Friday, March 5, 2010

Labor Force Dropouts and the Markets

A former economics research professor named Alfred Tella has an informative article out today in RealClear Markets titled What Is Unemployment Telling Us?

It is interesting to learn quantitatively that for an equivalent percentage loss of jobs, the rate of unemployment as measured by the BLS has been lower than expected in the last two downturns.

The author points out that one of the surprising aspects of this Great Recession's unemployment rate is that this is occurring even though people who receive all the forms of unemployment benefits are not considered dropouts from the labor force. One truly has to be a dropout to thus lower the denominator used to calculate the rate of unemployment.

As most know, when jobs return, the measured labor pool has tended to expand as people who dropped out of the labor force re-enter it, believing that jobs are again available.

The recent (or current if still ongoing) depression/Great Recession always struck me as far more severe than any downturn I can remember relative to baseline, though the 1973-5 recession was pretty awful given actual physical shortages of oil and various products.

Remember that this time, nominal retail sales dropped over 10%. Since they typically rose 7% yearly, we are looking at close to a 20% drop in actual sales vs. that which was predicted based on the prior trend. Worse, various measures of commerce and industrial production dropped 20%.

Snapbacks from prior depressions or severe recessions were generally stronger than the current one. Paradoxically, this slow recovery provides support to various markets in the short term, as traders and investors seek out yields above zero and trading profits.

Yet the financial stress lines are building. A relatively small straw in the wind is the continued losses in and shrinkage of the U. S. Postal Service.

The strategy of "privatizing" governmental functions such as Fannie Mae and the Post Office is being revealed as a sham. This trend was capitalism without capital.

As George Soros said recently, one way to make money in the markets is to join a bull market that is fated to go to excess, and of course not stay at the party to late. Based on the massive fraud in governmental finances and those of its allies in Big Finance, the big-picture fundamental case for gold remains.

As in the easy money period after the 2001 recession, I believe that the odds favor growth fueled by money-printing. The excess will not be in housing. Right now the growth, such as it is, is relatively balanced and thus the view here is that specialty discount/deep discount retail (TJX, ROST, DLTR) as mentioned here several times before remains in a cyclical bull market but is no longer "cheap". One thing people do when they drop out of the labor force is cut discretionary spending and spend more time seeking bargains, an effort that might not have been worthwhile when they were working or looking for work.

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