Four Years
In the summer of 2008 there was a kid who graduated from high school somewhere in this country. His parents likely told him how lucky he was to be going to college because the job market was getting bleak. They likely told him to study hard, have a good time, and that things would be better when he graduated college in 2012.
So our man graduated high school and like the sea-of-youth that surrounded him he drove off to college where he passed the time studying diligently. Now…he may have skipped a few classes and he might have even gone to a bar or two, spoken with some girls, hunted and fished all he wanted, and occasionally had to run from the campus police…but I’m confident that he at least studied a bit. Ultimately he was in a position to side-step the economic carnage, study for four years, and then take the job market by storm when he graduated.
That kid is now 6 months away from graduating college…and his job prospects are even worse today than when he started as a freshman 3.5 years ago. In the summer of 2008 the Unemployment Rate was at 5.80% and was just starting its climb to 10.00%. If he is a business major he might even know that this is the fourth consecutive year we’ve entered with Fed Funds at zero percent.
You heard that correctly…2009, 2010, 2011, and 2012 all began with Fed Funds at zero percent. If this kid is on the honor roll he might also know that the Fed is telling us that 2013 will start that way too! That makes me feel very old all of a sudden…someday I’ll be saying things like “I remember when the Fed kept rates at zero percent for five years!” And I think I might be lucky if I’m saying it was only five years.
Today our college graduate is facing some bleak prospects…the worst of which might be having to transition from a life of keg parties and dating, to moving back in with his parents…who are likely not having keggers and could also be unwilling to finance his dating schedule. Oh the humanity!
This kid is going to grab his diploma, walk off the campus, and wade into a huge pool of unemployed Americans where he will tread water and hope to be rescued quickly. As he works to stay afloat he may strike up a conversation with some of the others in the pool…almost half of the people he talks to will tell him that they’ve been in this pool for more than 27 weeks.
Our man will now begin to wonder how long he can keep his head above water. Almost half of these people have been unemployed for more than 6-months. His mind now starts to wander toward thoughts of Grad School. If he can find the money he can be back in the comfort and safety of an academic/party setting by September.
If our man was a member of the national honor society he might even be aware of the fact that it takes roughly 150,000 jobs a month just to absorb people like him (the new entrants to the work force). Given the fact that there are 12.9 million people on the “official” unemployment rolls, and that only 9 of the past 36 months have posted more than 150,000 non-farm payroll additions he can do the math and see that it is going to take a long, long time before everyone that wants a job can get one. This economy can’t even generate the jobs needed to absorb the new entrants to the job market…much less to start digging into 13 million unemployed that are treading water in the unemployment pool.
So what is our man to do? What is the outlook right now? Is the data telling him to stay in the pool because the economy is coming back and a job should float along shortly? Or is the data telling him that the economy is bad enough that he should go back to Grad School pronto before he misses the application deadline?
Given what we know about the economy we should be in a good position to help this kid make a decision.
Let’s start off with a very brief review of 2011 (not necessarily in chronological order)
- The year started with Fed Funds at zero percent
- Unemployment started at 9.8 and ended at 8.6
- Tsunami in Japan
- Nuclear Meltdown in Japan
- 8% of total unemployed apply for McDonald’s position in April!
- Fed commits to keep rates low ‘til 2013
- Refi story keeps coming back to us
- The “Arab Spring” sweeps across the middle east
- The Fed shuffles their maturities with Operation Twist
- Fed routinely says things should pick up in second half
- US gets downgraded by Moody’s
- Moody’s confused when Treasury prices RISE after the downgrade!
- It’s good to be AA+ in a BBB world
- Goldman says it could be end of decade before rates rise
- Greece causes problems in the Eurozone
- Austerity and riots in the streets in Greece
- Second half finally got here…and brought no growth with it
- Italy, Portugal, and Spain, begin having problems too
- MF Global goes under (a US Primary dealer)
- Osama Bin Laden gets to meet SEAL Team 6
- Meredith Whitney no longer remembered as the gutsy, genius analyst that predicted that Citigroup would cut their dividend
- Year ends with Fed Funds at zero percent
You’ll notice that there wasn’t a tremendous amount of good news on that list. That fact didn’t escape the Fed either…which is why we still have Fed Funds at zero percent and the Fed searching for new and improved ways to tell us that rates will remain there for a while longer.
If you read all of the FOMC statements…and it’s an unfortunate fact that I have…the tone you get is that we are in the midst of a very modest and fragile recovery where any bit of positive data that they can conjure up is offset by a laundry list of risks that offset it. There is no glaring positive news that they can put on a pedestal and say “that right there is a very good sign for this economy”.
Instead they say things like this:
“The unemployment rate dropped to 8.6 percent in November, and private nonfarm employment continued to increase moderately during the past two months. Nevertheless, employment at state and local governments
declined further, and both long-duration unemployment and the share of workers employed part time for economic reasons remained elevated. Initial claims for
unemployment insurance moved down, on net, since early November but were still at a level consistent with only modest employment gains, and indicators of job openings and businesses’ hiring plans were little changed.”
That paragraph came from the most recent FOMC minutes and it’s typical of recent descriptions of economic activity from the Fed. You’ll notice that they have to dig to find data that is somewhat positive…and after they lay it out there they come back and hedge it until you lose any excitement you might have had.
It’s a bit like a doctor telling you he was wrong when he told you that you only had 18 months to live…and you start to get excited and then he cuts you off and says “I should have said 24 months.” The news is “less bad” but it’s certainly a long way from “good”. That’s kind of where the economy is right now.
What will 2012 bring?
As you begin to ponder what the next twelve months will bring, and you hold board meetings and make forecasts…keep in mind that the Feds job is to maximize employment and maintain price stability. Those two things will dominate much of their thinking as we move forward.
There are certainly other things they will have to deal with as the global crisis ebbs and flows. They will continue to be involved with the global issues but keep in mind that their primary focus will be jobs and inflation.
So…where are those things right now?
Everyone on the FOMC committee says the same thing with regard to jobs…because it’s obvious…the unemployment rate is too high and it is falling at a rate that is unacceptably slow. Too many people are out of work and they have been that way for far too long and will likely stay this way for a long time to come. Boom…on to the next part of the dual mandate.
With regard to inflation, the Fed isn’t worried. They continue to state that long run inflation expectations are stable and that they are below their long term target levels. We are free to agree or dis-agree with their opinion on this matter…but the fact is that they are the ones who set the target Fed Funds rate and that’s the way they see the inflation picture. If we want to have the slightest hope of figuring out what they are going to do with rates then we need to know what page they are on.
The outlook for low and stable inflation coupled with the high rate of unemployment give the Fed a green light to stay on hold. In fact, at the last FOMC meeting the lone dissenter wanted MORE accommodation as opposed to less. When you take this a step further and consider that there will be new voting members rotating onto the committee this year whose outlook is more in line with those who prefer accommodation, you can get even more comfortable with the fact that rates are likely to remain low for a long time.
The most recent news from the Fed is that they will now be providing us with their internal forecasts for where they see Fed Funds going. A friend of mine laughed recently and said “so much for the Fed Funds Futures market.” I had to laugh too…what will all of those traders do now that the Fed has pulled the rug out from under them? I put out a short Market Update on 1/4/11 that gives an overview of the Feds new communication policy if you are interested in their new communication plans.
What to think about 2012
As you think about 2012 and what it might bring I want challenge you with the following task. Find a way to fill in the blank on the following question: “In 2012 economic growth will come from _______”.
If you come up with an answer that you find believable then you will likely be planning on increased economic growth and higher interest rates right around the corner.
If you can’t fill in the blank with a believable answer then you’re in good company. I don’t know what to put in that blank, and I haven’t spoken to anyone who can fill in that blank. The Fed certainly can’t…which is why they are committed to holding rates low through at least mid-2013…and there is no shortage of speculation that they could leave them there a lot longer than that.
To me it looks like 2012 will be another year full of excuses for why we won’t have any decent growth. In 2011 earthquakes and uprisings in the middle-east were the excuses for our lack of growth in the first half of the year. The longer it went on the more we were told that we’d get our growth spurt in the second half. Then the second half got here and there was no growth…and then Europe started melting down…and then everyone realized it just wasn’t going to happen in 2011.
Now we are starting 2012 with slim pickin’s for growth prospects…and a whole new slate of potential excuses for why we’re still in the ditch.
Wildcard events for 2012
Below are a few items that should haunt the headlines at some point in 2012. These all have the potential to become roadblocks to growth in 2012. I’m certain there are a lot more out there…these are just the ones I could think of with one cup of coffee in me.
Iran – There is a lot of talk about somebody smacking Iran hard before they can build a nuke. I have no idea what the odds are of this happening…but I think I’m safe in saying that if that happens we should expect a big rally in Treasuries with prices going up and yields dropping.
North Korea – North Korea just lost their leader. You might think he was just a guy with a bad haircut that wore a Members Only jacket and platform shoes…but apparently he talked/coerced many into believing that he was a god of some sort.
This is a country that launched a missile at Hawaii on the 4th of July when they had STABLE leadership. I can see why the experts are concerned about their potential for creating instability now that there is a new and untested twenty-something year old guy at the helm.
Europe – At this point it feels like the consensus is becoming that Europe will just be a big drag on everyone. It seems like a lot of the big scary stories about the breakup of the Euro and “war-on-the-continent” have faded and now it has become a game of “how long we can drag this out before we have to admit that it won’t work.”
The Election – We will surely get a non-stop drumbeat of news this year regarding the economic plans and fixes from both the incumbent and the challengers. I wish we could just fast forward to the end but it’s not that easy…we’ll have to put up with 11 months of headlines and debates that will jostle the markets along the way. This is a big wildcard for sure. I have no idea how the election will impact the markets…but I know that it will impact them. There isn’t much more color I can provide on that topic.
Military drawdown – If you’re a student of history you know that once the wars are over the US makes drastic cuts to its military. It happens after every war and given our current fiscal condition one might expect these cuts to be even deeper than usual.
This should have at least two impacts. First is that it’s a drop in government spending, which in the absence of a corresponding increase in another area will have a negative effect on GDP (this isn’t an argument for keeping the military at current levels…it’s just worth noting that government spending has been propping up GDP and this will be a reduction in that support). This spending has been on items ranging from salaries for active duty military and civilian contractors to the acquisition of high dollar weapons systems.
Many people don’t realize how expensive military hardware really is. Sebastian Junger gave a good example of the economics of conflict in his recent book about combat in Afghanistan titled “War”. He said that one day he marveled at the complexity of it all as he watched an $80,000 shoulder fired missile, get launched by a guy who doesn’t make that much in a year, at a guy who doesn’t make that much in a lifetime. The point is that governments spend a LOT on war when it happens…and that spending will soon be cut drastically.
Additionally, these cuts will transition a lot of people from government contract work and military service…into the domestic job market…where there are very few opportunities awaiting them. This will put some amount of upward pressure on the unemployment rate.
So what should we tell our recent college graduate?
So now I’m sitting here staring at the college graduate across from me and pondering what to tell him. From where I sit his choice is this…he can go out into the real world where he will likely have to wait a long time just to find a low paying job that doesn’t match his skill set…or he can go back to college, study a little, hit happy hour three nights a week, go to football games or hunting or fishing on the weekends, and ride out the worst business cycle he is likely to see in his lifetime in relative ease.
My answer is that he better apply quickly…because grad school sounds pretty sweet and I might beat him to it if he doesn’t.
What will you tell him?
If you have any questions or if there is anything I can be doing for you just let me know.
Steve Scaramastro, SVP
800-311-0707
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