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3 Things - The 5.6% Lie, Dividend Cuts, Valuation

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Submitted by Lance Roberts vai STA Wealth Management,

Jim Clifton Strikes Again - 5.6% Unemployment Is A Lie

I recently published a piece analyzing Jim Clifton's, CEO of Gallup, comments regarding the potential overestimation of employment by the Bureau of Labor Statistics (BLS) due to the birth/death adjustment utilized. To wit:

"We are behind in starting new firms per capita, and this is our single most serious economic problem. Yet it seems like a secret. You never see it mentioned in the media, nor hear from a politician that, for the first time in 35 years, American business deaths now outnumber business births.

 

The U.S. Census Bureau reports that the total number of new business startups and business closures per year -- the birth and death rates of American companies -- have crossed for the first time since the measurement began. I am referring to employer businesses, those with one or more employees, the real engines of economic growth. Four hundred thousand new businesses are being born annually nationwide, while 470,000 per year are dying.

 

This is an extremely important point as it suggests that employment, as presented by the BLS, has been significantly overstated over the past six years. If we take the differential as stated by Gallup and compare that to the annual birth/death adjustment used by the BLS we find that jobs have been overstated by 3,678,000 or more than 613,000 annually.

How does this compare to the cumulative number of jobs as reported by the BLS since 2009? It is quite substantial."

Employment-BD-Adj-011515

Now, Jim Clifton is back stating that not only is BLS wrong in its assumptions about employment activity, but also that the 5.6% unemployment number is "extremely misleading."

"The official unemployment rate, as reported by the U.S. Department of Labor, is extremely misleading.

 

Right now, we’re hearing much celebrating from the media, the White House and Wall Street about how unemployment is 'down' to 5.6%. The cheerleading for this number is deafening. The media loves a comeback story, the White House wants to score political points and Wall Street would like you to stay in the market.

 

None of them will tell you this: If you, a family member or anyone is unemployed and has subsequently given up on finding a job -- if you are so hopelessly out of work that you’ve stopped looking over the past four weeks -- the Department of Labor doesn’t count you as unemployed. That’s right. While you are as unemployed as one can possibly be, and tragically may never find work again, you are not counted in the figure we see relentlessly in the news -- currently 5.6%. Right now, as many as 30 million Americans are either out of work or severely underemployed. Trust me, the vast majority of them aren’t throwing parties to toast 'falling' unemployment."

Of course, Jim is once again correct. Many arguments of low labor force participation rates have focused on the retirement of the baby-boomer generation. Therefore, to exclude that argument, even though those over the age of 65 that are currently employed is at the highest level on record, we can look solely at the group of individuals that should be actively employed (16-54 years of age.)  The following chart, which is the labor force participation rate of solely 16-54-year-olds, shows the real problem with the BLS's employment figures.

Employment-16-54-010615

Considering that only 46% of that age group are currently employed suggests that an unemployment rate of just 5.6% is highly misleading.

Of course, you already knew that didn't you?

 

Dividend Cuts To Impact Personal Incomes

Political Calculations brought out a very interesting point recently discussing the rise in dividend cuts due to the deteriorating economic backdrop.  To wit:

"Going by the number of publicly-traded companies that acted to cut their dividends in January 2015, the U.S. economy didn't just experience recessionary conditions during the month. Instead, it outright contracted."

Dividend-Cuts

"Or perhaps a better description of what happened is that the U.S. oil industry's efforts to push its luck as far as it could has run out of good luck to push.

 

By that, we're referring to the consequences of falling oil prices, which are forcing an increasing number of companies tied to oil extraction activities in the United States to take the dramatic step of slashing their dividends. With 57 U.S. companies taking that action in January 2015, the number of companies taking that action in a single month is consistent only with previous months in which the U.S. economy either experienced contraction or in response to major dividend tax rate hikes.

 

January 2015 saw no major tax rate hikes on dividends, so contraction it is."

Importantly, another impact of the decline in dividend payout will be a reduction of the amount of dividend income that makes up part of the personal income and spending reports. The chart below shows the monthly net change of a few components of the personal income figure. Notice that in the most recent month personal interest income is negative due to the plunge in interest rates and dividend income was marginally positive.

Personal-Income-Mthy-Chg-020415

Considering that the decline in oil prices is supposed to good for the consumer, even though personal spending declined in the most recently reported period, the decline in dividends will certainly have a negative effect on those depending on those dividends. As I showed recently, the current detachment between spending and the stock market will likely be corrected rather harshly at some point.

PCE-SP500-020515

 

2nd Most Overvalued Market In History

I recently gave a presentation at the 2015 World Economic Conference (see full slide deck here) in which I discussed varying aspects of the market that should have investors fairly concerned. High yield spreads on the decline, extreme deviations from the long-term mean, and margin debt levels should all be at the top of the list. 

One point I did not include, but should have, was noted recently by my dear friend Doug Short.

"The peak in 2000 marked an unprecedented 147% overshooting of the trend — nearly double the overshoot in 1929. The index had been above trend for two decades, with one exception: it dipped about 13% below trend briefly in March of 2009. But at the beginning of February 2015, it is 91% above trend, down from 95% above trend the month before. In sharp contrast, the major troughs of the past saw declines in excess of 50% below the trend. If the current S&P 500 were sitting squarely on the regression, it would be around the 1060 level. If the index should decline over the next few years to a level comparable to previous major bottoms, it would fall to the low 500 range."

Dshort-Valuation-020415

"Incidentally, the standard deviation for prices above and below trend is 40.6%. Here is a close-up of the regression values with the regression itself shown as the zero line. I've highlighted the standard deviations. We can see that the early 20th century real price peaks occurred at around the second deviation. Troughs prior to 2009 have been more than a standard deviation below trend. The peak in 2000 was well north of 3 deviations, and the 2007 peak was above the two deviations -- as is our current level."

As I stated during my presentation, we can certainly "hope" that the markets will continue to march endlessly higher. However, "hope" has never been an effective portfolio management strategy.

 

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Thu, 02/05/2015 - 19:25 | 5749689 lordylord
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It's not a lie if you believe it.  -George Costanza (or every government ever)

Thu, 02/05/2015 - 19:38 | 5749732 mayhem_korner
mayhem_korner's picture

 

 

You can twist perception, reality won't budge.  -Neil Peart

Thu, 02/05/2015 - 19:44 | 5749753 NoDebt
NoDebt's picture

I feel like I've read this story before.  

 

Thu, 02/05/2015 - 19:46 | 5749760 lordylord
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To be honest, ZH has had the same articles for the last 5 years.  I come for the comments.

Thu, 02/05/2015 - 20:52 | 5749973 disabledvet
disabledvet's picture

So you'd rather believe me than your lying eyes.

 

Very well then....

Fri, 02/06/2015 - 06:47 | 5751010 winchester
winchester's picture

i do not even read fully articles, only titles explain the  spectacle of the site, and comment shoot  any detail of articles, simple to understand, title says AAA comments say BBB.

 

this is how it works here. as  the rest, boring. the modern lifestyle is boring as fuck. some day i wish world go off grid for a decade so some die and others start to really budge.

we would have  a lot let troubles with simpler lifes.

 

futur smells shit, technology is our doom.

Thu, 02/05/2015 - 19:24 | 5749690 Blythes Master
Blythes Master's picture

Dividend cuts to affect income.....only is you're tarded enough to still be in stawks!

Thu, 02/05/2015 - 19:28 | 5749702 Creepy A. Cracker
Creepy A. Cracker's picture

So this is the standard "the economy sucks" article as everyone on ZH already understands.  Please tell us when the market crash will happen?  Plus or minus a couple of months to make it easy for you.

Thu, 02/05/2015 - 19:30 | 5749707 lordylord
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The frog is in the pot and the flame is already lit.  Get a clue.

Thu, 02/05/2015 - 22:29 | 5750270 Creepy A. Cracker
Creepy A. Cracker's picture

It has been heating by flame since 2009.  Get a clue.

I'm not doubting that it will happen.  I'm just stating the obvious - that everyone on ZH already knows so the 2345th article about it is just babbling.

Thu, 02/05/2015 - 19:31 | 5749709 stocktivity
stocktivity's picture

It's all Bullshit!!!

Thu, 02/05/2015 - 19:36 | 5749725 mayhem_korner
mayhem_korner's picture

Please tell us when the market crash will happen?

 

.01 nano-seconds after you capitulate to Janet's printing machine and go all in.  The algos are watching you.

Thu, 02/05/2015 - 19:53 | 5749786 MATA HAIRY
MATA HAIRY's picture

so true...so very true

Thu, 02/05/2015 - 19:38 | 5749710 mayhem_korner
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Hope is not an effective portfolio management strategy, but money printing and deception are. 

(Until they aren't.)

Thu, 02/05/2015 - 19:34 | 5749719 falconflight
falconflight's picture

Gallup's CEO not aware of U-3 v U-6 or the now untracked unemployed beyond one year is an indictment on the general appitude of most of Amerika, the elites and otherwise.  I've rarely heard/read any DemPublican make the distinction.  

Thu, 02/05/2015 - 19:39 | 5749736 thamnosma
thamnosma's picture

Clearly unemployment is now structural.   So the "economy" is now divorced from employment levels.  Very feudal.

Thu, 02/05/2015 - 19:40 | 5749738 Wait What
Wait What's picture

i've found that if you want to convince someone of your authoritativeness, you present things in threes. 3 points that support your argument, 3 points that weaken you opponents. anything beyond that and the perception is you're trying too hard, anything less and you appear ignorant.

3 is the magic number:

https://www.youtube.com/watch?v=aU4pyiB-kq0

https://www.youtube.com/watch?v=0irL1M15DH8

Thu, 02/05/2015 - 19:43 | 5749749 mayhem_korner
mayhem_korner's picture

 

 

+3 SHR segue.  I'm partial to Interjections!

Thu, 02/05/2015 - 19:42 | 5749745 SickDollar
SickDollar's picture

Hope??? there is no market dude

 

 

Thu, 02/05/2015 - 20:18 | 5749867 SheepDog-One
SheepDog-One's picture

The Shitshow must slouch forward.

Thu, 02/05/2015 - 21:16 | 5750031 Osmium
Osmium's picture

The reason the labor participation rate in the US is so low is that a lot of folks have retired.  They don't need to work because they made a shitload of money buying stawks.

Fri, 02/06/2015 - 00:31 | 5750631 TheReplacement
TheReplacement's picture

"Of course, you already knew that didn't you?"

Actually, we did.  This is fight club.

Do NOT follow this link or you will be banned from the site!