What You Have Not Been Told?

Even knowing that the 9.4% US employment rate – the worst in a quarter century is scaring enough!

What the government has not told us is that this official number is grossly understated. It doesn’t even begin to count the millions who suddenly find themselves trying to live on a part-time income or the millions more who have given up looking for a job altogether.

In essence, I believe the worst layoffs are yet to come, not only from giants like Chrysler and General Motors but also from millions of small businesses across America. That will put a big stress to recent bank ‘stress’ tests, which assumed an average unemployment rate of 8.9% this year.

One thing I note is that the unemployment rate is highly correlated with the delinquency rate on mortgages - means that it is now virtually inevitable that mortgages defaults and foreclosures will surge far more.

History teaches us that despite the hype and happy talk coming from Washington and Wall Street, the fundamental trend will always prevail. Please avoid a whole new round of stinging losses! It doesn’t take a rocket scientist to figure out what is coming next. Just connect the dots – consumer spending is 70% of the US economy and those consumers are now either out of work or are terrified that they could be the next to lose their jobs. The message couldn’t be clearer.

Treasury Secretary Tim Geithner traveled to China last week to reassure Chinese officials that they would get the budget in control and that the investment in US bonds is safe. I doubt that Chinese would believe a word of it.

False recoveries are nothing new. This is because major recessions in the past have been interrupted by small upticks in growth. Even if the leading economic indicator (LEI) has hit a cyclical low that doesn’t means the recession is over! History shows that the time between the LEI’s low and the beginning of the economic recovery can be as much as four quarters apart.