Wednesday, June 16, 2010

Q4 Is There Still a Risk of a Double Dip Recession?

"Brain surgery is not rocket science to a brain surgeon".

In recent weeks I have been answering the questions we are lately being asked most often. If you have found value in what you've read from us we would be privileged to have you click the "follow" button.

These questions are regarding issues that are billed by "experts" as complicated or hard to understand for us laymen. Hopefully I have succeeded in proving that these issues are neither complex nor difficult to understand at their most basic levels. I have come to believe that nothing is really all that complicated at its core once some common language, a little education and some basic experience is applied hence my observation "brain surgery is not rocket science to a brain surgeon". Said another way, for those of you old enough to remember these commercials, magician Marshall Brodien (Wizzo on Bozo Circus) always said "Most magic tricks are easy...once you know the secret". It's funny. I never have any trouble answering trivia questions...that I ask!

I admit that one of the phrases I hear most often from my wife and closest colleagues is "Matt, you use a lot of words". So, all of the above reviewed, I'd like to take a stab at the fourth question whose answer many of you will likely consider mercifully short.

Question 4: "Is there still a danger of a double dip recession"?

Short answer: No...and Yes.

Long (ish) answer: Please, read on.

Please begin with the understanding that the following is not political commentary although our skepticism of current and proposed policy is clear. It is not offered to foster optimism or pessimism. It is simply our opinion on the direction of the economy based on internal analysis of objective, publically available data that leads us to conclusions regarding spending decisions and investment strategies.

It can be said that recession is the significant and/or extended absence of meaningful economic growth. If you have been following the earlier stuff you know that two of the most instructive measures of economic health are the Employment Situation Summary ( and the Gross Domestic Product reports ( These, as well as most other indicators, in their detail tell us that there is no momentous recovery out there and Blue World analysts see no catalyst for one to take hold. If we (Blue World) have seemed rather cynical about the U.S. or global "recovery" is it because we do not see any objective evidence of a meaningful one occurring. So, from a really twisted perspective, I have to admit that we CAN'T see a chance for a second dip if we don't think we have emerged from the first one.

So, change the question for me a little bit. Ask "Is there a chance things could get worse?" Now the answer is a resounding and unfortunate "YES." Other posts have given some detail so I'll just offer a quick list here of what we see as ominous threats. In the face of rising deficits, rising unemployment and decreasing federal revenues I'm not sure who first said "Hey, I have an idea. Let's borrow more cash, add massive entitlements, keep interest rates low and...just print a bunch of new money to pay for it all" but it is unsound fiscal policy for reasons too numerous to list here. Taxes are going up. The increase in capital gains tax alone will retard investment. Add to that a looming commercial debt crisis, slowing construction, inflation and interest rates that can only rise from here and we already have a recipe for further economic deceleration. That's not the worst part. The worst part is the effect all this has on jobs.

Pay attention here. This is not difficult material. A full seventy percent of our economy is driven by you and me, the consumer. If we are nervous we don't spend. If we don't spend demand falls. When demand falls production slows. When production slows consumers lose jobs. When consumers lose jobs everybody gets nervous. When we are nervous we don't spend. Simple as that! The employer base, the only entities that can actually create jobs by increasing production and hiring people, reads the same data that I write about. They are powerless to increase production and add jobs if consumers are nervous and failing to spend. With unemployment near ten percent and more mass layoffs being announced every week where do we think this "recovery" is happening? Sure, there are those who point out the government is hiring. The government is no exception to these laws of economics. For the government to be an employer it can only get the money to pay employees from the private sector. If the private sector is not producing then the revenues to the government decline and they, eventually, have to effect mass layoffs just like any other major employing entity.

The private sector depends on demand. The government depends on the private sector. I'm afraid we just don't see fiscal or economic initiatives that will serve either well so we remain, as all who invest and spend real money are, very nervous and defensive for the foreseeable future...and that's exactly why things could get worse.

Short (ish) answer? I tried.

Again, thank you for reading and...stay tuned.

Wednesday, June 9, 2010

Q3 Why Do I Keep Hearing Social Security Won't Be There When I Retire?

"Brain surgery is not rocket science to a brain surgeon".

Over the last couple of weeks I have been answering the questions I seem to be getting asked most often lately. Below is another answer to a question that is billed as complicated and confusing. It's not.

Question 3: "Why do I keep hearing that Social Security won't be there when I retire"?

Short answer: Because it probably won't.

Follow-up Question: Why not?

Short answer: Arithmetic

Long answer: Please, read on.

I am in the final stages of writing a book entitled "Money as a Second Language". There are three chapters dedicated to what I describe as the three biggest enemies of wealth building. One of those three is excessive taxation. I go out of my way to say that the chapter is not intended to be political commentary because it isn't. But you simply cannot talk about financial responsibility, money, investing and wealth building without talking about the single largest expense a working family has. That's right. Taxes are the greatest expense a working family has in America. More than food, mortgage, car payments, etc. How can that be? Note, I did not say "income tax". I said "taxes". Income tax is only one of the myriad taxes we all pay to local, state and federal governments. It troubles me that while most people are aware of the more well known taxes by name like income, property and sales they fail to recognize other costs as the taxes they are. Some include parking meters, pet licenses, tolls, telephone, and sin. There are over 90 taxes we pay regularly and the number of taxes as well as the rates we pay are growing all the time. So, please keep in mind as you read that this is not political commentary. It is just an objective, mathematical description of why the Social Security program is fatally flawed with the unavoidable implied criticism of the policies and management that created the problem.

I keep hearing about how complicated the Social Security problem is. I guess it could become complicated if you did not understand basic arithmetic so students Pre - 1 may require five to ten minutes of additional explanation before they get it. The rest of us, well...

Let's begin with the concept of Social Security (an oxymoron). Originally Social Security was advertised as a guarantee that everyone who earns a paycheck, responsible and irresponsible alike, would have money set aside for retirement. The mandate was to take money from workers' paychecks and set it aside for their golden years. There are those who will say the more sinister goal was to give a federal government with a rapidly growing appetite easier access to a percentage of every paycheck issued without having to go to the inconvenience of billing for and waiting for us to remit our taxes.

Regardless of how you feel about such a program in theory, it is fundamentally flawed as a practical matter. Those flaws are routinely and aggressively camouflaged with misinformation. Again, a simple concept. Take money from a paycheck and set it aside for retirement, right? Wrong!

The first problem with Social Security is that it does not provide "security". Aside from the real risk of going broke you know very few, if any, people who can afford to retire on Social Security alone while maintaining a lifestyle they aspire to. So, by default, no "security".

The second problem is that the program, as advertised, is a complete falsehood. For simplicity, one way to save money is to take some money from each paycheck and put it into a piggy bank. Each check same procedure and the balance keeps growing. They want us to think that's how Social Security works. It doesn't.

Without getting into the details of trust funds and collateral the simple fact is that it does not work as advertised. You see, the money taken from your check is not put into an account for you to just keep growing with every check. This is the really important bit. THE MONEY YOU PUT IN TODAY IS BEING PAID OUT TO RETIRED PEOPLE TODAY. We each have a Social Security number but that number is just the unique identifier of a tax payer. It does not correspond to an "account" with our names on it that just keeps building up cash. Don't buy the line that Social Security yields about a 3% return. There is no return on money spent on other people today! In addition, Social Security has well exceeded its original mandate with payments for disability, lost spouse, lost parents, etc. The fraud and abuse is enough to eventually bankrupt the program but we have a much bigger threat to it than that.

Here is the simple arithmetic I keep referring to. This is all you need to know to fully understand the un-sustainability of the Social Security system. Social Security is funded exclusively by the current labor force. It can be expected that over time the population and, therefore, the size of the labor force, will ebb and flow. That is just common sense. The baby boom produced a big, bell-shaped curve in the population of the United States. If the money taken in today goes to pay for people retired today and the number of people retiring today exceeds the number of people entering the work force today and that trend continues for 5, 10, 15, 20, 25, 30...years eventually the obligations owed to the recipients will overwhelm the ability of the donor force to meet the demand. Things just keep getting worse and worse because the number of retirees keeps rising and the work force keeps shrinking. That's it.

This situation is exacerbated by the recession we are currently in (yes, we are still in it) occurring at a time when the baby boom generation is starting to retire en masse. So an already shrinking labor force is being further decimated by a prolonged recession with double-digit un/under employment leading to curvilinear revenue reductions for a system already stressed to the breaking point.

Solutions? Several good ones. I just hope I don't need to explain why raising the Social Security tax rate is not one of them.

As always, thank you for reading and...stay tuned.

Friday, June 4, 2010

Employment Situation Summary Analysis

Employment Situation Summary
Release Date: Usually the first Friday of each month
Release Site:
Market Relevance: VERY HIGH
Management Value: VERY HIGH

To learn about the official release please follow:

Friday, June 4, 2010

Blue World Employment Situation Analysis

Remember when I sent out a tweet that said don't listen to "experts" in the media when making important financial decisions because most headlines start with language along the lines of "analysts were surprised when..." What I meant to say is "listen to us." Some very big names were predicting anywhere from 450,000 to 600,000 new jobs for May. As an organization that saw virtually no potential for good job growth in the private sector we wondered "could we be that wrong? Unfortunately, NOPE. The unemployment rate fell to 9.7% but, so far, even the media does not seem to be trying to spin this as a good thing. Ironic, isn't it? The rate jumps in April and that was a "good thing." The rate falls in May and that is a "bad thing." Go figure.

As usual, the real truth is in the in the detail behind the headlines so let's take a look...

The overall rate fell .2% from 9.9% to 9.7%. Workers 25+ with a bachelor's degree or higher continue to be unemployed at historically unprecedented rates near 5% (4.7% in May). The rates for those without and with only a high school diploma also rose in spite of the summer-help hiring season getting started. That's not a good sign. The number of people reentering and first time entries to the job market also fell.

As we move to Table B (Establishment Survey) we can readily see the meaningful data. The economy added 431,000 paychecks. Ordinarily we'd say that's a good thing. The problem, however, is that of those 431,000 only 41,000 came from the private sector. The balance of 390,000 came from government hires. Worse, yet, is that the vast majority of those are temporary census jobs. One can argue that a job is a job but remember, the government's ability to be an employer is based completely in its ability to collect revenues from the private sector. If the private sector is not growing (GDP and employment says it's not) then it is only a matter of time before the government has to start laying off part-time and full-time workers.

The percentage of workers unemployed for 27+ weeks edged up, again, to 46%. That is over 6.75 million workers. Also troubling is that those unemployed for 5 week or less rose again. These are new job losses and earlier this week some major companies announced mass layoffs to come soon.

Manufacturing weekly hours worked and overtime remain predictably lackluster based on the GDP numbers but hourly manufacturing wages rose enough to notice.

Well, let's beat the same ole' drum. Blue World analysts do not see the catalysts necessary to drive a vigorous recovery. We, instead, perceive several major risk factors for continued and accelerating weakness, especially as we head into the second half of 2010 and Q1-2 of 2011 (Tax Season).

We remain in a very defensive posture with our investment strategies and will for the foreseeable future.

Thank you for reading and...stay tuned!

Release Site:

Every effort is made to ensure accuracy of data transcription but accuracy cannot be guaranteed. The official release site should be cross referenced for accuracy and footnoting. The analysis represents the opinion of Blue World Asset Managers, Ltd. who are not giving advice and does not warrant or guarantee predictions based on its analysis.

Tuesday, June 1, 2010

Question 2: Is There a Meaningful Recovery Going On?

"Brain surgery is not rocket science to a brain surgeon".

Question 2: "Is there a meaningful economic recovery going on out there"?

Short answer: No.
Long answer: Please, read on.

Don't shoot the messenger, folks! I am not a Negative Nancy by any stretch but when it comes to money and investing objective reality trumps headline fantasy every time.

As promised, every few days I'll be answering the four questions I am being asked most often. They are in no particular order and involve subjects that are billed as "complex" or "difficult". Don't you believe it! This stuff, like all stuff, just isn't that hard to understand at its highest level. Can macro and microeconomics be made confusing to the layperson? Sure. But you don't need that kind of drilled-down study to understand the state of the economy and what drives it. In teaching I like to start at one-hundred thousand feet at a place everyone shares common language and then move in closer and closer to the detail as the situation warrants. For example, if I am teaching the anatomy of the arm I start with "this is an arm". I can then move from there all the way down to the individual cell types of skin, blood, muscle, bone, etc. based on the needs of the audience.

To understand the economy and what drives it we can begin with language everyone understands. The main driver of the economy is you and me. It is a simple circular relationship. The more confident we are in the economy the more confident we are that we will keep our jobs. The more confident we are we will keep our jobs the more likely we consider it to receive raises and promotions. The more confident we are we will keep making more money the more likely we are to spend money on products and services. The more we spend on products and services (demand) the more products and services are offered (supply). The more demand for supply the more companies need to hire workers. The more workers companies hire the lower unemployment gets. The lower unemployment gets the more working people there are who want to spend further driving up demand. Now full circle, the more confident we are in the economy the more confident we are that we will keep our jobs....

It really is that simple. Now, there are boatloads of economic releases that come out each week, month, quarter, year. There is GDP, the unemployment report, housing starts, consumer confidence index, new home sales, existing home sales, new housing permits, first-time jobless claims, factory orders, manufacturing index and on and on and on... What I want you to realize is that for all the data gathered, analyzed and reported on they all have just one common objective. It is to see what kind of mood you and I are in as consumers. If we can determine what kind of mood the consumers are in and what their spending patterns are we can predict which way the economy is likely headed. If unemployment is headed down, personal income is increasing and GDP is rising it is a darn good bet that good times are-a-comin'.

While headlines are useless for anything other than spin we don't need to delve too deeply into the latest batch of anecdotal or objective data to see what's really going on out there.

The perception is that taxes are going up, inflation has no choice but to rise, interest rates are about as low as they can get and unemployment is forecast to remain well above 8% for the foreseeable future. With the notable exception of some early, cautious loosening of liquidity in the M&A space, there is not a single ingredient common to healthy economies much less economic recovery.

Objectively, we don't need to dive very deep into the latest economic reports to get a sense that the anecdotal observations appear to be supported by the objective data.

The jobless rate is hovering around 10%. {Release site:} That is bad enough. When we factor in the under-employed and those who gave up looking the rate is about 17% with no relief in sight. Even worse is that those unemployed for more than 26 weeks are at historic levels and workers who are 25 years and older with a bachelor's degree or higher are out of work at rates never seen since the statistic has been kept (near 5%). This group, in particular, is the group most likely to spend on big ticket items, feel secure and start new companies. The media attempted some positive spin on the rise in unemployment from 9.7% to 9.9% and we could hardly believe our eyes and ears. The statement that the rise in unemployment is a sign of optimism on the part of workers is ludicrous. It has a great deal more to do with the possibility of unemployment benefits being discontinued and, remember, they are looking for work not finding it. Hey, maybe that's why the percent of unemployed people WENT UP!!??!!

The Gross Domestic Product (GDP){Release site:} numbers are not as rosy and bright as you have heard in the media, either. The GDP for Q1 2010 was "predicted" to be 3.4%, came in on the advanced estimate at 3.2% and was revised down to 3% at the second reporting in May. Strip out increases to inventories (stuff made but not sold) and we are at about 1.6%. The best indicator of consumer demand is "final sales of domestic product" found in the addenda section of Table 1. The latest estimate is that it grew at a paltry rate of 1.4%, revised down from an initial report of 1.6%. Blue World expects a further downward revision at the final release on June 25th.

There are many other indicators showing similar data. Those mentioned above tend to be the more headline grabbing names. We simply don't see any fundamental catalyst needed to drive a sustainable or vigorous economy. On the contrary, there are ongoing significant threats not the least of which are continuing foreclosures, a looming commercial debt crisis and a flood of newly printed money in the face of rising federal deficits. The objective data just does not support the existence of a robust, or even modest, recovery underway. We have a problem with the concept of a "double dip" recession when the data does not indicate meaningful emergence from the first drop.

Objective data not headlines, friends. Keep an eye on your money. "D - fence" is still our chant.