End of an Era
By ALAN ABELSON
Prepare for meaner slumps and less exuberant recoveries. The jobs report tells only half the bad news.
WHAT CAN YOU SAY ABOUT JUNE? IN A FAMILY MAGAZINE, THAT IS. Except good riddance.
It was, as Dubya might put it, a heck of a month. But that doesn't quite convey how very distinctive and how awfully bloody it was. Great for ghouls, vampires and short sellers. Bad for just about anyone else with a pulse who happened to own as much as one solitary share of stock.
Of course, if you had invested your dough in a nice little oil well somewhere you probably feel like a million bucks and your net worth must feel even better. Or, if you were one of those dastardly speculators who, sneering all the while at the world's hungry millions, took a flier on wheat, while steering clear of zinc, June was a positively lovely month.
But if you're the diehard equity type, as so many of us innocents are, you suffered the agonies of poor old Job. For the sad truth is, to find an equal to how bad June's stock market was. you need to go all the way back to 1930, when the fall-out from the Great Crash was wrenchingly evident and the bodies were still hitting the pavement on Wall Street.
If it's any consolation, the elite billionaires as well as we poor investment peasants have been roughed up by this year's cruel and vicious market. We can offer you that solace, thanks to the efforts of crack researcher Teresa Vozzo, who secured the data from an interesting Website dubbed GuruFocus.com
As its fairly repellent name may give you a hint, GuruFocus tracks the stock picking performance of 55 mostly famous (and usually rich) investors including the likes of Warren Buffett, George Soros, Dave Williams, Glenn Greenberg, Carl Icahn, Ron Baron, David Dreman, Edward Lampert, Bill Miller, Marty Whitman and Seth Klarman. We know a number of these fine gents and even like a few of them.
According to GuruFocus, in the first half of this year, only four of the 55 bought stocks that collectively scored a gain. This lucky quartet was headed by T. Boone Pickens, the oil maven, whose stock purchases in the first half of the year were up a nifty 23%; Ken Heebner, whose equity buys averaged a 14.5% rise; Steve Mandel, who enjoyed a 10.1% average gain on the shares he bought in the opening six months, and David Winters, who posted a 3.8% appreciation.
The worst losers were Marty Whitman, whose first-half picks were down 43.9%; Mohnish Pabrai, whose buys were down an average of 41.9%; and Bill Miller, whose purchases, on average, lost 38.5%. No need, we hazard, to pass the collection plate.
THE BANK FOR INTERNATIONAL SETTLEMENTS -- BIS, for short, and blessedly less of a mouthful than the official moniker -- has been around four score years and thus seen it all: panics and booms, recession, depression and bountiful prosperity, inflation, disinflation and that particularly ugly hybrid, stagflation. The bank, in the not unlikely case its existence has eluded your ken, is the central banks' central bank, a kind of global nanny keeping an eye cocked on the world's banking system and trying, regrettably not always with success, to persuade its charges to act with some semblance of prudence and reason.
For an institution coping with no fewer than 55 central banks, it somehow has contrived to retain its sanity and, perhaps even more surprisingly, its equilibrium. Indeed, for the most part, it manages to eschew those endearing qualities that conspire to make "smart banker" an oxymoron. Unlike so many vaguely official entities with "international" in their title, the BIS renders its analyses and opinions as guided by facts on the ground rather than revelations from on high.
We're grateful to our friends, Philippa Dunne and Doug Henwood at the Liscio Report, whose latest commentary on the economy prompted this little riff on the BIS. Like the diligent scholars they are, they plowed through the 260 pages of the bank's annual report and distilled some of the salient material it contains. Less scholarly and for sure less diligent, we, in turn, are distilling their distillate.
The BIS, incidentally, is based in Basel (forgive us our alliterations), which, we suppose, doesn't surprise you, for where else would the central bank of the world's central banks be based but in Switzerland? More to the point, its Swiss locale provides a suitably neutral perch from which to survey the global economic and financial scenes. What we found gratifying is that so much of the BIS' view of the way things are and what lies ahead of us is very much akin to what we've been scribbling here for months on end (vanity, thank heavens, is not a mortal sin). Its take on inflation, for example, seems quite on the money. It doesn't much hold with the notion, so firmly held in Wall Street and Washington, that the concoction known as "core" inflation, which eliminates such insignificant stuff as the cost of food and energy, is the proper measure of inflation. Instead, the bank is convinced that in the U.S. and the Eurozone, headline inflation -- which, of course, much to the chagrin of the no-inflation claque, includes prices of food and energy -- has become a much better predictor of inflation.
As to whether the economy is done in by a violent flare-up of inflation in a redux of the 1970s or by the insufferable weight of debt aggravated by the brutal credit crunch, the BIS ventures with admirable impartiality that those on both sides of the argument might in the fullness of time be proved right. Which pretty much echoes our feeling that the current surge of inflation will worsen ponderably and be followed by a painful period of deflation. The bank warns that resorting to "gimmicks and palliatives" to support asset prices and stymie an impulse among consumers to save will only make things worse.
The BIS lays the blame for the current financial mess we find ourselves in squarely on the vast buildup of debt over the years that has instilled in various global economies a dangerous tendency, fed by easy credit, to magnify booms and busts. From here on, in other words, you might as well kiss those comparatively mild recessions and moderate expansions that we've recently had goodbye.
As Philippa and Doug sum up the message in the BIS annual, it increasingly looks "like the evermore freewheeling financial environment that we've taken for granted for the last 25 years is behind us." Or, as the Bank declaims "has run its course."
In sum, better buckle your seat belt; the ride ahead stacks up as pretty darn bumpy.
ANOTHER MONTH, ANOTHER PUNK EMPLOYMENT REPORT.
We're always razzing the poor old consensus for its bum forecasts, often so very much off the mark, of monthly employment numbers. So we figure it's only fair to be nice for a change and commend the consensus for being smack on target. And we'll even refrain from pointing out that once in a very great while, the guy or gal with a blindfold on does pin the tail on the donkey.
Anyway, the going estimate on the Street for June was a loss of 60,000 or so jobs and, by golly, the actual number was 62,000. All you members of the consensus, stand, please, and take a bow (it may be a long time before you get a chance to do it again).
The unemployment rate, meanwhile, which had taken a huge jump in May, the biggest, in fact, in 22 years, held steady at 5.5%. Revisions to April and May swelled the earlier reported totals of pink slips by a combined 52,000.
The private sector lost 91,000 jobs, with, as you might expect, construction and manufacturing the heaviest hit. The good news was on the skimpy side: The biggest gains in hiring were by municipalities and states, and given the increasing financial pinch afflicting city halls and statehouses just about everywhere, that old reliable geyser looks due to dry up in a hurry.
Just for the record, governments of every stripe chipped in 29,000 to the job total. There were some 30,000 fewer temps working at the end of June than at its start, which tells you more about the economy than you'd like to hear. It's also a bit of an evil harbinger for employment.
That insightful pair, Philippa Dunne and Doug Henwood, cited above, are invariably spot-on when it comes to parsing the monthly job numbers and we've passed along their conclusions, many a time and oft. Our only reservation, and a modest one, has been, kindly souls that they are, they were too forgiving of the Bureau of Labor Statistics' birth/death model, which seeks to capture the jobs added and subtracted by, well, the birth and death of new firms. The device invariably strikes us as a fire alarm that works swell -- except when there's a fire. And in the overwhelming majority of months, it perhaps conveniently serves to bloat the total of jobs added.
As it happens, we now have reason to forgive Philippa and Doug for being forgiving. Here's what they say in Friday's review of the latest jobs report: "Although we usually shy away from pointing to mischief coming from the birth/death model, this seems to be one of those moments when we should overcome our shyness: It added 177,000 to June employment."
Duly noting that the birth/death calculation is made without seasonal adjustment, they nonetheless observe that save for it, private employment would have been down a formidable 268,000 or so. Other absurdities: The birth/death model miraculously added 29,000 to rapidly vanishing construction employment, 22,000 to professional business and professional services and -- get this -- a whopping 86,000 to leisure and hospitality.
They comment dryly: "Given the weakness of the economy and the crunchiness of credit, we doubt there are enough start-ups around to match these imputations." Exactly.
"The era of procrastination, of half-measures, of soothing and baffling expedients, of delays, is coming to a close. In its place, we are entering a period of consequences." - Winston Churchill, The Gathering Storm