No Jobs = No Recovery

The Department of Labor released its weekly initial jobless claims today. They weren't good - at 484,000 people, the highest level in 6 months they were up by 2000 people since last week, and 14,250 since the prior week. The department also revised its previous claims estimates upwards. The trend and the reality continue to be unfortunately, dismal. We are still losing jobs.

And yet, news outlets continue to report this negative information as merely some kind of unanticipated interruption in the economic recovery we're all supposed to be enjoying (according to Tim Geithner, Ben Bernanke and the rest of Washington, anyway). This morning's interpretations of the claims?  They were higher than analysts' expectations.'  I continue to be amazed, not that economists keep getting it wrong, but that the media hasn't figured out that they are consistently overestimating the 'recovery' and underestimating the true deterioration in the economic condition of the country.

Goldman's Private Equity Spin-off - For Rules? or Profits?

Banks aren't boy scouts. So, I tend to be skeptical about banks proactively doing things deigned simply to adhere to new rules, like spinning off their private equity arms  - especially when it's years before those actions are necessary. Yet, despite my general cynicism, I was surprised that even my hero, Tyler Durden, considered the possible spin-off of Goldman's prop desk a positive sign. Now, Andrew Ross Sorkin considering anything Goldman does in a positive light, I expect - but Tyler?

It made me think maybe I was wrong this time. So I took a look at some numbers.

In the last quarter (Q2/2010), Goldman's net revenues were $8.84 billion. Trading (of the Non-Volcker Rule or NVR - type) comprised $5.6 billion (or 63%) of that total. Principal Investments (PI: the area that Goldman considers to be its private equity leg) were $943 million (or 10%.) Compare that to the second quarter of 2009 (q2/2010), in which net revenues were $13.8 billion, trading (NVR) was $10.78 billion (or 78%) and principal investments were $811 million (5.9%).

First, either way -  in good and less good trading quarters - PI comes in at, or below, 10% of total net revenues, not tiny of course, but nothing particularly huge either. 

Second, this is what Goldman's CFO, David Viniar said about that PI's contribution this past quarter:

"Let me now review our Principal Investments, which produced net revenues of $943 million in the second quarter. Our investment in ICBC generated $905 million, largely driven by the recognition of our liquidity valuation adjustment as the transfer restrictions on our investments expired during the quarter. Our corporate and real estate investment portfolios were not meaningful contributors during the quarter."

He basically said that a key part of the business that he considers to be principal investing or private equity (which mostly represents a stake in China's ICBC) came to the end of its investment period. When Goldman bought its stake in ICBC, partners and other investors had to stay parked for three years. Those years are over and they made a killing. Shifting out of that investment because of a US law, rather than just to take profits, might look a whole lot better to China. The rest, as Viniar says - is 'not meaningful.'

Separately, many of the news reports say Goldman may spin off its prop trading desk (others say its private equity arm): yet, nowhere does Viniar mention the prop desk as a separate earnings category, nor is it delineated separately in the firm's earnings report, so it remains to be seen how that would look in practice, and it's unclear why these news reports don't differentiate - or use the earnings statements to do so.

True, Goldman wouldn't be the only bank spinning off a private equity arm: there's Bank of America, Citigroup, and Morgan Stanley, too. But, for all the 'adhering to rules' spin of the spin, these moves aren't particularly meaningful in altering the Wall Street landscape, as the areas aren't significant contributers to the bottom line in revenue or risk, compared to 'customer-driven' or 'market-making' trading. If they were, they wouldn't be happening before the potential 7 years grace-period written into the financial reform bill. Plus, the 'spun-off' entities wouldn't be comprised of shifted investments from the main bank, and run by former employees of the main bank either into the asset management arm or a newly created entity - that's about as close to an overlap as you can get. 

Maybe the Fed should rethink the term 'Economy'

Today, in a South Carolina speech, Fed Chairman Ben Bernanke repeated a bunch of stuff he's said in the past, stuff that confirms the status prevailing in his head - that he (along with notable DC cohorts) are invincible gods that stopped another Great Depression in its tracks simply by spilling out tons of money into the banking system, even if the results aren't that stellar for most of the rest of the country...

(note, I'm about to paraphrase him):

- The economic recovery isn't going as fast as we thought/said it was.

- We need to keep rates low so we don't choke the recovery that isn't going as fast we thought/said it was (though in practice that means banks will keep hoarding capital to trade and corporations will bulk up on debt.)

- The 'recovery' is still jobless (though he can't seem to understand why.)

- Households will probably start buying more at some point because incomes will magically rise which will help the economic recovery that isn't going as fast as we thought/said it was.

He probably said more, but I lost interest in the premise of his delusion - that the true majority of people in this country are feeling like they're actually in the midst of an economic recovery - slow or otherwise.

Since the trillions of dollars of bailouts poured into Wall Street, what's basically happened is:

- The largest banks are doing better (cause of the trillions of dollars).

- The largest corporations are reloading up on debt (cause of the trillions of dollars that went to their banks and the fact that rates are so low.) This July marked a month of record debt issuance for big firms.

And yet, none of this is translating into:

- Small businesses or individuals getting equivalently good terms on restructuring debt, or gaining loans for expansion or to keep current payroll numbers and not have to cut jobs. Instead, bankruptcies continue to rise.

- New jobs (people applying for initial unemployment claims continue to stream into that status at a rate of just under half a million a week, and that figure doesn't count freelancers or contractors who can't get unemployment so can't file claims to begin with). The unemployment rate is likely to push up to 10% again at this rate (even with DC figure tinkering), and that's not even including everyone who's underemployed.

- Higher general salaries (higher productivity yes - but, people working more hours for less money, is not the stuff of a true recovery.)

- Less foreclosures - the first half of this year marked a greater amount of home foreclosures than the first half of 2009 or 2008. 

Maybe it's time Bernanke reconsidered what the term 'economy' means to the general population.

What do you guys think - how should 'the economy' really be measured?