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Barton Biggs: Dismal Jobs Report Raises Chance of Recession to 40%

Friday, 01 Jun 2012 12:09 PM

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U.S. employers created 69,000 jobs in May, the fewest in a year, while the unemployment rate ticked up, boosting the chances of a double-dip recession to 40 percent, says Barton Biggs, founder of the Traxis Partners LP hedge fund.

Jobs reports in March and April disappointed as well and were further revised downwards in the May data, sparking fears that the economy is experiencing something worse than hitting a soft patch.

"We were looking for a soft patch to last throughout the summer, but certainly the risks have now increased that this is not just a soft patch and that we may actually roll over into a mild double-dip recession," Biggs tells CNBC.

Editor's Note: Startling Proof of the End of America’s Middle Class. Details in the Video

"I'd say it's about a 40 percent possibility, and I would have said that it was a 20 percent possibility two months ago."

The weak jobs report has fueled talk that the Federal Reserve will stimulate the economy via an unconventional monetary policy tool known as quantitative easing.

Since the downturn, the Federal Reserve has jolted the economy via two rounds of quantitative easing, known widely as QE1 and QE2, which are asset purchases from banks designed to fill financial institutions — and the economy — with job-creating liquidity.

QE1 saw the Fed buy $1.7 trillion in assets from banks, mainly mortgage securities, while QE2 saw the central bank snap up $600 billion of Treasury bonds, the latter of which wrapped up on June 30, 2011.

Such moves are used to juice the economy when interest-rate cuts don't work, and are generally seen as tools used when the country is headed for trouble.

Further stimulus is possible, but don't expect the Fed to rush in with easing measures, which weaken the dollar and send stock prices rising as a side effect of their goal of ensuring price stability and increased hiring.

"I think the Fed could step in again, but I also think that they're also very wary that they don't want to get the market hooked on quantitative easing and at some point if they abuse quantitative easing it won't be a positive anymore," Biggs says.

"I think they're going to wait and see."

Other experts agree that such a poor jobs report depicts an economy experiencing something worse than running into a soft patch, pointing out that wages remain weak as well.

"It's painfully obvious the economic recovery in the U.S. isn't just slowing down, it's pulling up the emergency brake. And, lack of job creation isn't the only critical concern. Wages/Income is sharply lower," says Todd Schoenberger, managing principal at The BlackBay Group in New York, according to CNBC.

"For those lucky enough to have a job, their spending power is sliding when accounting for inflation. The markets will respond negatively to this report."

Talk that the Fed will intervene continues, especially as the yield on the 10-year Treasury plunges, dipping early Friday to around 1.45 percent, which signals that investors are rushing to safety with little to no appetite for risk.

"It was a lousy number ... it certainly suggests that perhaps the softness in Europe is either influencing the U.S. or that the U.S. recovery may not be strong enough to overcome the softness in Europe," says Jack Ablin, Chief Investment Officer, Harris Private Bank in Chicago, according to Reuters.

"I don't think the Fed will respond necessarily to economic numbers but if they feel that there's a stress on the U.S. financial system they will respond."

Quantitative easing rarely fails to drum up debate.

Supporters says the measure, which basically floods the economy with dollars to push down long-term interest rates, steers the country away from a cliff of a vicious cycle of deflationary decline.

Critics say the move is basically printing money out of thin air and plants the seeds for inflation down the road.

One noted investor says jobs reports will improve as the November presidential elections approach.

Unemployment rates are rather easy to manipulate, meaning they are low today but will show miraculous leaps and bounds of improvement come November, which will make President Barack Obama look good, famed commodities investor Jim Rogers told Newsmax.TV days before the May jobs report was released.

"Remember the government has a huge leeway in how they report all this stuff, and they jiggle the numbers. If you get into the unemployment numbers, you'd be astonished at some of the ways they come up with things to say that everything is better," Rogers says.

One way the government makes the labor market look better than it really appears is by excluding those who don't have jobs and aren't looking for work out of the labor force.

Only those who are actively job hunting are counted, so when discouraged workers are yanked out of the equation, the headline unemployment rate that comes out each month is lower than what it really would be if all those who were out of work but wanted to work were counted.

Expect that trend to really continue this election season.

"You are going to hear a lot of good news between now and November," Rogers says.

"I don't like saying this, but our government has lied to us for many, many times, unfortunately."

"On inflation, they make up the numbers. On unemployment, they make up the numbers. All sorts of things."

Analysts point out that the economy needs to create 125,000 jobs a month just to keep the unemployment rate steady, according to Reuters data.

The labor-force participation rate — the share of working-age Americans who either have a job or are looking for one — crept up by 0.2 percentage point to 63.8 percent after dropping to a 30-year low in April.

Still, the May jobs report shows weak jobs gains across almost all sectors of the economy.

Editor's Note: Startling Proof of the End of America’s Middle Class. Details in the Video


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