An ominous jobs number

Jobs lost

The most interesting event of the day was a Bloomberg story that showed the relationship between jobs created and lost over the business cycle. The article pointed out that at this point in the recession the economy has lost more jobs than were created during the previous expansion.

Over the last expansion (say 2000 to 2006, I don't have the article in front of me so my dates may be off a bit) the economy created 5.2 million jobs. Since the downturn, the economy has shed 6.3 million jobs. That is the first time this has happened since...you can guess this one....come on...the great...the greaaaat....depression, that's right. One more thing to add to the "worst since the great depression" list.

I think the worst part about the metric is that the job loss figures are still in freefall. There doesn't seem to be any POSITIVE news that would indicate a bottom...a stabilization of some sort. We just blew past a record with no sign of slowing down.

Right now everyone is grasping and reaching for a leg of hope. There doesn't seem to be any truly "good" news out there. There is an abundance "less bad" news...but that hardly qualifies as "good" does it?

It's a bit like the doctor telling you he has "good news", then he says that you'll likely live 3 more years instead of just the 2 years he initially thought. It's tough to spin that as good news but plenty in the media seem ready to do so.

Muni problems

Moving on from that...how is California NOT rated as junk? THEY CAN'T PAY THEIR BILLS!!!

If California were a company (a different company than Fannie or Freddie who don't operate under the rules of the real world...or even AIG...but I digress) their debt would be trading with junk ratings and junk prices. If a company is handing out IOU's to their suppliers in lieu of cash it's a pretty big warning sign.

So far Fitch is the only rating agency that has even come close. They downgraded California GO paper to BBB...just two notches above junk. It makes you wonder how much political pressure is being put on Moody and S&P to keep their ratings levels articifially high. Just what we need on the heels of ratings agencies misleading people on CDO deals (remember the AAA rated CDO deal that dropped 17 ratings notches in ONE DAY?)...doing it again on Muni's.

The political pressure on the ratings agencies is likely to come due to the fact that so many regulated depositories hold California paper. If that debt gets downgraded to junk there will necessarily be a massive wave of OTTI writedowns associated with the debt in bank investment portfolios. If a bank holds $1 million of a California GO that they bought at par ($100) and the paper subsequently gets cut to junk and trades at $45, the bank has to write the value of the bond down to it's market value. They will see a $55 write-down go through the income statement (ruining earnings) and then hit the capital account on the balance sheet.

The last thing a bank needs in this environment is anything that erodes earnings and capital. This could be enough to push some marginal banks over the edge. It will certainly prolong the time it takes to get the financials back on solid footing and therefore stall any hope of economic recovery. This is why I expect there is a lot of political pressure on the ratings agencies. If you think there isn't take a look back at how the Treasury twisted Ken Lewis' arm at Bank of America when he thought about backing out of the Merril Lynch purchase. I'm sure there is dirty pool being played all over right now.

This will be an interesting train wreck to watch.