Thoughts From The Frontline : BLS

The Unemployment Surprise

John Mauldin — Mon, 08 Oct 2012 22:41:00 GMT

You Know You Were Surprised
The Eat, Drink, and Get Sick Sector
The Really Important Employment Numbers
Portland, Chicago, Atlanta, and South America

The unemployment number surprisingly dropped to 7.8% last Friday, and the shoot-from-the-hip crowd came out in force. To say that the jobs report was met with skepticism would be a serious understatement. The response that got the most immediate airplay was ex-GE CEO Jack Welch (who knows a few things about making a number say what you want it to say) tweeting, "Unbelievable job numbers ... these Chicago guys will do anything ... can't debate so change numbers."

Not be left out, Fox Business quoted Ed Butowsky of Chapwood Capital Investment: "'No way in the world these numbers are accurate,' he said. 'Somebody needs to do an investigation.... Investigate these numbers.'"

Such a significant drop in the unemployment rate does not seem, at least on the surface, to be consistent with the slowing economy. It certainly wasn't what most Republicans were expecting one month prior to the elections, and the partisan reaction from my fellow Republicans was sadly predictable. So, since an investigation has been called for, this week we will do just that: we will investigate the numbers. What we will find is that the falling unemployment number was perfectly consistent with a slowing economy, if you look at the details. That seemingly contradictory conclusion gives rise to a question, gentle reader, that will take more than one paragraph to answer. It will make for some interesting reading, I think.

Let me start by acknowledging that one of the most dangerous things one can do in the writing business is try to separate a man from his pet conspiracy theories. But this is one conspiracy that needs to be thoroughly debunked, as the reaction to it is an example of the coarsening of our American culture. If some bit of data does not dovetail with our favorite meme, our immediate reaction is to shoot the messenger rather than examine the facts as presented. With that proviso, let's jump right in.

You Know You Were Surprised

Like anybody else who is paying attention to the current economic situation, I was surprised when the headlines said that unemployment had dropped to 7.8%. A drop of that magnitude does not seem to be historically consistent with an economy growing less than 2%, with job growth – at least as measured by the Establishment Survey – barely keeping up with population growth, or with tax receipts that were relatively flat for the last month. My immediate reaction was "Show me the data." There was clearly going to be something interesting lurking down among the details. And there was.

Before we wade into the data, though, I want to analyze the reaction. What if someone said, "The military is manipulating the data from Iraq and Afghanistan in order to help the election of the current administration," (whether Republican or Democrat)? The appropriate response to such a statement would be to suggest that such a characterization was demeaning to the professionalism and integrity of our military professionals. I think it is doubtful that a statement like that would get much airplay or gain much credence in the public discourse. The military is a well-respected institution in the United States.

Yet we seemingly dismiss quite easily the professionalism of the employees of the Bureau of Labor Statistics when their data doesn't fit our perceptions of reality. Let's look at what they do. First and foremost, they collect data. In regards to employment data, they do two surveys. The first is the Establishment Survey, which polls 400,000 companies about the number of employees they have, whether they are full-time and part-time, and other details (along with income data). Then there is the Household Survey, which asks 60,000 households each month how many people live in the household and who is working, again distinguishing between full-time and part-time. If the job is part-time, they try to determine whether the part-time work is voluntary or whether it is for economic reasons, such as poor business conditions or because the person could only find part-time work. If a person does not have a job, they try to determine whether they have looked for a job within the past month or the past year.

The data they compile is surprisingly detailed. Want to know the unemployment rate in your city or metropolitan area? It's likely to be found in the BLS data.

The problem with conspiracy theories is that there have to be people involved. In order to manipulate data within the BLS, you would have to get a surprisingly large number of people to cooperate. The fact is that many of these people have been with the BLS for many years and started working there during many different administrations, so presumably, they have different political affiliations, making it very unlikely that everyone would have cooperated in a conspiracy to cook the books this past month. Someone would have blown the whistle. It would be a career-ending move to try to manipulate the data, not to mention that I'm sure there are many laws against such manipulation.

The BLS process is rather straightforward. The data is collected and the numbers are crunched according to a very transparent formula. And then the results are published.

The Establishment Survey is what is known as contributory. By that we mean that this data feeds into other statistics we use in the government and business. It is considered to be accurate data. But note that it is constantly being revised as new and better data comes in. The monthly numbers we see first are the result of a survey, and that survey is as accurate as they can make it. But then actual data comes in the form of contact reports from state authorities and other sources, and the numbers are adjusted. Only a few of us data wonks pay much attention to the revisions.

The Household Survey is not, to my knowledge, contributory. The only major number we really get from it is the employment rate. As we will see in a few paragraphs, this survey is quite "noisy" from one month to the next, although over a period of about a year it conforms rather well to the Establishment Survey.

The following chart, courtesy of The Big Picture, shows a rather tight correlation between the two surveys. "Separately, and almost certainly unknown to Mr. Welch, the BLS issues a technical document every month that address the trends in both surveys. That document can be found hereand contains the following chart:

"Among the objectives of the monthly analysis is to produce an Adjusted Household Survey (seen above). BLS:

"This [Adjusted Household Survey] is a research series created from household survey employment to be more similar in concept and definition to payroll survey employment. Household survey employment is adjusted by subtracting agriculture and related employment, nonagricultural self employed, unpaid family workers, private household workers, and workers absent without pay from their jobs, and then adding nonagricultural wage and salary multiple jobholders. The effects of population control revisions also have been smoothed out in the historical data in this series.

"But you knew that, right, Jack [Welch]? The Adjusted Household Survey shows that 1.836MM jobs have been created over the past 12 months. The Payroll Survey? 1.806MM. The difference between the two over the course of a year? A paltry 30,000. While there may occasionally be wide month-to-month swings (and the Household Survey is known to be the more volatile of the two), the two series generally track fairly closely over time, which is how data should generally be observed." (The Big Picture)

In past letters, when commenting on the employment situation, I have noted that there are times when the Household Survey seriously underestimates the number of jobs, as compared to the Establishment Survey. This month the disparity is in the other direction. That is a function of the methodology of the survey. I'm sure that if BLS spent more money it could survey more households and get a more accurate picture, but I doubt it would be worth the money.

In summary, the fine people at the BLS do their best to collect the data is accurately as possible and make it available as quickly as possible. The formulas by which they interpret the data are well-known. To suggest otherwise demonstrates a lack of understanding of the process and essentially defames the people involved. If you don't like what the data says, don't shoot the messenger.

This is not a recent problem. In 2003-04 Democrats were constantly deriding the positive statistics coming out of the BLS. Dr. Austan Goolsbee, Obama's ex-chief economic advisor, accused the government of "cooking the books" on the unemployment number in a New York Timesarticle in late 2003 entitled "The Index of Missing Economic Indicators; The Unemployment Myth." I actually agreed (and still do) with his analysis, just not his partisan rhetoric and conclusion, but that's a story for another letter. (http://www.nytimes.com/2003/11/30/opinion/the-index-of-missing-economic-indicators-the-unemployment-myth.html– hat tip Bill King)

Now, with that out of the way, it is totally fair game to question the basis for the interpretation of the data. The way the government derives the unemployment numbers has changed significantly over the last 30 years. No surprise, then, that whatever administration is involved, the new equations for determining unemployment result in a lower unemployment rate than they would have if the 1980s methodology were still in place.

You are not counted as unemployed if you have not looked for a job for the last four weeks, by the current BLS methodology. That policy is very clear, and to my knowledge the policy was the same during the Bush administration.

I find that methodology rather bizarre. There are many people who have not looked for a job in the last four weeks; but if you asked, I bet just about every one of them would consider themselves unemployed. They would take a job if they could find one. That, to me, should be the definition of unemployed. And if you use the raw data, you can come up with that number on your own. Or you can create whatever definition of unemployment you want.

(There are literally hundreds of BLS data series. Want to know how Vietnam vets are doing? Hispanic women under 25? Married Asian males over 55? Unemployment just in your state or city? It's there somewhere if you care to look. I am constantly amazed at the granularity of the data.)

John Williams of ShadowStats calculates his own unemployment and CPI numbers based on the older methodology (from the early '80s); and, no surprise, it shows unemployment to be much higher than the government says. The Gallup organization would like us to measure the payroll-to-population ratio. If you're not disabled and you're receiving unemployment or welfare benefits I think you should be counted as unemployed.

Now we can come to the question of how we can have a drop in unemployment that is consistent with a very slowly growing economy. Bill King noted that employment taxes actually fell in September, then asked, how can 873,000 jobs have been generated, according to the Household Survey?

Median Real Disposable Income is up only 0.2% annually over the past few years, against the postwar average of 2.9%. The increase in average hourly earnings hasn't kept pace with the rate of inflation, which means that workers are losing ground. Dr. Lacy Hunt estimates that about 1.5% of GDP growth in the first quarter was from manufacturing. Manufacturing jobs have been flat for the last two quarters.

For the last three years, while we were averaging between 120,000-160,000 new jobs a month that paid between $20,000-40,000, we were losing anywhere from 20,000-60,000 jobs a month that paid more than $70,000. A detailed study of job status earlier this year by the Center for Labor Market Studies at Northeastern University found that more than 53% of college graduates under 25 were underemployed last year – working in jobs unequal to their college or postgraduate attainment.

All of this is to say there is a reason why we don't feel that unemployment dropped by 6% last month: we're not seeing a brighter jobs outlook reflected in our paychecks.

The Eat, Drink, and Get Sick Sector

The Establishment Survey found only 114,000 new jobs. (Philippa Dunne of the Liscio Report noted wryly, "Our old friend the eat, drink, and get sick sector (bars and restaurants plus health care) accounted for 52% of total job gains." There were significant revisions to the prior two months, but almost all of those jobs were in government (education-related) jobs. This bump in government jobs is part of a pattern and not a conspiracy of politicians to make things look better.

As noted above, the unemployment rate is taken from the volatile Household Survey. This month it shows 873,000 jobs created. 582,000 of those jobs were part-time for economic reasons. That means people wanted more work but could only get part-time jobs. 7.25% of all part-time jobs were created just last month!

The BLS also gives us something called the U-6 unemployment rate, which is the total unemployed plus all marginally attached workers employed part-time for economic reasons. Right now the U6 unemployment rate is 14.7%, which is exactly where it was one month ago. The chart below is for the last year, and you can easily see that there's been no change in the last month.

That means the entire drop in the headline unemployment rate is from the increase in part-time workers. That such significant numbers of people can only find part-time work is not a sign of a strong and growing economy. It is however completely consistent with a flat, lackluster economy.

If the next 0.3% drop in the unemployment rate is again due to a gain in the number of part-time workers, I don't think anybodywill be talking about how strong the US economy is.

And it makes sense, at least to me, that the number of part-timers rises in September. There is something in the American experience that says September is the time to go back to work. It comes from our public school system, which traditionally had the school year beginning in September. You can see this phenomenon when you look at the non-seasonally adjusted numbers for part-time workers. They show a big drop-off in summer and a correspondingly big increase in the fall. Look at how volatile the annual numbers have been for the last 10 years. And we can show the same thing for the last 60 years. (This is one of the reasons why we look at seasonally adjusted numbers rather than the volatile raw data.)

People graduating from college, for instance, might spend the summer looking for a job, but when September rolls around they take what they can get, even if it is a part-time job.

The Really Important Employment Numbers

Look at the next few charts. What they show is the devastation from the last recession. There is a reason that people call it the Great Recession.

"We've now regained close to half – 48% – of the jobs lost between December 2007 and February 2010 (the low in employment, eight months after the recession's formal end). It's still going to take about 40 months at current rates of job growth to regain all the losses, but it's worth acknowledging the progress that's been made. (The Liscio Report)

Note that we regain all the losses only if there is not a recession in the next 40 months. If there is a recession, recovery will take even longer as we once again lose more jobs. Now, we're back only to roughly where we were at the beginning of 2009, when Obama took office.

The labor-force participation rate is now below where it was in 1980. This statistic has been in decline for 12 years, and precipitously so since the beginning of 2008.

Even more distressing is the civilian employment-to-population ratio. While it might only take us another four years or more to get back to the number of jobs that we had in 2007, the population is growing each and every year; so it is going to take us even longer to get anywhere close to the '07 employment-to-population ratio. Five years? Seven years? Ten years?

The unemployment rate is a function of the number of people looking for work and/or participating in the labor force. The drop of 2.5% in the participation rate masks the severity of the unemployment rate. Do we really think that, since 2007, 2.5% of the population has decided they don't want a job?

We are employing almost 5% fewer people as a percentage of our population than we were at the beginning of 2008. That means our real unemployment-to-population level is well over 12%. So we're not even close to where we were in 1999, during the last year of the Clinton administration.

And that doesn't take into account the 50% of college graduates who are underemployed.

A significant part of the problem is simply the fact that we are trying to recover from a deleveraging recession. The data suggests that such recoveries may take 10 years. For Japan it is more than 20 years, and counting.

The solution, of course, is to once again grow the economy over 3% per year for a decade, as we did for the 60 years following the Great Depression and for almost the last two centuries, up till the beginning of the new millennium. This is something we have not done for 12 years, averaging much less than 2%. Analysts are now estimating that corporate earnings were down for the last quarter. Yet it is the private sector that we need to both create jobs and to generate additional income that will enable us to afford the level of government that we want.

Increasing oil and gas production will help, of course, especially if we can turn natural gas into chemicals made in the US for export. But we will need whole new industries, just as computers created such growth in the '80s and '90s. And of course we must rein in the size of government and our deficit. But those are topics we'll return to in another letter (and book!).

Portland, Chicago, Atlanta, and South America

I fly some 60-80 times a year. I have to say I was rather surprised to hear Al Gore suggest that it was perhaps the altitude of Denver that was responsible for Obama's off night. I can remember landing in Denver and speaking two hours later and being just fine. Then again, I have flown into cities at sea level and been flat as a pancake. I don't think it happens often, and I'm not sure of the reasons, but sometimes I am just not as sharp as usual on the podium. It happens to the best of speakers. Obama still has two debates to go. I know style counts, but I would like to think that most Americans were listening to the discussion of the issues. We're not voting for class president. The decisions that the next president makes will affect us profoundly.

I leave Wednesday morning to go to Portland to speak for Common Sense Investments, and they have invited me to stay the next day and go pheasant hunting. I will get to be with my good friend and hedge fund manager Kyle Bass, whose insights I greatly admire. The next week I will be in Chicago, once again speaking for Common Sense Investments, and then move on to Atlanta to speak at Hedge Funds Care. Then it's home for a week before I ship off to South America at the end of the month (Sao Paulo, Montevideo, and Buenos Aires).

To help do our part in creating job growth, Mauldin Economics is looking for a high-quality marketing copywriter to assist us with writing assignments related to our letters. Rather than send a resumé, I'd like to encourage experienced candidates to submit a short sample (250-500 words max) of their writing, along with their contact information. The team will review your work and, if we are interested, we'll contact you. Candidates should have an understanding of finance, economics, and direct marketing, and ample respect for my readers. In other words, fraudsters and hypers need not apply. You can contact us at Talent@MauldinEconomics.com .

This coming weekend I really do want to get down to Houston for my 40^th Rice University class reunion. It also coincides with Rice's centennial year, so there will be lots of interesting things going on, as well as many old friends to reconnect with. I turned 63 last week, and as I was graduating from Rice, that age sounded rather ancient. Now I feel like I am just hitting my stride, albeit with a few more aches and pains in the joints than 40 years ago.

It really is time to hit the send button. I had to go to Houston yesterday (Sunday), so I got started rather late on my first day of writing this letter on what was supposed to be Sunday afternoon. Oh well, the best laid plans and all that. Have a great week, and thanks for your comments and suggestions. I do read them.

Your looking forward to the next 40 analyst,

John Mauldin

subscribers@mauldineconomics.com

O Deflation, Where is Thy Sting?

John Mauldin — Sat, 20 Nov 2010 01:16:00 GMT

The Sputtering Economy
Old and Outmoded
We Have Deflation Exactly Where?
O Deflation, Where is Thy Sting?
Mexico, High Noon, and Thanksgiving

The CPI was out this week, and it showed a continued drop in inflation. There were those who immediately pointed out that this vindicated the Fed's move to QE2. We have to get ahead of this deflation thing, don't we? Well, maybe, depending on how you measure inflation/deflation. This week we look deep into the BLS website on inflation to see just exactly what it is we are measuring, and then take a walk down Nostalgia Lane. But first we look at what I think we can call The Sputtering Economy, because that will tie into our inflation discussion.

The Sputtering Economy

My father, who would be 100 this summer, would hitch up the wagon on a farm in Castleberry, Texas, about 6 miles from downtown Fort Worth, to drive to church or to the Big City for supplies. He was 57 when they put a man on the moon. It was hard for me as a kid to relate to wagons and outhouses, although we grew up rather poor on the outskirts of a very small town on the edge of West Texas, living as country kids. It was a great life. We were all poor and didn't know it.

My kids have some of the same issues about understanding my early era. I grew up as we were first starting to get power lawn mowers, a dream for me, as I hated push mowers and slings. But you had to constantly tinker with them. Neglect them for too long and they would start to sputter. When that happened, you first looked at the spark plugs, then the carburetor and the gas/air mix, filters, etc. And as I got older, that helped with my transition to taking care of my car. I was not a great mechanic but, as nearly everyone was, I was adequate.

Today? I can't even figure out what is under the hood. No clue. And my tools back in 1967? Not designed for a 2010 model, let alone a hybrid.

Same with our old black and white TV of the late '50s. As a ten-year-old kid, when the TV went out I would take off the back of the set, take out every one of the 20 or so vacuum tubes, and test them all. You wanted to test them all because if more than one was bad it was two miles to the store on my bike, and it was uphill at least one way. Those old tubes went out all the time. Just part of the price of watching TV.

Our economy today is like that old lawn mower engine. We get one piece of economic data that is good to very good, and the next day we get some bad news. Let's look at some of the data for the past few weeks.

Last week we got the New York Fed Empire Index. It was simply ugly. It fell from 15.7 to a -11.4. But then this week we get the Philly Fed Index, and it's shockingly high. The consensus saw a mild increase to an index level of 5, but it jumped 21 points to 22.5. And all the underlying components were very solid. It is hard to square such a difference when the cities that spawned these reports are about an hour train ride apart.

Capacity utilization is slowly rising, but is still at a recession level 72.7%, up 4 points from 12 months ago and the highest since over two years ago. So are we getting better or are we still mired in the doldrums? I think the answer depends on how many hours you are working.

The surveys from the National Federation of Independent Business continue to indicate that small businesses are not out of the woods. Hiring is at a virtual standstill but is at least not falling, as it was most of this year and last year. Business conditions are mixed. The survey is better than it was but still shows a sputtering economy.

The latest establishment employment survey shows job growth, though not at a level that can bring down the unemployment level. And if you look at the household survey, two things leap out. First, there is a significant rise in the number of people employed part-time. The rise in employment is not of a sort that prompts a sigh of relief. Part-time work, while better than none, does not inspire consumer confidence. It is not the fabric of a solid recovery.

Second, there are not many small business start-ups, which are the source, the feedstock if you will, of job growth. Whether because it is harder than ever to find money (it is) or because entrepreneurs are uncertain about what the future holds (they are), or for whatever reason, that is a very troubling metric. And the household survey showed a large decrease in the numbers of jobs and people working, a different story than the establishment survey.

What it all suggests is an economy growing between one and two percent. That is better than recession but not good enough to really bite into the unemployment rate.

Old and Outmoded

And that could mean trouble, as there are millions of people who are coming to the end of their 99-week extended unemployment benefits this next year. Although Congress rejected an extension this week, it was on a vote that required a 2/3 majority. That bill will be back as one that only needs a simple majority, and then it will be up to the Senate. Even so, as I understand it, benefits will only get extended for three months. At least that is the current plan.

Already, people are running out of their extended benefits. Earlier this year there were 12 million people on the extended and regular unemployment rolls. That is dropping each week and is now down to 8,854,206 people, according to the DOL. Since the regular continuing claims number is not really changing all that much, much of it is from people dropping off the rolls.

And the number of people on food stamps continues to rise. As of the end of August, when continuing benefits were running over 10M, a total of 42,389,619 people were receiving food stamps under the SNAP program. This was an increase of 553,379 people over July's number, or an increase month-over-month of 1.32%. The year-over-year increase was 6,147,762 people or 17%. In July the increase was 17.51%.

Now here's an interesting thing my friend John Vogel noticed. Households on food stamps are growing even faster than the number of individuals on food stamps. In August, 19,720,255 households were on food stamps, an increase of 284,877 households over the July numbers. This was a percentage increase of 1.47%. In terms of a yearly increase, the number of households grew by 3,159,502 or 19.1%, versus 19.53% recorded in July. As John wrote me:

"So, the numbers keep growing strongly, with households growing more rapidly than people. This still signifies more childless couples or single people being affected lately.

"I cannot figure this out yet, but I feel that we are going through a very significant change in household formation, in the type and quantity of available jobs, in small business stability and formation - and we are applying old, outmoded macroeconomic solutions to problems that will not and cannot respond."

We'll come back to that thought, but first we have to look at the definition of deflation.

We Have Deflation Exactly Where?

President Clinton famously remarked about his escapades that "... it all depends on the definition of what is is." And similarly, whether or not we are in danger of deflation all depends on what your definition of deflation is. First, let's look at the recent headline numbers. What we find is that core inflation, at 0.6%, as well as trimmed inflation (which takes out the statistical outliers and anomalies) are both at post-war all-time lows.

Another way to look at inflation is all-items inflation vs. core inflation, that is, inflation without food and energy. From the BLS website:

I have often joked that when you become a Fed governor they take you into a back room and do a DNA change on you. When you come out you are at all times and everywhere viscerally opposed to deflation. You will not let it happen on your watch.

And that is what happened in 2003, as deflation became a concern. The Fed under Greenspan allowed interest rates to stay low "for an extended period of time" in order to make sure deflation did not take root. Notice that it was in late 2002 that Bernanke gave his famous "helicopter" speech on deflation. There was very real concern in policy circles.

But should there have been? What if the way we measured inflation was flawed in some regard? Let's play a thought game. Back in the early '80s there was some consternation about using the price of houses as a way to calculate inflation. Read this paragraph from the BLS website (emphasis mine):

"Until the early 1980s, the CPI used what is called the asset price method to measure the change in the costs of owner-occupied housing. The asset price method treats the purchase of an asset, such as a house, as it does the purchase of any consumer good. Because the asset price method can lead to inappropriate results for goods that are purchased largely for investment reasons, the CPI implemented the rental equivalence approach to measuring price change for owner-occupied housing. It was implemented for the CPI-U in January 1983."

Homeowner equivalent rent is 25.2% of the input when they calculate the Consumer Price Index (CPI). Thus it makes a big difference how you calculate the price of housing. It is extraordinarily difficult to find historical data on homeowner equivalent rent in the BLS database. You can find "shelter costs," which include energy, insurance, etc. and are 41% of the CPI, but for our purposes today I want to focus more narrowly.

I did find an old release that shows the index value for the year 2000 to be 198.7 (http://www.bls.gov/cpi/cpid00av.pdf). The index value as of this October was 256.8. That means the rise in housing costs over the last decade was about 25% or roughly 2.5% a year, although in the last few years that number has gone deadline flat. And you can see that in the graph of total housing costs below.

But house prices went up by more than double that amount, and about 65% in the seven years from 2000 to 2007 (back-of-the-napkin estimate). That is an asset inflation of about 9-10% a year.

What if we had been using actual home prices as the measure of inflation? Let's look at the year-over-year change in inflation for the last ten years:

Homeowners equivalent rent is 25% of the index. So take the home price rise, divide it by four, and add it to the inflation index. Inflation in the middle of the decade would have been running 4-5-6% and in 2005 would have been over 7%!

Would rates have been kept low "for an extended period of time" if we had still been using actual home prices? I rather doubt it - alarms bells would have been sounding. The Fed would have been leaning into the rise in "inflation." Thus no housing bubble would have developed. And then no credit crisis.

And the difference all stems from how you measure inflation. These details matter. Now, let's go back to that highlighted portion from the BLS web site.

"Because the asset price method can lead to inappropriate results for goods that are purchased largely for investment reasons [emphasis mine], the CPI implemented the rental equivalence approach to measuring price change for owner-occupied housing."

In the 1980s the BLS (under Reagan, so not a liberal plot!) decided a home was an investment and not a roof over our head. It also conveniently allowed for lower official inflation, which is what Social Security and other government programs are tied to. But that change had significant unintended consequences.

O Deflation, Where Is Thy Sting?

Now, if you have no social life (at least on Fridays, when I write) you can go to the BLS website and get a plethora of data. (I bet that breakout of HOER is somewhere there, I just can't find it, and their search engine needs an update.) One of the things they do is offer all sorts of ways to look at inflation, way down the page (http://www.bls.gov/news.release/pdf/cpi.pdf).

First, we find that inflation for all items is 1.2% over the last year. All items less food and energy, or core inflation (which the Fed pays attention to), is only 0.6%. That is getting dangerously low, isn't it?

Maybe not. What you find is that inflation when you take out housing costs is a jaunty 1.9%. Right in the Fed target range of 1.5-2%. Even "core" inflation, when you take out housing, is 1.5%. That is not exactly something we should be worried about. That flat equivalent-rent number is showing a deflation risk that is simply not there.

But the Fed is worried about deflation and other things, so they are going to embark on a $600-billion quantitative easing, which among other things is going to help devalue the dollar and has already caused a rise in commodity, energy, and food prices.

We may in fact get some inflation, but precisely where we do not want it. While the Fed may prefer to look at core inflation, the rest of us live in a world where we buy food and consume energy. And for those in the lower part of the income spectrum, the rising cost of food and energy is disproportionately high. It acts like a tax on disposable income, which will hurt retail sales, which is PRECISELY what we do not need.

And all because we have the hubris to think we can measure inflation in some precise manner, and then choose policies to react to our imprecision.

Remember my 1967 tools? They wouldn't do me much good if I had to try and fix my car today. Not that if I were in the desert and my car broke down I might not try. It is after all still an engine, and somewhere in there must be something I can understand.

I wonder if the Fed is not trying to fix a modern 2010 economy with tools made in the '50s, based on theories based in the writings of a bunch of dead white guys. They were smart guys, I give you that. But times have changed. And our measurement tools seem flawed to me.

Thankfully, I rather think that the $600 billion can be absorbed without too much collateral damage. We do have a large economy, and the multiplier effect is at an all-time low. Or maybe I am just guilty of wishful, optimistic thinking.

Finally, this thought on what we can do to shore up home prices, from one of my favorite thinkers on the housing market, John Burns. Now here is a program that would work and also save taxpayers money. (http://www.realestateconsulting.com/content/our-proposed-rental-solution)

"Proposed Rental Housing Solution: Falling home prices don't help anyone, and anyone who says we can let the free market take care of things is saying that it is ok for taxpayers and the banking system to lose many more billions of dollars, virtually assuring another recession and maybe worse. To boost housing demand and limit supply, we propose the following:

" 1) Create an Apartment REIT: Distressed sales need to be kept off the market. Rent out the Fannie, Freddie and FHA REO (owned properties through foreclosure). These properties currently comprise 42% of the 562,000 REO and a large percentage of the 5.1 million homes currently in the foreclosure pipeline (already 90+ days delinquent or in foreclosure). This is best accomplished by contracting with an outside firm (competitively bid of course) to manage local property management firms. The rental income will be self-sustaining and the properties will be financeable in the public markets, just like publicly traded REITs are financeable. The GSEs will benefit from future price appreciation too, as opposed to being damaged by further price deterioration. The Banks, who currently own 22% of the REO, should also be allowed to contribute properties to the REIT. The Administration can keep pushing for loan mods if they want, and we heard over and over again how government doesn't want to foreclose on people. All we ask is that you keep the distressed sales off the market.

"2) Loans to Landlords: To stimulate demand and restrict supply on non-GSE distressed sales, have the GSEs make very safe loans to individuals or corporations who will promise to rent them out for an extended period of time. The GSEs should make a tidy profit on these loans, while also helping provide affordable rental housing to those who need it.

"3) Keep Mortgage Liquidity Flowing: Housing is extremely affordable right now, but the uncertainty in the mortgage industry is making underwriting more challenging, and uncertainty in the economy is hurting buyer confidence. Stop changing the underwriting rules so everyone knows what is required, and keep the fantastic financing environment. Once the economy turns around, real buyers will return to the market. We believe that the solutions above will also help restore home buyer confidence that prices won't plunge, which will boost demand."

Mexico, High Noon, and Thanksgiving

I was sitting in my office late last night. I had gotten an e-letter from my good friend Doug Casey, one of his occasional "Conversations." In this one he decided to talk about music. I almost deleted it (music recommendations from Doug Casey? Gold mining stocks, maybe). But then I saw one song I had not thought of for years, and he had a link to a YouTube site where I could hear it. And then another and another. It seems Doug and I, both being of a certain age, grew up with the same music. It was late and I was in the house alone, so I turned up the speakers, poured some scotch, and went back down Nostalgia Lane.

He even mentioned Frankie Lane, and there was a link to the theme song from High Noon, which of course made me go to the original by Tex Ritter. About that time, my middle son, Chad, age 22, slipped into the room and scared the life out of me. After I recovered he asked me what in the world I was listening to. I found out, to my great shame as a derelict Dad, that he had never seen High Noon. I asked Tiffani, my oldest. No. Somehow my kids left home without ever seeing High Noon.

Really. How can you understand my father's generation or how they shaped us without understanding the era that could make a High Noon? Once your kids are grown, there is not much that you can do to make up for what you didn't do when they were in your hands. But I can change this one thing. When they are all home for Christmas, the only thing I want is for us all to sit down with Gary Cooper and Grace Kelly and watch High Noon and then talk about it. Now that will be a real present. And then, as we normally do, we can go watch a new movie. (There is a great DVD of High Noon at Amazon.com)

This week is Thanksgiving, and it looks like it will be crowded at the Mauldin home, with maybe some 30-odd (in some cases the right word) people. Seems someone wants to invite someone who has a friend, and it just grows. And it gets to be more fun. I love to cook, and this is one of those days when I pull out all the stops. My prime rib is the best ever and my mushrooms are to die for. As is everything at Thanksgiving. It seems everyone brings the things they are best at, and so we all feast.

Sunday, Tiffani and Ryan and I leave for LA and the Forbes Cruise down to Mexico. I am really looking forward to it.

Have a great week. If you are in the US, enjoy Thanksgiving. Spend it with friends and family and pause for a few moments to count all your blessings. And remember those in harm's way who make it possible.

Your thinking about how fast the years have gone by analyst,

John Mauldin

$1.6 Trillion in Losses and Counting

John Mauldin — Sat, 12 Jul 2008 04:13:00 GMT

$1.6 Trillion in Losses and Counting
Banks Start to Reduce Their Lending
Take Freddie Mac. Please.
The Ugly Muddle Through
Once Again, the BLS Numbers Paint a False Picture
Las Vegas, Maine, and a Wedding

It seems that with each passing month the estimates for losses in the international banking system keep rising. This time last summer the largest estimates (from credible sources), if memory serves me correct, were around $400 billion, give or take a few months. By the end of the year it was in the neighborhood of twice that. Then last quarter we saw estimates approaching $1 trillion. Last week, the number being broached was $1.6 trillion, by Bridgewater Associates, one of the top, and more credible, analytical firms in the world. In this week's letter we look at the implications of that projection, analyze recent lending patterns by banks, briefly touch on the implications of the recent unemployment numbers, and end with a few comments on the bear market. It will make for an interesting letter. Warning: remove sharp objects from your vicinity before reading.

But first, I need your help, and in return I would like to give you a link to a recent speech I gave, where I speak about what I think is the development of an important new asset class, one which will come about precisely because of the problems I am writing abut today. I have not yet written about this topic in public, and the speech has been well-received. I think you will like it. Now, as to how you can help me ...

I get to travel a lot with my daughter and business partner Tiffani (actually she runs the business) and meet new people. Over the years, she has become as fascinated as I have with their individual stories. Everyone has a story to tell or a lesson to teach. We have decided to write a book about those stories, looking at the differences in perspective between old and young, retired and working, those who are wealthy and those who aspire to wealth. What are the differences in attitudes, in work habits, in how you manage money, in how you look at the future, and a score of other items? How do all of these things correlate?

We have created a totally anonymous online survey seeking answers to these questions and more. We hope to get at least 10,000 people to fill out the survey; and we are eager to see what we find as we pore over the resulting data and engage in a lot of in-depth analysis. Are the rich really different? Is there a difference in people from Europe, Asia, Latin America, Africa, and the US? I think we will find some very interesting information. Please note: this is not just a survey for millionaires. We want everyone, of all income levels and ages, to take the survey, so we can get a true representative sample.

You can get to the survey page by clicking here. It will take about ten minutes to complete, and I think that going through the questions will make you think about your own situation. Some have told us the survey is quite thought-provoking. If you have attempted to take the survey and had problems, we think we have worked out the bugs.

At the end of the survey, you will be sent to a page with the speech. If you cannot listen to it immediately, then simply save the page or the address. And of course, you can just take the survey to help us.

Also, Tiffani and I want to do live (mostly by phone) interviews with 200 millionaires, of all shapes and sizes and locales. We will interview you for about 30 minutes, and then you can have equal time asking me anything you want. Since I will have learned a lot about you, those questions can be as detailed or as general as you like. We want at least 20% of the interviews to come from outside the US. We will use those interviews in the book, but will attach no identifying items or real names. If we use something from your interview in the book, we will let you see it first. If you are interested in being one of the interviewees, just drop Tiffani a note at eu@2000wave.com and she will get back to you and work out the details.

I am really excited about this project and even more so about working with Tiffani. We will report back to you on what we find. Thanks for your help.

$1.6 Trillion in Losses and Counting

One of the great privileges I have is getting to read a wide variety of economic research. While I get a lot of material direct from the source, I also have a wide network of people who read other sources and send me what they think is important. When Ambrose Evans-Pritchard wrote this week about a report done by Bridgewater Associates, it got my attention, and fortunately this report was sent to me by a few friends. In my book, Bridgewater is one of the top analytical groups in the world. I pay attention and give strong credence to what they write. And this report is quite sobering.

First, let's look at what Evans-Pritchard wrote in the London Telegraph:

"Bridgewater Associates has issued an apocalyptic warning to clients that bank losses from the worldwide credit crisis may reach $1,600bn [$1.6 trillion], four times official estimates and enough to pose a grave risk to the financial system.

"The giant US hedge fund said that it doubted whether lenders would be able to shoulder the full losses, disguised until now by 'mark-to-model' methods of valuing structured credit.

" 'We are facing an avalanche of bad assets. We have big doubts as to whether financial institutions will be able to obtain enough new capital to cover their losses. The credit crisis is going to get worse,' said the group in a confidential report, leaked to the Swiss newspaper Sonntags Zeitung.

"Bank losses on this scale would have far-reaching effects. Lenders would have to curtail loans by roughly 10-to-one to preserve their capital ratios. This would imply a further contraction of credit by up to $12,000bn [$12 trillion] worldwide unless banks could raise fresh capital."

Let's look at some of the details in the report. First, these losses are not all subprime. In fact, more than half of it is from corporate liabilities, around $800 billion. About $550 billion of the corporate losses have yet to be written off. As an example, Bridgewater estimates losses on commercial loans to be as much as $149 billion, none of which has been written off.

Better than 90% of the losses from subprime assets that are on the books have already been written off. That is good. But Bridgewater estimates that there are losses lurking in the prime and Alt-A loan portfolios that could be much bigger than the subprime problems, as those loan books are more than six times the size of the subprime. Quoting:

"The US commercial banks are in a position to suffer the greatest losses, because the core of their portfolio is risky US debt assets. In order to get a sense of their expected losses we examine both their loan book and their securities portfolio and price each type of asset out based upon a reference market. If we use this current market pricing as a guide, there is a long way to go, as these institutions have only acknowledged about 1/6 of the expected losses that they will incur as a result of the credit crisis."

I could go on, but the details are not important. The bottom line is that they estimate there is at least another $1.1 trillion of losses that will have to be written off by institutions all over the developed world, including very large potential write-offs from insurance companies.

Banks and investment institutions worldwide may need another $400 billion in capital infusions. But where they are going to get it is the problem. They have burned through the usual suspects, and burned is the correct word. Any sovereign wealth fund or large investor who has put money into an investment or commercial bank has watched their investment take large losses in a very short time. How likely are they to be willing to belly back up to the bar with more money, on anything except very dilutive terms to current shareholders? The answer is obvious.

And let me be clear. There are some very large commercial and investment banks which are simply going to be absorbed, as regulators move to keep the entire system working. Bear Stearns is not a one-off deal. I think it is likely we will see at least one European bank nationalized. Losses the size that Bridgewater describes are beyond ugly. They are life-threatening for more than one major institution. More on this later.

Banks Start to Reduce Their Lending

Further, let's revisit a theme I have written about on several occasions over the past year. As banks incur losses, they either have to find new capital or reduce their lending in order to maintain their capital ratios, or some combination of both. And what we are seeing is that lending is starting to actually decrease.

Earlier this year lending rose as normal, even though anecdotal reports told of tightening lending standards and reduced loan lines. The tightening of standards did not seem to be affecting actual loans being made, which was odd. But this was partly illusion, as banks were taking back loans they had spun off in SIVs, taking capital away from their traditional loan business. This gave the appearance of expanding loan capacity. Evidently, this bringing back of off-book loans is now being worked through, as evidenced by this analysis by good friend and analyst par excellence Greg Weldon, who slices and dices the data to give us this view (www.weldononline.com):

"[looking at the chart below] ... FOR SURE, the recent decline strongly suggests that the risk of a US recession has intensified CONSIDERABLY, as defined by what amounts to one of the largest nominal credit contractions in DECADES, at (-) $154.3 billion, and a clear-cut violation of the uptrend in place since at least 2001."

Greg goes on to suggest that bank credit could contract a further $6-700 billion over the next nine months, which is a contraction of about 8%. Healthy economies have a rising rate of bank credit, which is one source of expansion. When banks have to reduce their lending, it reduces the growth of the economy or can put it into outright recession.

And if the Bridgewater report is anything close to right, Greg is being an optimist, which is not his normal milieu. Now, do I think worldwide credit will shrink $12 trillion, as Evans-Pritchard suggests? (Note, that was not a suggestion or conclusion by Bridgewater.) Not in my worst nightmares. Capital will be raised, and the various central banks of the world will do what is necessary to give banks the time to work through their problems.

But in the meantime, the trend toward lower lending is likely to continue. And lower lending is going to be a huge headwind for an economy that is already struggling.

This week Ben Bernanke suggested that the "temporary" Term Auction Facility might be extended into 2009. Let me suggest that it will be extended into at least 2010 before it is no longer needed. Banks are going to need to be able to take their illiquid paper and convert it into liquid Treasuries against which they can make loans and continue to function.

As I have written for a long time, it is all about buying time. In 1980, every major bank in the US was technically bankrupt, as they all had large amounts of Latin American bonds in their portfolios, at a size far larger than their capitalization. When the Latin American countries started to default, if the Fed had made the banks mark their portfolios to market, it would have been a disaster of biblical proportions. There would have been no American banks left standing. The US economy would have gone into a deep depression.

Instead, with a wink and nod, they let them keep the bad bonds on their books at face value, which they all did. Then in the latter part of the decade, starting with Citibank in 1986 (cue the irony), they began one by one to write off the bad loans, but only when they had enough capital to do so. It took six years (or more) of profits and capital raising to get to where they could deal with the problems without imploding themselves and the economy of the US at the same time.

Today is only different in the details. The Fed and central banks around the world are allowing banks to buy time to work through their problems. There really is no other option. That extra $1.1 trillion that the research by Bridgewater says will have to be written off? You can take it to the bank, pardon the pun, that it will not be written off this quarter. This is going to be an ongoing process that will take several years at a minimum. Just like in 1980, the regulators are going to allow banks to write down their losses as they can, except in the most egregious of circumstances, in which case those banks will be "absorbed," a la Bear Stearns.

Treasury Secretary Paulson said Thursday that no bank is too big to fail. That is for public consumption. The fact is that there are any number of banks that are too big to fail, depending upon (and borrowing from my favorite linguist, Bill Clinton) what your definition of fail is. If by fail you mean that shareholders are wiped out, then he is correct, there is no institution too big to fail. If by fail you mean that the operations and debt obligations will be allowed to collapse, then there are institutions whose collapse would pose major systemic risk to the world markets. They cannot be allowed to collapse.

Take Freddie Mac. Please.

(Cue Henny Youngman) Take Freddie Mac. Please. Its shares are down almost 90%. "Freddie Mac owed $5.2 billion more than its assets were worth in the first quarter, making it insolvent under fair-value accounting rules. The fair value of Fannie Mae [down 78%] assets fell 66 percent to $12.2 billion, data provided by the Washington-based company show, and may be negative next quarter, former St. Louis Federal Reserve President William Poole said." (Bloomberg) Poole asserted that these institutions are essentially on a short path to insolvency.

But in the same story, Senators Schumer and McCain both said Freddie and Fannie would not be allowed to fail. Even curmudgeonly former Fed Vice-Chairman Wayne Angell (someone whom I sincerely respect), said on CNBC yesterday that the government regulator of the GSEs (Government Sponsored Enterprises) ought to get some money from Congress to buy preferred stock and then get even larger amounts from the public through an offering of preferred stock. He said that Congress ought to learn about its responsibilities with regard to a GSE; and the public ought to realize that we are in for a long, tough fight. (He also expects the second half of 2008 to be no better than the first half, and he sees 1% growth in 2009.)

I wrote the above paragraph, and a few I deleted below, on Thursday, as I am on a plane to Las Vegas and need to finish the letter in order to attend a conference. I wrote with suggestions about how a collapse of the two Government Sponsored Enterprises might be handled. Last night, the New York Times broke a story that government officials are looking at how to go about taking over operations at Freddie and Fannie, should worse come to worst. Then this morning, the Wall Street Journal in its lead story elaborated on this theme.

The basic problem is that both Fannie and Freddie need more capital, and perhaps far more than their current market capitalization. Where to find it? What investor wants to try and catch this falling safe, without government guarantees? The Journal article quotes numerous people with various ideas about what to do. Most of their ideas will potentially cost US taxpayers.

And make no mistake. The problems with Fannie and Freddie have to be solved. They are now doing 80% of the mortgages in the US. Without them the housing market would grind to a halt quickly and housing prices would drop even beyond Gary Shilling's pessimistic views.

Not to mention that the world has assumed the implicit backing of the government in buying the paper of Freddie and Fannie. How easy would it be to finance US debt if this paper was allowed to default? The implications are serious. I understand the arguments for allowing them to fail, and I think shareholders should bear the risk they take on when buying equity.

A very reasonable idea was broached by Steve Forbes on a BizRadio program this afternoon, which Dan Frishberg graciously allowed me to co-host. He suggests breaking Fannie and Freddie into eight smaller companies, giving them whatever backing they need in the form of public financing to start business, and then cut them off to sink or swim on their own, with much tighter capitalization controls. Remember, this is one of the more free-market conservative thinkers.

The authorities are slowly losing control. All they can do is crisis manage. There are no good solutions, only expedient ones. And we must all hope they choose the best among a handful of not particularly pleasing options. Allowing the system to devolve into chaos is not an option. The Fed and whatever administration comes in will do the same as the current group, which is to buy time so that the wounds can heal, and hopefully put in place rules to prevent another such occurrence.

(Sidebar: I will go into greater detail in a later letter, but regulators need to move NOW to create a Credit Default Swaps Exchange. A problem/crisis in that unregulated market is actually a far bigger problem than the current subprime crisis. Why do you think Bear Stearns was not allowed to go into bankruptcy? There are banks that are too big to fail, despite what Paulson says for public consumption.)

There are a lot of conflicting opinions, which you can read at www.bloomberg.com if you care. Some say Fannie and Freddie will have to lose $70 billion before the regulators step in. Poole says they are insolvent now, using fair market accounting methods. I don't know, and neither do 99.9 % of the shareholders. At this point Fannie and Freddie are not an investment, they are a gamble. Sitting here at Caesar's in Vegas, and reading the opinions, makes me think I have better odds at the tables below me.

I hope that when (not if!) taxpayer money is used, it is at market rates and means that shareholders are last in line, if at all, to recoup any money. For those of us who for years have called for tighter regulation and increased capitalization of the GSEs, as well as a clear removal of any government backing, implicit or explicit, being able to say "I told you so" does not feel all that good. Freddie and Fannie cannot be allowed to go out of existence. They are too tightly wound into the core and fiber of the US economy.

What can and should happen is that shareholders bear their losses, taxpayers pick up the bill, and when they are healthy again, as they will be at some point, another public offering should be done to hopefully recoup the losses to taxpayers. Or perhaps an auction with some guarantees to a potential buyer, but a complete removal of implicit government guarantees on future loans, and higher capitalization requirements. There are any numbers of ways to lessen the ultimate cost to the taxpayer.

What I fear is that politicians will use the opportunity to prop up the mortgage markets with taxpayer guarantees and create much larger losses, which could quickly mount into the hundreds of billions if not properly dealt with. A new populist-oriented administration could find this problem on their desk as they take office.

I would not want to own any stock in the financial sector. There is going to be a continual stream of write-offs over the coming year, at a minimum. Yes, some banks are better managed and will avoid the real life-threatening problems. Some will be like JP Morgan and end up with solid assets backed by government guarantees.

But which ones? Do you want to trust the analysts that have been telling you there is value in the financials at each step, all the way down? The management who insists they are in good shape, then raises capital at dilutive prices? The very people who did not see the problems to begin with, telling you that they are now solved?

The "value" that analysts optimistically see in various financial stocks is evaporating with each quarter, as they slowly write down ever more losses. With another potential $1 trillion to be written off or absorbed through earnings from profitable parts of the business, there is more pain to come. Investing in financials today is like trying to catch a falling safe.

The Ugly Muddle Through

Goldman Sachs published a report Thursday in which they suggest the most probable scenario for the next 12 months is GDP growth between -0.25% and 0.25%, or basically zero. Wayne Angell, mentioned above, expects the second half of '08 to be no better than the first half and for GDP growth to be 1%.

In the Bridgewater report mentioned above, they estimate that the net worth of US-based assets is down about 13% since January 2007, a total loss of almost $8 trillion. This is hitting pension plans, corporations, and consumers, making them think twice about planned investments and expenditures.

Earnings estimates are being cut with each passing month. The P/E ratio for the S&P 500 is currently at a sporty 23. Historically, in times of rising inflation, the stock market goes through "multiple compression." That means P/E ratios fall more than earnings. If multiples fell just 20%, back to 18, which is still above long-term trends, the market would see another 20% drop from here. Even with earnings growth, the market is going to have a challenge rising in the current environment.

Sidebar: A number of you have written questioning my source for the P/E ratio, as you read or hear different numbers from what I write. You can indeed find estimates of forward P/E ratios as low as 12 a year from now. That is a lot different than the 23 I cited above.

There are two basic types of earnings that are reported. One is "operating earnings," or what I call EBBS, or Earnings Before Bad Stuff. Then there is "reported earnings," which is what the corporations report on their tax forms. Not all that long ago, in the mid-'90s, operating earnings and reported earnings were generally in line with each other. Companies would deduct genuine one-time, unusual losses from their reported earnings to give us operating earnings. And such a system has a valid basis for existence. If something is truly one-time, maybe an investor should overlook it when evaluating the company's potential.

But then the media and analysts started using the operating earnings as the primary number, and companies began to game the system. More and more items were considered one-time. One of the more egregious examples was when Waste Management Systems declared that painting the garbage trucks was a one-time extraordinary expenditure and should be accounted as such. Today the difference between as-reported and operating earnings can be 20-40% or more! It seems there are many losses that management assures us are just one-time items.

Standard and Poor's has a web page where you can see a spreadsheet of historical data and projections for both types of earnings. That is the source of my data. It is at http://www2.standardandpoors.com/spf/xls/index/SP500EPSEST.XLS?GXHC_gx_session_id_=5350992f205e73e4& .

Analysts' estimates do tend to get brighter the further out one looks on the table. But if the growth scenarios mentioned above come about, and banks have to curtail all sorts of lending, the earnings projections are going to be way too high, as they have been for the last 12 months. That is going to mean more pain for the stock market.

I think it is quite likely we see the Dow slip below 11,000. (Ok, I wrote that Thursday!) As I said on Kudlow the other night, another 10% drop in the market would take us only to the average bear market. A "9 handle" on the Dow seems quite possible, if not likely. (Note: when someone says "a 9 handle," they mean that the first number in the index or stock price is a 9. The first number is the handle.) The risk is to the downside, given the tepid potential growth of the economy.

Once Again, the BLS Numbers Paint a False Picture

I almost get tired of writing this each month, but it is important, and I will do it quickly. The unemployment number from the BLS last week showed a loss of 62,000 jobs. Private sector jobs were off by 91,000, with the government showing growth of 29,000.

But once again, the birth/death ratio of estimated new jobs was 177,000. As The Liscio Report noted: "... without the b/d's contribution, private employment would have been down by something like 268,000. It added 29,000 [new jobs] to construction, 22,000 to professional and business services, and 86,000 to leisure and hospitality. Given the weakness of the economy and the crunchiness of credit, we doubt that there are enough startups around to match these imputations."

Revisions to the prior two months were a negative 52,000. When they do the final numbers a few years from now, we will find that the revisions will be in the hundreds of thousands for the first half of the year. We have now had five consecutive months of downward revisions, which is typical of recessions.

Unemployment held steady at 5.5%, but that masks an underlying and growing problem. There has been a huge increase in the number of people working "part-time for economic reasons" and a large number of people who are discouraged and not looking for a job but would like one. These two categories are not counted as unemployed. If you add them into the equation, the unemployment or underemployment number goes to 10.3%! (per Greg Weldon)

As I warned above, this has not made for pleasant reading. But it is reality, and we need to deal with it.

And let me say that even given the above, I am a long-term (and even mid-term) optimist. We have to work through some serious problems, but we will. Valuations are going to be low once again, and it will be time to become bullish. And researching and writing my book on how the world will change in 20 years makes me very optimistic. No one in 20 years will think of today as the "good old days." The changes that are in front of us will be amazing. So, simply take a deep breath, be conservative today, and get ready for a really wild and fun ride.

And speaking of investment banks, I need an introduction to someone who is deeply involved in the creation of Exchange-Traded Notes. Drop me a line.

Las Vegas, Maine, and a Wedding

I am at Freedom Fest in Las Vegas, and want to hit the send button so I can attend the sessions and see a lot of old friends. I really think it will be good fun. I have dinner with Frank Holmes of US Global tonight, and look forward to it. Frank is the consummate gentleman and always very interesting.

And speaking of dinner, I was with Barry Ritholtz (of Big Picture fame) last week, and we agreed we are psyched about going to Maine at the end of the month for David Kotok's annual fishing extravaganza. Lots of good friends, wine, and conversation - and I will get to collect on at least one of the group bets we made last year predicting markets, etc. And I was way wrong, but everyone else was even more wrong. Go figure. I will tell you all the details after the trip.

Daughter Tiffani's wedding is getting closer. 08-08-08. Less than a month, and a lot of coordination to be done. It is at the point where I am sitting in on meetings. Flowers cost what? Fireworks? Credit lines are being squeezed. But it is going to be so much fun!

Remember, the markets are not where you live. If your investments keep you up at night, sell until you can sleep. Life is to be enjoyed, and I am doing my part. So have fun this week! And call some friends and share a few laughs.

Your wishing he could be a bull analyst,

John Mauldin

What's That Hissing Sound?

John Mauldin — Sat, 08 Mar 2008 06:02:11 GMT

The BS from the BLS Help Me, Obi-John A New Program for All Investors 2,500,000 "Lost Jobs" and Counting Taking a Long-Term Perspective Leverage in Reverse Gear What's That Hissing Sound? A Response from Tiffani The official number for employment...(read more)