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Author Archives: Lenore Hawkins, Chief Macro Strategist

About Lenore Hawkins, Chief Macro Strategist

Lenore Hawkins serves as the Chief Macro Strategist for Tematica Research. With over 20 years of experience in finance, strategic planning, risk management, asset valuation and operations optimization, her focus is primarily on macroeconomic influences and identification of those long-term themes that create investing headwinds or tailwinds.
Employment Gains Disappoint

Employment Gains Disappoint

I’m starting to feel a bit like the grim reaper this week as the downward trends continue. This morning the ADP report showed that private sector jobs rose by only 38,000 last month, much less than the downwardly revised 183,000 gain that was expected.

  • Large businesses with 500 employees or more cut 19,000 new employees
  • Medium-size businesses added 30,000 workers
  • Small businesses that employ fewer than 50 workers added 27,000 new workers
  • Service-sector jobs increased by 48,000
  • Factory jobs fell by 9,000

Businesses drew down inventories, with the inventory index dropping to 48.7 in May from 53.6 in April.

On a positive note, price pressures eased with the prices index falling to 76.5 from 85.5 in April.

This data, coupled with the double-dip in housing reaffirms our belief that the Fed is unlikely to raise rates anytime soon. As one would expect, bond prices rose and yields dropped in response to this news, with the 10 year Treasury note dropping below 3%.

 

Q1 Dissapointed, Q2 to repeat?

Q1 Dissapointed, Q2 to repeat?

After the disappointing growth in the first quarter of 2011, many economists believed that the economy would pick up in the second quarter.   At Meritas we looked at the trends in housing (still dropping), employment (fewer employed today than in 2000), income (declining real wages) the credit markets (little expansion), and government spending (fiscal stimulus to decline) and just couldn’t see how the math could possibly work to generate a robust second quarter.  Looks like the economists were wrong, as well an many of the big banks.

JPMorgan revised down their estimate to a 2.5% GDP growth rate from 3%, while Bank of America Merrill Lynch cut theirs to 2% from 2.8%.  Deutsche Bank also cut its forecast to 3.2% from 3.7%.

According to the study by Carmen Reinhart and Kennneth Rogoff, “This Time is Different,”  growth rates are typically subdued after a financial crisis versus a recession induced by other factors.  In addition, when countries reach high levels of debt to GDP ratio, near the 1:1 level as exists in the U.S. and most of the developed countries, GDP growth suffers.

Until employment and housing show significant improvements (and the two are clearly related), we don’t expect to see consistently strengthening growth rates.

Dollar continues its decline

Dollar continues its decline

Today saw the dollar continue to drop, slipping to below 74 before closing at 74.27, getting closer and closer to the March 2008 low. In turn, commodities are making new highs with gold closing above $1,500 and silver above $46. The cyclically sensitive currencies like the Aussie dollar and the Canadian loonie are strengthening as well against the dollar. Even the Euro, with all its debt challenges is stomping on the greenback, apparently unaffected by all the talk of debt restructuring. Emerging market currencies continue to firm against the dollar and as one would expect, stocks rise against our falling currency.

We expect that the Fed will work out a way to extend its program of quantitative easing, possibly using funds from the maturing mortgages on its books. If this indeed does occur, the push into risk assets will most likely intensify and the trade deficit will decline.

The Coming Municipal Bond Crisis

The following segment was on CBS’s 60 minutes last night and discusses the likelihood of a state and local funding crisis, which Meredith Whitney predicts will begin in the next 12 months. The municipal bond market is one of the most opaque in the investing world and is subject to strong political machinations. Ms. Whitney nailed it with Citibank and at Meritas Advisors, we think that her detailed analysis of this market warrants serious attention.

An Alternative To Increasing Taxes

I hear politicians and pundits talking about the massive federal debt and assume that the only way to deal with the problem is to raise tax rates.   Raising rates in tough economic times can be very damaging to the economy and may in fact, result in lower tax receipts as tax payers can shift their behavior in response to higher taxes.  Dan Mitchell of the Cato Institute put together a video on the subject.

Unemployment drags on

Unemployment drags on

Roughly a million Americans have dropped out of the job market altogether over the past two months. That is the only reason why the headline unemployment rate is not exploding to a post-war high.  The share of the US working-age population with jobs in June actually fell from 58.7% to 58.5%. This is the real stress indicator. The ratio was 63% three years ago. Eight million jobs have been lost.

The unemployment rate dropped unexpectedly to 9.5%, but this was not received positively by markets as it was largely the result of a decline in the participation rate. As the unemployed grow frustrated and stop looking for work, they are removed from the unemployment rate calculation. Had the participation rate remained at April’s levels, the unemployment rate would be 9.9%.

The average time needed to find a job has risen to a record 35.2 weeks. Nothing like this has been seen before in the post-war era. Jeff Weniger, of Harris Private Bank, said this compares with a peak of 21.2 weeks in the Volcker recession of the early 1980s.

The number of workers that have been unemployed for more than 6 months is at 6.75%, a record 4.39% of the civilian work force.

Washington’s fiscal stimulus is draining away. It peaked in the first quarter, yet even then the economy eked out a growth rate of just 2.7%. This compares with 5.1%, 9.3%, 8.1% and 8.5% in the four quarters coming off recession in the early 1980s.

There is considerable controversy these days over what kind of GDP growth we will see in the second half of 2010.  It is going to be awfully tough to have a significant rebound in the economy with unemployment levels looking so grim.  We may very well have considerable volatility in the markets, but don’t mistake volatility for true growth!   For solid economic growth, people need jobs.  To have job growth, businesses need to want to hire.  For businesses to hire, they need to be confident and optimistic about the future.  So far, the theme is more about hunkering down and delveraging rather than preparing for growth.

 

The Rahn Curve

As I head off to Las Vegas for an exceptionally inspiring conference called FreedomFest, I thought I’d leave you with a great video from my friend Dan Mitchell about the Rahn Curve, (developed by Richard Rahn) which graphically illustrates the relationship between the size of government and the economic success of a country.  On the one extreme, anarchy is incredibly expensive and suppresses productivity.  On the other extreme, an large government, with onerous tax burdens is also debilitating for an economy.  As an investment advisor I watch the direction the nation is taking, as over the long-run that will affect overall GDP and investment opportunities.  We are currently on a disconcerting trajectory of government expansion, with increasing sovereign debt and onerous rules and regulation to control and limit the growth of business.  While Europe moves away from Keynesian economics as they realize the consequence of entitlement programs they cannot afford, we continue to expand ours.

The First Step is Admitting You Have a Problem

The First Step is Admitting You Have a Problem

This morning as I eagerly gulped down some much needed coffee and tried to read the Journal through my bleary eyes, I realized that I just might want to cut back on the caffeine.  That got me thinking about how the first step is acknowledging the problem.

 

Apparently America is also acknowledging that it has an addiction that has historically fired the economy up like my morning fix, but we seem to now be in the dreaded 2pm crash.  A recent Gallup poll shows that Americans are finally worried about the magnitude of the federal debt.  We can only hope that this awareness translates into political pressure to curb spending and address both the current mountain of debt and the tsunami of unfunded liabilities racing towards us.