Real Unemployment Closer to 18%: Watch Those Long Positions

In 1994, for the cited reason of statistical integrity, the Clinton Administration decided to exclude individuals who had given up looking for a job, after one year of trying, from government unemployment measurements. Today, if those individuals are added to (a) officially unemployed persons, (b) those who had unsuccessfully attempted to get a job in the last 12 months and (c) those that only have part-time employment status, the true measure of unemployment is closer to 18%, not 7.20% as reported on Friday.

In the past, given the intrinsic correlation between Lines U-3 and U-6 in Table A-12 of the Labor Department’s monthly jobs report on one hand and alternative measurements including 12-month-plus “discouraged” workers on the other, analysts have not found it necessary to read beyond the publicly-announced unemployment numbers. But, as the alternative measurements of the domestic labor market (e.g. the SGS Alternative) now suggest jobless rates approaching Depression-era thresholds, investors who continue to hunt for value at today’s price levels need to urgently examine their founding premises. For information purposes, Line U-3 states the official unemployment rate, i.e. 7.20%, while Line U-6 includes officially unemployed persons, plus “marginally attached” workers, plus part-time workers (for a rate of 13.5%).

If the alternative measurements include certain momentum-related data from Friday’s jobs report, the picture of the present and the future is bleaker. Nearly 25% of the “officially” unemployed (total of 11.11 million) have been looking for work for over six months. The unemployment rate amongst teenagers remains above 20%. Though the establishment and household surveys currently in use are not designed to identify the role undocumented workers play in the jobs matrix, the Labor Department concedes that only “some” undocumented immigrants are counted—which leaves a huge pool of approximately five million people willing to work, or employed illegally at low wages, on the statistical fringes of the job market!

Despite the widely assumed fact that an unemployment rate of 25% confirms the recession-to-depression transition, comparisons with the 1929-1933 phase of history are largely misplaced. Before anybody gets into panic-mode, this writer must point out that today’s social security net, which President-elect Obama says he will improve, dictates that unemployment levels in the 20s will not create the same broad conditions of desperation (and potential social unrest) witnessed during the Great Depression. But it is a matter of grave concern that the biggest challenge to the unemployment scenario is not being openly acknowledged and debated: viewed from the prism of relative (domestic vs. foreign) production costs, any rise in American jobs and wages must be conditioned by the continuing ability of developing-world economies to deliver cheap goods to American ports, and cheap services to American boardrooms.

Unless, of course, another Smoot-Hawley Tarrif Act (1930), or something similar, is enacted along with the $850 billion (or thereabouts) stimulus package. Already, spokespersons for the incoming administration are indicating that the final rescue plan will contain a “Buy America” provision for contractors engaged in the building of roads, railways, bridges, schools and green projects. Such a provision could signal the start of an entirely new phase of protectionism. By itself, such protectionism would be good for jobs, at least in the near-term. But will it be good for American business?

Arguably, Friday’s jobs report reinforces the short call on the major indices (DIA, QQQQ, SPY), in anticipation of a 20%-plus decline in equities in the first half of this year. However, this writer’s short positions are predicated more on what lies in store in the future, and less on the shape of the present.

Very briefly, the ability of American assets to sustain earnings and valuations, and to service outstanding debt obligations on a timely basis, has diminished substantially over 2008, mainly due to the commencement of the long-overdue de-leveraging process, deliberate and otherwise, in the global economy. We need to wait for this de-leveraging to achieve rationality via proven benchmarks before embarking on any bottom-fishing exercises.

Disclosure: Author holds short positions in QQQQ, SPY

Comments

[Prudent Man...:]

Excellent point.

But, how many people work in the "underground economy"? Estimates run all over the place but I know quite a few people who earn good incomes working out of their trucks and home and get paid in cash. Some of these folks receive food stamps and unemployment benefits and some are inclueded in the "no longer looking" numbers.

Statistics don't lie, but...

Jan 11 09:15 AM

[investor88:]

Salute to Rakesh for short positions in QQQQ and SPY, he eats his own cooking.

Whilst so many giants in the investment world are calling bull every other day, Rakesh finds there are too many time bombs and skeletons around. The future is bleak and he follows that up by shorting QQQQ and SPY despite these indices rising above 50d moving average and bulls saying they can go up another 40%.

My style is to remain largely in cash and make quick trades long/short; like Rakesh I do not think it is safe at all to jump into stocks with both feet in.

Jan 11 09:17 AM

[herbert hoover:]

The statistics coming out of this administration are highly suspect - the revisions keep coming and - in case you haven't noticed - they are always on the downside. Politicians are liars and the Bush people are really good politicians.

Jan 11 10:16 AM

[Rakesh Saxena:]

Dear PrudentMan: You are correct, statistics don't lie. All I am urging that "all" the statistics are brought into the public domain so that people can make considered decisions. Your point about the underground economy is well taken. FYI, in places like India, the underground economy is equivalent to almost 40% of GDP. In the US, we are not there yet, but I have seen figures between 7 and 15 percent being thrown around. Many thanks - Rakesh


On Jan 11 09:15 AM PrudentMan, CFA wrote:

> Excellent point.
>
> But, how many people work in the "underground economy"? Estimates
> run all over the place but I know quite a few people who earn good
> incomes working out of their trucks and home and get paid in cash.
> Some of these folks receive food stamps and unemployment benefits
> and some are inclueded in the "no longer looking" numbers.
>
> Statistics don't lie, but...
>

Jan 11 11:31 AM

[Rakesh Saxena:]

Dear Investor88: Yes, though there is little point in going into day-by-day trading strategies in this forum, your approach of making "quick" trades is credible, given all those market-bottom calls being issued regularly on the business channels (e.g. CNBC). I would retain a short bias, however, and adopt the sell-on-rallies strategy. Many thanks - Rakesh


On Jan 11 09:17 AM investor88 wrote:

> Salute to Rakesh for short positions in QQQQ and SPY, he eats his
> own cooking.
>
> Whilst so many giants in the investment world are calling bull every
> other day, Rakesh finds there are too many time bombs and skeletons
> around. The future is bleak and he follows that up by shorting QQQQ
> and SPY despite these indices rising above 50d moving average and
> bulls saying they can go up another 40%.
>
> My style is to remain largely in cash and make quick trades long/short;
> like Rakesh I do not think it is safe at all to jump into stocks
> with both feet in.

Jan 11 11:35 AM

[PROXIMO:]

The same giants in the investment world who are calling bull every other day are the ones who, if the S&P tanks to say 500-600, will be saying it was screamingly apparent that the market was headed straight down.


On Jan 11 09:17 AM investor88 wrote:

> Salute to Rakesh for short positions in QQQQ and SPY, he eats his
> own cooking.
>
> Whilst so many giants in the investment world are calling bull every
> other day, Rakesh finds there are too many time bombs and skeletons
> around. The future is bleak and he follows that up by shorting QQQQ
> and SPY despite these indices rising above 50d moving average and
> bulls saying they can go up another 40%.
>
> My style is to remain largely in cash and make quick trades long/short;
> like Rakesh I do not think it is safe at all to jump into stocks
> with both feet in.

Jan 11 02:49 PM

[Alf Landon:]

Just typical politicking. Expect 7 million created jobs to emerge if politically warranted. The "jobs of tomorrow" aren't building bridges and roads or "shovel ready" by the way.

I expect this plan to be the most pork-laden bill ever. Let's hope it works. I have my doubts.


On Jan 11 10:16 AM Herbert Hoover wrote:

> The statistics coming out of this administration are highly suspect
> - the revisions keep coming and - in case you haven't noticed - they
> are always on the downside. Politicians are liars and the Bush people
> are really good politicians.

Jan 11 05:20 PM

[freefall51:]

I share the bearish sentiment because of some very negative developments that affect my work environment, the recent motion of Lyondell for bankrupcy protection. Rock solid asset rich company that was employing a lot of shrewed people, unfortunately over-leveraged as well and they paid the price

That notwithstanding I believe the bull is not dead as long as the last max or the last min of the say S&P index is not undercut, which is not the case yet. However the market does feel skittish, not bullish.

In times of uncertainly the chartists rule. Plus at this time the market is fully determined by statistical oversold - overbought conditions on every time span, 3 min, 10 min, 60 min, 1 day and so on. Whenever such a condition is reached, the computers that launch buy or sell orders start talking to each other. lf you can anticipate what comes next you can make some money with some probability until it is over and the direction changes. Got to stay alert if you want to play.

Jan 11 05:23 PM

[Rakesh Saxena:]

Dear freefall51: You may have a point re market movements influenced by charts. I just heard one broker say on Bloomberg that he thinks that 85-90% of individual retail investors "did nothing" with the portfolios since mid-October, i.e. no selling, no buying. If that number is correct (it's coming from Wall Street!), then the thin conditions do indeed warrant looking at the charts. That said, I would recommend retaining the short bias, to stay in line with fundamentals, and using technical indicators when they present short trading windows. Many thanks - Rakesh


On Jan 11 05:23 PM freefall51 wrote:

> I share the bearish sentiment because of some very negative developments
> that affect my work environment, the recent motion of Lyondell for
> bankrupcy protection. Rock solid asset rich company that was employing
> a lot of shrewed people, unfortunately over-leveraged as well and
> they paid the price
>
> That notwithstanding I believe the bull is not dead as long as the
> last max or the last min of the say S&P index is not undercut,
> which is not the case yet. However the market does feel skittish,
> not bullish.
>
> In times of uncertainly the chartists rule. Plus at this time the
> market is fully determined by statistical oversold - overbought conditions
> on every time span, 3 min, 10 min, 60 min, 1 day and so on. Whenever
> such a condition is reached, the computers that launch buy or sell
> orders start talking to each other. lf you can anticipate what comes
> next you can make some money with some probability until it is over
> and the direction changes. Got to stay alert if you want to play.
>
>

Jan 11 11:56 PM

[HernandezUSA:]

Our is Economy down and Millions of American Citizens are out of work an Unemployment is at its highest level and our highest leaders considering amnesty for illegal aliens????? and even Bring in more LEGAL Foreign Workers?

We need the SAVE ACT and E-verify used for every business and NOT Amnesty for criminals.

E-verify does not discriminate against RACE, Religion, SEX or physically capability only your Citizenship and your LEGAL right to be and work in United States.

If we can stop Predatory business owners from hiring then the Illegal Aliens will not Stay and return to their native Countries.

This ISSUE is not about RACE, but Governments Federal/State/LOCAL not doing their jobs, because big and small business owners want cheap workers and no labor laws to bother with......Its called GREED!


Both Liberals and Conservatives need to take some pride in our Country and protect it from all invading nations citizens and corporate greed.

Please support, NO IMMIGRANT BASHING or HATE Crimes.
HATE only feeds the single RACE agenda groups for Open Borders and the Media.

numbersusa.com
dontspeakforme.org/

Jan 12 03:43 PM

[lowtechie1:]

A millionnaire investor years ago told me you can take USA stats from the Feds on unemployment and figure the real numbers are about 1.7-2.0 times what is posted. He pointed out that many people who run out of benefits fall off the charts, and they go into a cash society to get by. In Northern California, where we both lived at the time, he siad the 7.3% unemployment in our local county was actually closer to 13-15%. I predict our "published rates" of unemployemnt hit 10% by next fall, and that will indicate closer to 20% in reality. Anything over 8%, folks, and we're in a Depression. Don't fool yourselves. Also, look for about 50% more bad news across the board from public companies before any good news comes out in this country. I predict at least 500-700 public companies will be in bankruptcy that aren't being thought of that way now in January by the time next Fall comes. 2009 stacks up to be a disaster. I've never seen anything like this in 70 years. It is real, it is here, and our bailouts and national debt are adding to the fire. By the way, I am 97% in cash, 3% invested (mostly shorts, I'm sorry to say). Pray for our new leadership.

Jan 13 02:59 AM

[Trinitymaster:]

I agree. Real unemployment/underempl... is at least 25%.

And how about PROTECTIONISM? I say go for it. Hell, it helped turn a small depression into a Great Depression.

GD two is here. Can anyone show me where the nearest soup-line is?

Jan 13 03:01 AM