job cuts it already announced and blamed heavy losses at the unit, which competes with rivals UPS Inc. and FedEx Corp.”
“Fannie Mae's third-quarter net loss widened on a $21.4 billion write-down of deferred tax assets it would have used to offset taxes on future profits, showing the red ink at the government-sponsored provider of funds for home mortgages isn't expected to end soon.”
“U.K. factory gate prices declined at a record pace in October, as oil prices continued to fall sharply on concerns that the world economy is sliding into recession, data from the Office for National Statistics showed Monday.”
DONGGUAN, China – “Workers have flocked to southern China for plentiful manufacturing jobs in industries that offer better pay than farm work. Now, they are finding themselves in an unusual jam: lining up for increasingly scarce employment.”
Chris Martenson has written a blog post below showing the perverse logic of the world’s stock markets. As always, he’s done an excellent job of presenting the truth of what’s really happening.
Jobs report shows 240,000 losses and more Fuzzy Numbers
Friday, November 7, 2008, 11:44 am, by cmartenson
The Dow Jones is up roughly 225 points on the news that 240,000 people lost their jobs in October. This perverse sort of reaction defines how Wall Street works. Wall Street cheers this sort of news, because it implies that another rate cut is on the way.
So the logic boils down to this: The worse the news, the greater the chance that the Fed will shower us with even more cheap money.
In a more perfect monetary system, good news would be rewarded and bad news would be punished but that is just not how Wall Street works. Quite the opposite.
Of course, nobody ever seems to question this logic, or whether it even makes any sort of sense at all. To my way of thinking, the problems we are now experiencing stem from having entirely too much cheap money flooding the system for too long, and so I greet every new rate cut and Fed liquidity program with a grimace, knowing that they will merely prolong the agony.
But Wall Street cheers the prospect of cheap money and new credit, because it is those sources of funds that perpetuate their amply-rewarded jobs.
Meanwhile today is "job report Friday," and the news was predictably bad, but not as bad as 'expected'.
U.S. Unemployment Rate Climbs to 14-Year High of 6.5%
Nov. 7 (Bloomberg) -- The U.S. unemployment rate rose to the highest level since 1994 as companies slashed payrolls, setting the stage for the steepest economic decline in decades and a tough start for Barack Obama’s presidency.
The jobless rate rose to 6.5 percent in October from 6.1 percent the previous month, the Labor Department reported today in Washington. Employers fired 240,000 workers after a loss of 284,000 in September, the biggest two-month slide since 2001.
“We’re heading for a deep recession -- banish the word mild from your vocabulary -- it’s big, it’s bad and it’s broad-based,” said Nariman Behravesh, chief economist at IHS Global Insight in Lexington, Massachusetts.
This data fits in with the general theme of this recession being unlike any in recent memory. In my estimation, the job losses are just getting started, and we can fully count on another 12-18 months of increasing losses.
I reserve the possibility that the total number of losses could be far worse than any prior recessions, for two reasons. First, this is the largest credit bubble ever to burst, so this means the bottom will be lower than any prior events. The second reason is that the US is now an 80% service-based economy. Those jobs are easy come, easy go, so the number of them that "go" could be a real shocker.
And, of course, these numbers would have been a lot worse if the venerable Birth-Death model at the BLS had not added (yes, that's right, added) an additional 71,000 jobs back onto the sampled losses.
This is beyond preposterous. Certainly by now, if this were an honest mistake of honest statistical modelers, they would have admitted publicly that their model is clearly broken and in need of repair.
I am certain that we've been in recession since February, and yet, during that time the BLS job modelers have added 1,180,000 jobs to the official landscape.
The Birth-Death model, despite negative GDP, negative spending, negative industrial output, and negative hiring activity, has not recorded a single losing month from February onwards. How is that even remotely possible? Perhaps they should rename it the Birth-Birth model?
As a sanity check, note that the model has added construction jobs in each and every month, without exception, despite the largest fall-off in residential construction ever on record.
One wonders what is in this model? If I were building such a model, I would use inputs such as "spending activity" and "units built/shipped" as my drivers.
I strongly suspect that their "model" is little more than this formula: (prior amount of jobs) x (some factor).
At any rate, after subtracting out these mythical 71,000 jobs for October, the reported number would have been -311,000 jobs.
Worst of all, I suspect that all 1,180,000 jobs added by the Birth-Death model are in error and will have to be removed from the official numbers in the future.
This constant fibbing to ourselves about the true state of affairs is harmful because it prevents accurate diagnosis and treatment of what ails us.
It's time to stop, and I call upon somebody at the BLS to please come forward with the truth.