Market Talk

In light of today’s jobs report, and the far too widespread opinion that it heralds an improving jobs market, we present the following summation from Joan McCullough over at East Shore Partners:

Look. US GDP growth peaked in 2005 at +4.4%. As you recall, housing prices peaked in early 2005 and started to roll over into ’06 and ’07.

In hindsight, as the entire gig was imploding, it became crystal clear that the growth that we had enjoyed had been artificial as it was based on flawed debt, to put it mildly.

The flawed debt, as it turned out, nevertheless proved to be highly prolific in that entire industries grew up and overnight, made big earners out of street punks … the mortgage origination business comes to mind, to name just one segment. Said punks, in turn, bought expensive cars, suits and condos. Demand for Tyvek went thru the roof and cement was in short supply. Furniture, appliances, big-screen TVs, granite countertops, swimming pool filters, insurance agents, landscapers, architects, alarm-installers, pizza-delivery guys, dog groomers, IT supervisors, attorneys, cable TV trouble-shooters … you get the picture. Trillions of $ in GDP were created. As it turned out, the false premises upon which that flawed debt had boomed, upon which that GDP growth had piled on … were ground into the dust in the rush to escape the
conflagration which ended the orgy. We’re talkin’ here the implied guarantee associated with “layering of risk” along with the biggest boner of them all “housing prices will appreciate in perpetuity”. Gospel one day, fodder for the horse’s arse, the next. Amazing.

Well, they had shoveled it aggressively and many swallowed it. Most repugnant of all, most repeated it. And any naysayers were systematically shot down and branded “lunatic fringe.”

We know the government’s response: possessing no stomach for allowing the market to clear prices, they intervened, laying a claim on future earnings of US taxpayers in numbers that few can comprehend. In short, the private sector provided the financing for the housing bubble. After that imploded, the public sector was conscripted to be the eternal backstop.

Surely you can see the similarity: both scenarios are based on faulty debt. The first time, the mess was created by lending by the banks which gave rise to massive albeit artificial demand; the current mess has been created by borrowing by the government; artificial demand is the result here, too. As it turns out, John Q. is responsible for the latter which was occasioned by his being made responsible for the former.

And if you use your imagination, you can extrapolate a further similarity, i.e., the first one saw us cruise along on top of the world … but ended badly. The second one will have the same result.

And that’s about where we’re at right now.

Now, look at the jobs market through that prism. See anything different?