Reflecting on The Recession

After reading today's Verizon's announcement that it was reducing its employee base by 8,000 workers, it made me start thinking about how Employment has fared in this recession compared to other downturns. Using monthly payroll data from the Labor Department, a Wall Street Journal chart showed that 19 months after the start of the 2007-2009 recession, there were 6.7 million fewer Americans working than in December 2007, a 4.7% decline versus 3.1% for the short, sharp recession of '81-'82.
According to Stanford economist Bob Hall, quoted in the WSJ, "In terms of employment, we've now passed 1982 and we're just about to cross the worst postwar recession, which was 1948."

So, the stock market moved up 23% or so in the second quarter. The positive earnings reports and "upside surprises" in the second quarter were driven by cost-cutting, one-time events, and absurdly low expectations. There was nothing to report in general on the top line. Valuations expanded from bargain basement levels to fair market levels, or "boring" levels to use Jeremy Grantham's phrase. How can it move up from here without quality earnings?

The movement in junk bond indices is hard to fathom, but these moves are usually precursors or coterminous with a movement in equity prices. High quality corporate bonds had a twelve month return of about 8%. Grantham's advice is "Go long quality and short junk." It seems reasonable given the lack of support from fundamentals going forward a quarter.

Meanwhile, the Federal largesse being handed out to Goldman, J.P. Morgan and other Most Favored Banks has yielded windfalls to their execs and shareholders, but it has done little to help the traditional banking sector. Robert Willmers, the CEO of M&T Bank puts it well in the Washington Post, "we must restore the balance of regulatory oversight between commercial banks and other parts of the financial services industry. We should do so not only to be fair to banks but because the nation's ailments won't be cured unless solutions are directed at the entire financial system, not just one-third of it. "