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A Market Crash by Jobless Recovery?
By Economic Forecasts & Opinions
While certain signs have pointed to the end of the recession, unemployment remains rampant. With a double-digit unemployment rate, President Obama has been traveling throughout the nation, pushing his job-creation agenda.
Meanwhile, the House overwhelmingly approved extending the filing deadline for unemployment benefits and the COBRA health coverage subsidy through the end of February, and also narrowly passed the $154 billion jobs bill.
Billions would probably go toward highway construction and mass transit. However, the total is considerably less than the $780 billion stimulus bill passed earlier this year, and is not expected to hit the Senate until early next year. But if the legislation is ultimately passed into law, the total spending could amount to almost 1% of U.S. gross domestic product (GDP).
Worse Than You Know
The nation’s employment picture is certainly grim. The unemployment rate jumped to 10.2% in October, the highest in 26 years, albeit the number went down to 10% in November (most likely a sampling error). Nearly 16 million Americans are out of work, and there are now six workers competing for every job vacancy.
The headline unemployment rate; however, does not take into consideration discouraged workers, part-time workers who want full-time work and underemployed workers. Include these people, and the rate increases to 17.2% in November vs. 12.2% from a year ago.
Additionally, the U.S. Labor Department survey of companies doesn't count the self-employed and undercounts employees of small businesses. So the economic picture could be even more dire, as small businesses account for about 60% of the nation's jobs. Adding to the demand decrease associated with the recession, small businesses have been crimped further by banks tightening credit not willing to lend.
Stimulating the Wrong Way
In a recent Forbes article, Mr. Joel Kotkin points out that the latest job growth trend reflects the critical weakness in the stimulus package. The stimulus focused on government bailouts and transfers of research funds to universities while with less than 5% going to basic infrastructure.
“The strongest growth in high-end services is usually propelled by growth in tangible industries, such as energy, agriculture or manufacturing. When those industries tank….high-end services decline with them.”
A Different Joblessness This Time Around
The number of people unemployed for longer than 27 weeks is almost 6 million. Generally, the number of these workers is about half those unemployed for less than five weeks. This relationship switched midway in 2008.
Now, the mean length of unemployment is about 27 weeks, up from 15 weeks in December 2007. While the number of unemployed and the duration of unemployment is running deeper, those who are employed are working less hours resulting in smaller paychecks.
Recovery Paradox
Job losses have been unusually steep in this latest recession with some 7.3 million jobs have been lost since December 2007, according to NABE. And little evidence suggests that employees will start hiring on a mass scale anytime soon.
The severity and the speed of the downturn has made businesses exceedingly cautious about the recovery and is contributing to a substantial disconnect between their more cautious forecasts, and more confident recovery talk from government officials as well as many in the investment community.
Businesses remain skeptical about the economy and just how much Washington can do as the White House and Congress are tied up with health care reform and foreign policy issues. In addition, their ability to institute new programs will be hampered by the nation's record budget deficit.
Unemployment & GDP
One economic theory - Okun’s Law, suggests an empirically observed relationship relating unemployment to losses in a country's production.
The theory posits that for every point above normal that unemployment moves, GDP growth falls by 2%, and vice versa. While not an exact science with plenty of critics, the equation does provide a good quantifiable estimate of the effects of unemployment upon GDP output.
Indeed, unemployed workers represent wasted production capability, and it also means less money being spent by consumers. With consumer spending accounting for about 70% of the U.S. GDP, prolonged high unemployment leading to chronic lower spending has the potential to lead to lower growth, more unemployment, beginning a vicious cycle. (Fig. 1)
A Lagging Indicator No More
The unemployment rate is traditionally characterized as a lagging indicator, and Raymond James just reminded investors that on average, unemployment starts to go down seven months after the trough in the S&P 500 is reached.
Nevertheless, due to the sheer speed and volume of job losses across a wide range of sectors, I have to agree with PIMCO’s Mr. Mohamed El-Erian that the unemployment rate should no longer be regarded as a lagging indicator as it does have the potential to influence future market behaviors and outlooks.
Unemployment Could Go Even Higher
Just last month, the OECD noted that growth in the world’s industrialized economies has resumed, but warns that unemployment is set to continue to rise well into 2010.
This is echoed by the testimony before the Senate Democratic Policy Committee this week from Brookings Institution, who warned that even if the economy adds 200,000 jobs a month (a tall order, by the way), it will take seven years to lower the unemployment rate to 5%.
Moreover, even if companies do start re-staffing next spring, the unemployment rate could easily hit 11% from a growing labor force, the return of discouraged workers, the hiring of part-timers instead of the unemployed.
Bull to Bear from Tightening Liquidity
Now, the Federal Reserve has just upgraded its assessment of the US economy and highlighted its intention to shut down most of its crisis-fighting liquidity facilities in early 2010.
This tightening could potentially boost interest rate along with the dollar. This, coupled with lower consumer spending/growth in the US could mean the current liquidity-driven lofty commodity and equities price level could no longer be supported however bullish the market sentiment is.
Market Crash by Jobless Recovery?
Investors are moving in unprecedented lockstep driving up almost all asset classes (stocks, commodities, bonds and emerging markets) mostly on a weak dollar and easy money.
The simultaneous rally also suggests market is betting on a V-shaped recovery, particularly in the second half of next year, with companies getting their earnings growth mainly from outside the U.S. However, America is still the largest consuming country in the world. A majority of the emerging economies, even China, remain largely dependent upon exports to the U.S. for their livelihood.
As discussed here, with the high unemployment plaguing the U.S. economy, the rest of world is unlikely to enjoy a robust growth as some tend to believe. In that sense, if the unemployment rate does not go down below 9% by the end of 2010, it is conceivable, for example, that crude oil price could fall to the $40 to $45 per barrel range, the generally considered fair-market-fundamental price by oil industry leaders.
Meanwhile, the market herd mentality could leave investors with no refuge amid more signs that the worst U.S. recession since 1958 isn’t abating as perceived.
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And Henry Blodget predicted that AMZN would hit $400 in 1998.
It surpassed that on a split adjusted basis...
I didn't know that analysts did 10-year price targets....
Leo, I must disagree.In the city I live in 2 major employers are closing.It is like a slow motion train wreck, and the damage deepens everyday.Here, in the real world, outside of fun speculation, the damage grows.It will get much worse.I may not be an expert on investing but I am a good observer.The economy here is slowly shutting down.Tax receipt FAIL will mean the local gov and state gov will inevitably follow into the crater.Look at Detroit Leo.How the heck will that disaster get repaired?Look at the damage.True, it is ultra terrible there...but the costs are spreading onto to the ever dwindling number of workers.Apparently our leaders(such as they are) are motivated only by base greed and self interest, and when facing a challenge of such epic scale,Ben,Larry, and Timmy might as well be the three stooges.
I guess they could falsify the numbers and sell hopium.But actual positive change?I think systemic collapse is a lot more likely.That and much more war.
i am all in favor for upside but where are the jobs
coming from? what income quintile/decile? jobs
at mcdonald's is not employment growth to cheer....
show me why corporate profits vary with employment...
most profits are from job cutting...why take
on new employees? besides we have seen weak
profits all year...not sure why there is a sudden
change...
I agree. There is no relationship between corporate profits and employment. That is long gone. I just had a contract with a company that is having its most profitable year ever and they are actively cutting people every week. Robert Reich, the former Labor Secretary, commented that the job losses conceivably are permanent. Off-shoring and out sourcing are killing the US citizenry, and not so slowly.
You don't see any issues with imploding CRE, the next wave of mortgage foreclosures, or sovereign states going into default? Who is going to buy all the stuff when China has to stop reflating and the US consumer is still unemployed? Build those inventories, sure, but eventually you need end demand don't you? With 25% of homeowners under water, where does the money come from? Which is not to say that the USG/Fed couldn't just finish the job and buy the rest of the market cap of the NYSE and Nasdaq. Then they can just keep it going up forever.
The speed of the CRE collapse is more like a slow motion train wreck than a cardiac arrest....at some point the patient will flat line but the extend and pretend will continue much longer. I have been pounding the table to Tyler about the accounting changes that are coming online in april of 2010 and they are huge.
This will be a huge change to the system as the FASB is losing its independence to the SEC...yes the organization that is there to "help you out"
So if there is any assumption to be made the "mark to mythe" (as long as you don't intend on selling) will continue far longer than your short positions will allow you to stay solvent...trust me I F(*KING hate everything I said but you have to understand the casino is only open for those who know what is going to happen and they are well ahead of everyone else...don't forget all the money that have paying interest so they are having a risk free income...literally it is horrible...
Leo
The market will be up because we will lose more jobs...notice a correlation with Net Income and Joblessness....when your largest expense item is employee's and you get rid of them then you crush "earnings" which is what happened in the first and second quarter because the velocity of joblessness far exceeded everyone's expectations.
Furthermore as we have seen top line compress...like huge...it has not been outpaced by cutting into bone as skeleton crews are even now in McDonalds..serious compression.
I think your right THE GOVERMENT numbers will surprise to the upside ...but the REAL unemployement will be far worse which will continue to help 'earnings' at some point something will give ....either bond auction failure or some other "unforseen" event will destract everyone just like 2001.
I see alot of people slam you for your upside bias and I am with you but not from a positive note but from a negative note. The cycle will catch up to itself and at some point it will all end very badly ....but who knows when...
Leo;
We are in a deflationary DEPRESSION! Your glass is half full of Kool-Aid because you drank the first half. Please put the glass down, step away from the Kool-Aid
The lines from the shelters, pawn shops and soup kitchens may stretch from the Golden Gate to the Statue of Liberty, but the perennially upbeat predictions of a "bottom in housing" or "economic turnaround" will continue to blast from every corporate propaganda bullhorn in the nation. America is a never-ending source of baseless optimism and hogwash.
But I don't doubt that the numbers will "surprise to the upside" or "beat expectations" going forward. I am sure a couple of financial engineering sharpies or beltway think tank gurus could have it all figured out in no time flat. After all, these are elastic government numbers we're talking about. They will say whatever they need to say to keep the "nothing to see here" wealth transfer hustle running as long as they can. BLS should take a leaf out of the banking playbook when it comes to distorting the numbers. The trick will be to figure out how to keep people off the payroll AND off the unemployment rolls at the same time. Perhaps we'll get to that next year.
And it just might work, at least for a while. Let's not forget that 'Hope springs eternal' has been imprinted in the national DNA and nobody actually wants to accept that happy motoring, recreational shopping and the something-for-nothing America is gone and lost forever.
Ultimately, I wouldn't be shocked if we end up passing out draft tickets along with unemployment claim forms before it is all said and done. 15 million new Army recruits? Just think about how many terrorists could be thwarted and how much democracy could be spread! It doesn't take much imagination to see that this is where we're headed as a nation, especially with the war monger regressive right poised to take the congress and white house in the next few years.
Bingo bango...
This image is often attributed to the great depression, but was actually during the great flood of the Tennessee Valley, but the picture tells a thousand words...
http://4.bp.blogspot.com/_oUc6WpOAwto/SO7VbgDdhrI/AAAAAAAAA5w/I165qMIC38...
"While certain signs have pointed to the end of the recession"
DUDE, you're on ZH, we don't tolerate this sort of language!
Those 'signs' are as credible as the 'tooth fairy'. Given by Larry Summers and Shalom Bernanke. OK?????
The stimulus is nothing but a 2010 election slush fund. Obamacare is nothing but a 4yr money grab. Higher taxes and deficit spending is this administration's answer to everything. Federal and State tax receipts are off a cliff. And they want Cap and Trade on top of everything else. These fools remind me of $3000.oo worth of rims on $200.oo worth of Toyota that used to run.
I see unemployment as the deciding factor in future predictions. 11% and the TBTF's fail. 13% and the Fed and Zimbabwe Ben fail. This whole ponzi rests on the back of JS6's unemployed ass.
I like your ideas and thoughts. by chat sohbet Greetigns..
Bingo.
Unemployment used to be a lagging indicator
when monetary velocity was positive.
Real unemployment is 22% and growing.
Initial claims a leading indicator.
They are growing despite government
massage. Recall last Fall, Winter and Spring
government spokespeople said they had
bottomed? Myas...