Thoughts to Ponder About “Cyclical” Unemployment and Superman
I typically do not write a morning note on Friday — it is my one day to go “dark” and get some work done (like clean the house and walk the dogs). But given the market’s reaction to the jobs number, I thought I’d send out a quick one.First, despite an abysmal employment report (gotta look below the headline number, folks), the Obama administration is crowing about the drop in the jobless rate to 7.6%. But these economic savants fail to tell us that the number of people not in the labor force increased by an impressive 663,000 — to a record 90 million Americans (not a typo) who are no longer even looking for work). [Note: Some of the data in this note is lifted from ZeroHedge.com, which will always tell you what is REALLY happening behind the propaganda from Washington, the Fed and the ECB]. This is the largest monthly increase in people dropping out of the labor force since January 2012, when the Bureau of Labor Statistics did its census recast of the labor numbers. The most important number — labor force participation rate — dropped from 63.5% down to 63.3%. That’s the biggest monthly increase in 34 years. Now, you may say, “Well, a 0.2% reduction isn’t that much, Dan.” Well, it’s actually 3.1% of 63.5 — more than double what you might think. Perhaps it’s time for Joe Biden to go on his annual “Recovery Summer” tour. The last three tours didn’t end that well, but perhaps the fourth time will be the charm.
You may be able to fool all of the people some of the time, and some of the people all of the time…but there are 90 million people who fall into the category of “some of the people none of the time.”
So what are equities doing? Well, what they WERE doing was selling off. But we can now see some stabilization. The S&P, down 1%, remains decisively above the 50-day moving average. Look at IBM — touching a nicely uptrending 50-day moving average and bouncing. Still down 1.75%, but likely just presenting a good buying opportunity. CSCO got crushed as all the networking stocks sold off in reaction to dismal guidance by FFIV.
What’s the saving grace for the market? Why, it’s Ben Bernanke, of course! He is an economic Clark Kent. Superman with a fist full of dollars. Let’s chat about Ben Bernanke for a moment.
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I recall an interview he gave about a year ago, wehrein he said that the unemployment situation was “cyclical” and not “structural”. Look, I don’t to bag on this guy any more than I already have, but…well, maybe just a little bit more. This notion of “cyclical” rather than “structural” defines a new kind of stupid. He’s blazing a new trail of intellectual bankruptcy. You see, if he admits (or discovers) that unemployment is structural, then he must admit that the Fed is powerless to do anything about it. The Fed manipulates the financial markets to get us through this rough “cyclical” patch. But can the Fed impact structural matters? No. The Fed is impotent in such regard. It doesn’t (and shouldn’t) have the tools to address structural unemployment.
So his stance is either dishonest or hopelessly unsupportable. It’s a typical academic interpretation by a gentleman who has never worked in the private sector and had to make real-time decisions on employment and business growth:
“Do I hire someone new? Is my business peaking? Revenue is a bit down — Do I boost my sales force to try to gain market share…or will that just run me into the ground? My costs are quite a bit higher due to increased regulations and taxes (a double whammy…both cost money). Do I personally want to work harder to make less money, or should I just scale back, work a bit less, and try to keep more of what I make and slide semi-gracefully into retirement? What’s up with this health care thing? Maybe I hire part time workers. Maybe I contract with a temp firm who supplies me with temporary labor that has the requisite skills for the job? I wouldn’t even have to fire them — I’d just call the temp agency and tell them to send someone else.”
[And by the way, how many people who are referred by that temp agency would love to have full time jobs? How many of those folks do you think are working for that temp agency with the desperate hope that they’ll be hired for a full-time position as a result of their temp work? And how many of those employers will hesitate to hire them because of the current (and permanent) uncertainty imposed by increasing regulations and taxes?]
“Oh, wait! I’ve got a larger business — perhaps I should open a plant overseas. Labor is cheap. Unions are non-existent. Regulations are less onerous. The dollar is strong, which gives me more bang for my buck. Yeah, that’s the ticket!”
All of these questions…and many more…are questions that Mr. Bernanke isn’t even thinking of. And even if he was, he wouldn’t have the foggiest idea how to answer them…nor understand that the questions are the problem. The answers aren’t even relevant. The fact that employers are asking these questions (I know that I personally am asking these questions)
It is obvious to all but the most casual observer (or any professional intellectual) that the longer people remain unemployed, the more their skills slip. At some point, their skills become largely unmarketable. Further, the longer people must rely on entitlements from the government, the more difficult it becomes for many to get off those government subsidies and re-enter the work force.
Put 2 and 2 together. (Ask an economist what 2 + 2 equals and you’ll be asked, “What do you want it to equal?”) Declining skills will result in being qualified for low-paying jobs…perhaps even entry level jobs. Now, when you can only find a low-paying job, you’ll often find that working costs you more money than remaining on unemployment and/or disability. (You’re not supposed to get unemployment and disability — it’s illegal. But millions are doing just that for the same reason that a dog licks….well, you know.).
A person re-entering the work force in a low-paying job suddenly finds that they’ve got to pay for babysitters. They’ve got to put gas in their car to drive to and from work. Think gas isn’t a big deal. Wake up! What if your job isn’t right around the corner…but is instead 15-20 miles from home? How much does gasoline cost? Well, here in California regular gas costs more than $4/gallon. Oh, and they’ve certainly got to upgrade their clothes so that they can have more appropriate work attire.
Look, this is real-life stuff! I’m not talking about laziness or lack of ambition. I’m describing the real-life issues facing an increasing number of out-of-work people with dreams, ambitions…and hard costs. For many people with declining skill sets, the chances of them ever being able to get back on track are quite slim…because they simply cannot afford to take the only jobs that are offered them. Again…not laziness…just math. Money in vs. money out.
This stuff is not cyclical. It is structural. It is generational! But no one in Washington (on either side of the rat-infested aisle) will tell you this. Nor will the Fed. Why? Well, the former group of elected officials will actually have to do something. They can’t rely on the Fed to fix ANY of the problems outlined above. While the Fed has an ill-advised and ridiculous “dual mandate”, it cannot fix structural problems. So the vested interest in perpetuating a myth is widespread.
Simply put — you are not being told the truth. And if you think otherwise, then you need to apply for a high-level position in Washington because you are infinitely qualified to fill a senior role. Heck, you may even be interviewed by CNBC some day, standing in front of the White House, or in the halls of Congress. How auspicious!
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So in light of all of this (And I dare you — try to break my argument. It is unbreakable because it is based on facts, not wishful thinking. Not one time have I used the word “should”. This is reality, not propaganda), why is Mr. Bernanke our saving grace?
Simple! This is why today’s selloff is being met with buyers above support — because investors know that Mr. Bernanke will keep doing what he has been doing. He’s a one trick pony who is bent on navigating us through the “cyclical” unemployment issues that we are facing. So he’ll keep money as cheap as possible, thus herding investors into equities like cattle into a pen. It’s the only place to go.
So while I disagree with the eternal printing of money, it is resulting in rising equity prices. So we can capitalize on the monetary circus by playing the game. Be long equities…and buy every dip. After all, that’s what the big money is doing. How do we know that the big money is doing it? You can see it on the cart — dips lead to rallies. And sometimes it’s just that easy. At some point, the music will stop and there won’t be enough chairs (actually, there will be no chairs). But that won’t happen tomorrow, nor next year (unless you live in one of the P.I.I.G.S.)
So get long this dip. Scale in slowly so as to not assume maximum risk at any one level (remember, I could be wrong. I doubt it…but I’ve been wrong before and there is no chance that I will NOT be wrong again. Many calls…some right; some wrong. Sorry, the Wizard is really just another trader behind a big green curtain).
And by the way, to the many of you who are skeptical of my analysis, riddle me this: “If it was as easy as printing money, then why do we even need to do it?” It should be “one and done.” We’ve faced economic downturns before…so if printing money was the panacea for economic strife, it would have worked before. It hasn’t. It’s a theory. And after several years of putting this theory to the test, our economy is exceedingly weak, and our balance sheets are bursting with debt.
Housing prices are rising, sure. But that’s a function of supply being chewed up, and banks having been quite patient in how they administer their non-performing assets. But if housing were truly a source of employment that is a harbinger of better economic times, then why hasn’t the employment picture improved? (I’m not talking about the headline number, which is a laughably inadequate measure of what’s really happening in our domestic economy) Since the point of peak decline in homebuilding employment, just 125,000 jobs have been added to the residential construction sector. So that dog won’t hunt. Ha! We need more new jobs than that PER MONTH to just break even.
Back to money printing. If it works, then why isn’t everyone doing it? Wanna be a millionaire? Anyone reading this can probably become a millionaire before the banks close today. It only costs you about $2,800. Just convert your dollars to Zimbabwean dollars. Viola! You’re a millionaire!
Now, go try to buy a pair of pants, rich guy.
So, with all of this said, I’ll say it again. Embrace what’s happening. Understand that even disappointing Q1 earnings will not likely lead to a BIG decline. A decline? Sure. The market has already run about 10% in 2013. What do you expect? Another 10% each quarter? Not gonna happen. This is a stock-picker’s market now.
So start picking stocks. Superman has your back.
–Dan
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