06 December 2013

Jobs Update

So the jobs report was out this morning. Everyone’s saying it looked decent. About 200 thousand jobs created in Nov. The unemployment rate dropped to 7.0%. The government shutdown didn't even put the slightest dent into things.

The amount of jobs lost in the Great Recession and global financial crisis circa 2007-2010 is 2 ½ times the average lost in every post WW II recession preceding it. We have now spent 60 months with unemployment over 7%. During the economically challenged 1970s, unemployment was over 7% for a total of 30 months that entire decade. (To be balanced in presentation, we spent 74 months over 7% from the 1980-82 double-dip recession; but nowadays is still way worse.)

At the current rate in a little over half a year from now, we will have recovered all 8.7 million jobs lost in the worst recession in a generation. That will be a total drawdown/recovery period of almost 6½ years. Which will be triple the average duration of every post WW II recession before it. And about as anemic a recovery as that of the Great Depression, post-1934.

In those 6½ years, we will also have needed to generate enough jobs to keep up with population growth – about another 10 million jobs in that time. Which means, all the while through this "recovery", we have been adding jobs that barely even keeps up with population growth. Said another way, at this rate, we will never recover from the Great Recession of 2008/09.

Despite the fact that for over six years since late 2007, our central bank the Federal Reserve has been pumping unprecedented stimulus into the system to counter the depressive effects of the recession and global financial crisis. They have kept short term borrowing rates for banks at effectively 0% - free money for banks to lend. The Fed has nearly quadrupled the size of its balance sheet at this point, buying up treasury and agency securities in the open market, flooding the system with dollars.

Never before done on this scale, it would typically be very inflationary. Yet inflation has averaged at anemic levels below 2% for the past five years now. Too much inflation is bad. But a little is good. (Think of it as your pulse. You don't want it racing too fast, but it is nice to have one.) Too little is symptomatic of a depressive economic state. And in the face of the Fed’s colossal stimulus to date, it is exemplary of just how massively deflationary the full-on effects of the financial crisis would have been, had the Fed and government done nothing to counter it.

Stocks rally because the Fed is forcing investor capital into stocks with near 0% interest rates. Handing them too much cash through their stimulus efforts all the while. Profits are decent, so the market isn't overvalued. But sophisticated investment professionals understand that the economic landscape is still very precarious. When the Fed ends its stimulus, it will be a very bad year for stocks. But it will only be one year, so buy everything you like at that time (which is about nine months away, I'm guessing).

So when the talking heads apply a positive spin to pumping out 200 thousand jobs last month, they simply are being disingenuous or have no real understanding of this stuff.

The good news is, housing is now in a real recovery for about a year now.  It brought us down, so it will bring us out.  Banks still have housing assets marked on their balance sheets at unrealistically high levels.  This is why they don't make loans, despite the Fed handing them free money to do so for half a decade now.  You get home prices rising, lending activity up... Suddenly that $2 trillion in pent-up corporate cash goes to work - read: jobs.  And with that everyone's feeling a lot better.  The unprecedented vitriol in Washington (and power of certain radical third parties for that matter) will dissipate.  Politicians will not fear getting primaried for daring to cooperate.

Dogs and cats living together.  Ice cream for dinner.  You get the idea.  It's not gonna be that good, but anything just a little bit better than the past several years will be welcomed and appreciated enough, in my view, to get us back to the business of America.

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