Tuesday, November 10, 2009

Employment and the Markets

Calculated Risk addresses a Floyd Norris note on the dismal unemployment report Friday in
Employment and the Seasonal Adjustment. Mr. Norris asks, Did Unemployment Really Rise?

CR defends the seasonal adjustment that Mr. Norris implicitly questions. The statistics they are discussing involve the so-called establishment survey of numerous established businesses.

What neither person really addresses is that the rise in the unemployment rate is due to the household survey, which is derived by a separate method, namely calling almost 60,000 households around mid-month and simply inquiring about the level of (un)employment. That number was terrible, annualizing at over 6 million jobs lost.

There is no doubt that employment levels sank the past two months NBER may deem the recession/depression over this past spring or summer; or it may not. But employment levels have been dropping. 100% for sure. Are they going to rise? Likely, if for no other reason than steady population growth. But the recent (current) downturn is by far the worst for jobs since the 1930s.

Stock market bulls cite low levels of public participation as a bullish indicator. (TrimTabs cites this as a bearish indicator: go figure!)

Perhaps this time it's a little different than before. Everyone knows someone who is unemployed, underemployed, has taken a pay cut or foregone a raise, or whose business is down if not out, etc. Then a semi-sophisticated investor looks at a NASDAQ with about a zero dividend yield and an S&P 500 index with a 2% dividend yield and turns around and buys a muni bond or bond fund, or corporate bond fund, perhaps one with leverage, as the public already has 3X as much money in stocks as in bonds (per David Rosenberg's statistics) and will accept 5% taxable or less tax-free rather than riding around in stocks and some day sucking air after accumulating almost no dividends along the way. And for people who don't want/need dividends, gold and other commodities are far sexier and provide diversification for most people.

While there is definitely a logic to the madness, it remains discordant for the G20 to announce that the economy is so fragile that stimulus must be continued and then for the stock market to celebrate. That's like a round of hurrahs after the doctor comes out of the intensive care unit and tells the family that the patient is still not well enough to go to floor care.

The truth is probably that if the government had done its job the past decade, none of the insanity would have been allowed to have happened. Now, even serious investors have no possible way to assess whether financial institutions are well capitalized or not based on today's asset values. It's not fair and is corrosive to the very concept of free markets. One need not be a gloom and doomer to be cautious about having any involvement--either long or short--with a market in which these large complex financial institutions are do important. I can make a case for a much higher or much lower stock market in the next two years, or an unchanged one. While that's always "sort of" been the case, the opacity and complexity of the financials -- a deliberate situation -- has not existed before to the current degree.

The world is unpredictable enough without having to deal with potentially rigged markets with the most important information known only to insiders.

Copyright (C) Long Lake LLC 2009

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