Bearish Take on the Unemployment Numbers

I found the unemployment numbers to be quite bad, and not because I write a newsletter on shorting stocks (well, I also recommend some longs based on a contrarian view of the Street's conventional wisdom.) When these data are released, regardless of the months, I look at three data points: net employment gains or losses, long term unemployment and gains in income. This month something else became important - the labor force participation rate. What all investors and traders should be looking at is the net impact of any of these reports on national income and the ability of the consumer to spend. And these are still shrinking big time.

Net Employment Gains: We are still losing jobs, and even if the Street wants to trade the second derivative, the decline in the rate of decline, a quarter of a million jobs lost is five football stadiums fewer people working and spending less money than last month. Impact on the economy is quite negative.

Long Term Unemployed: This jumped to more than five million, up 589,00. A terrible number indicating large pockets of the economy are toast, and unable to spend almost anything except on necessities. Impact on the economy: also quite negative.

Income Gains: The increase in the work week was noise - one tenth of one percent - and the income gains were 2.5%, which is less than the real rate of inflation due to increases in gasoline and health care costs. And since this is an average number, and millions fewer people are working, including quarter of a million last month, national income continues to decline. Impact on the economy: no impact, not a good thing when the economy needs a boost.

Labor Force Participation Rate: Since the country lost jobs and the unemployment rate stayed the same, fewer people are looking for work, and therefore fewer people are looking to increase their income, holding back any potential gain in national income and consumer spending. This is not a good thing for the economy.

My focus is national income. This recession is now being driven by a lack of consumer spending due to the recession, a staggering loss of consumer wealth in their homes and portfolios and the incredible pullback in consumer credit we have seen in the past two years, more than $4 trillion dollars by year end. Since 70% of the economy ( this number is shrinking, actually) is consumer spending, the continuing declines in national income means the recession is still getting worse and the nonsense about the second derivative is just that, nonsense.

Am I being too negative? Maybe, in part due to the new mandates in the financial broadcast media only to smile and have upbeat commentators. Not one commentator I saw on CNBC, Fox Business or Bloomberg had a bad word to say. What does that tell you? It gets tiring and since these networks are posing as journalists, balance is needed for people interested in getting in or out of the market.

What does this mean for investors or traders? For investors who value any kind of fundamentals, the market over time will respond to a W shaped recession or a bottom with no climb up, which means it will go down. There will be a statistical bump in GDP in either Q3 or Q4 but it will be just that, statistics based on inventory restocking, a one time event, and import and export flows and the market may go up in response to these numbers.

For traders, the play is bonds. Look at the TBT, the double inverse ETF on ten year Treasuries, they are trading down right now as the Street assumes the Fed will respond to the end of the recession by ending interest rates. The Fed will do no such thing but that trade is there, right now.

Disclosure: No position

Comments

[Roger Knights:]

"the Street assumes the Fed will respond to the end of the recession by ending interest rates."

"ending"?

Aug 09 06:38 AM

[Pauly B:]

It makes so much sense that we are pulling out of this recession! Lets go through the logic of all this:

Corporate earnings are falling, inventories are being shrunk, consumers are contracting, the government has tripled its debt load, frieght loads are down, less income earned
more people are unemployed, the dollar is falling, Banks still have bad balance sheets, commercial real-estate is in the tank.

This is just great fertilizer for making green-shoots.

Aug 09 08:43 AM

[a fat panda:]

"This is just great fertilizer for making green-shoots. "

Either that or green-shoots make great fertilizer.


On Aug 09 08:43 AM Pauly B wrote:

> It makes so much sense that we are pulling out of this recession!
> Lets go through the logic of all this:
>
> Corporate earnings are falling, inventories are being shrunk, consumers
> are contracting, the government has tripled its debt load, frieght
> loads are down, less income earned
> more people are unemployed, the dollar is falling, Banks still have
> bad balance sheets, commercial real-estate is in the tank.
>
> This is just great fertilizer for making green-shoots.

Aug 09 09:34 AM

[j-dub:]

If I start off with 100 men in my army and on the first day 9 die and the second day 8 die and the third day 7 die and the fourth day 8 die and the fifth day 8 day and so on and so on until there's only 2 men left.
That day both are shot and killed. Do I report back to my general that "Only 2 were killed today. So things are improving."
And so go with the "less bad" cult...............

I am watching the news one day, and I hear 19 people were shot and killed. And so goes for the next year. A year later I hear that only 14 people were shot and killed. Do I get excited and start singing and dancing? Well, if the newscasters were telling me constantly that 14 is better than 19 and that means maybe we'll have only 5 dead in a near future crime scene. Maybe that would rub off on me and I would post an article why 14 dead could be considered good? But the news wouldn't do that, BECAUSE THEY HAVE NO ECONOMIC MOTIVES TO DO SO, UNLIKE THE WALL STREET PUMPERS AND MEDIA SCHILLS.

No matter how you slice it, THERE IS ONLY ONE WAY TO LOOK AT THE EMPLOYMENT NUMBERS, U3. U6, U7 OR SGS. THEY WERE TERRIBLE. THERE IS NO POSITIVES, SO PUT THE KOOL-AID DOWN!!!

(It's amazing what a phony stock market rally can do to trick the mind)

Aug 09 09:43 AM

[Gregman2:]

How's the dollar velocity in the economy doing?;-)

Aug 09 01:34 PM

[Dialectical...:]

We are many months into the cheerleading and it still amazes me that this kind of no-nonsense article needs to be written. Exactly who is falling for this "less bad is good" nonsense? Apparently a lot of folks of course, but how? I am just mystified. I will be the first to admit (and cheer) when things start getting better -- as in we ADD jobs -- but until then I will seek out articles like this that keep me from questioning my own sanity when so many people (and the markets) are cheering "less bad."

Aug 09 05:40 PM

[Mad Hedge F...:]

kjasdb.Looks like I am going to have to be the designated driver at this brewfest. The Friday nonfarm payroll showing losses of only 247,000 jobs, with upward revisions to May and June, is signaling to many that the bull market is back. We’re definitely getting worse at a slower rate. You might as well put a giant neon sign on your roof saying “party here tonight.” One can never underestimate the animal spirits here. I’m sure the newspapers are going to call the 0.1 % micro improvement in the unemployment rate to 9.4% as the beginning a major trend. But look at the chart below, which shows were aren’t close to a turnaround in the worst jobs turndown since the thirties. I don’t see any new consumers on this chart, and I was able to breeze through my favorite restaurant at lunch because it was still half empty. I think what is really happening here is that having priced in Armageddon in March, we are now pricing it back out. What’s an Armageddon worth? Some 3,000 Dow points, or 350 S&P 500 points, about where we are right now, sounds like the right price to me. Let me know when you’re ready to go home, and I’ll pile your inebriated carcasses back into the car. I’ll even take the breathalyzer test.

Aug 09 05:46 PM

[cattieg:]

I'll drink to that..


On Aug 09 05:46 PM Mad Hedge Fund Trader wrote:

> kjasdb.Looks like I am going to have to be the designated driver
> at this brewfest. The Friday nonfarm payroll showing losses of only
> 247,000 jobs, with upward revisions to May and June, is signaling
> to many that the bull market is back. We’re definitely getting worse
> at a slower rate. You might as well put a giant neon sign on your
> roof saying “party here tonight.” One can never underestimate the
> animal spirits here. I’m sure the newspapers are going to call the
> 0.1 % micro improvement in the unemployment rate to 9.4% as the beginning
> a major trend. But look at the chart below, which shows were aren’t
> close to a turnaround in the worst jobs turndown since the thirties.
> I don’t see any new consumers on this chart, and I was able to breeze
> through my favorite restaurant at lunch because it was still half
> empty. I think what is really happening here is that having priced
> in Armageddon in March, we are now pricing it back out. What’s an
> Armageddon worth? Some 3,000 Dow points, or 350 S&P 500 points,
> about where we are right now, sounds like the right price to me.
> Let me know when you’re ready to go home, and I’ll pile your inebriated
> carcasses back into the car. I’ll even take the breathalyzer test.
>

Aug 09 10:04 PM

[paulbip:]

The U.S. government has taken over 71 banks this year compaired to 25 last year. Why isn't this being reported?

Aug 09 11:15 PM

[BullnBear:]

I have taken a “fundamental” bear position several times from April through the current timeframe and have grown accustomed to banging my head into the wall for pain relief as a result.

I saw the unemployment data release on Friday and witnessed the market reaction with what has become a regular occurrence of nausea and disbelief as I wonder who has missed the fact that the major index levels are back to pre Lehman/Sterns/Derivatives crash levels.

The current media clowns can theorize all day long about a jobless recovery but in my reality I have found that I don’t need to do much more than spend some time out amongst my fellow “common folk” to get a pulse on what’s going on; actually I sometimes need only ask myself how things feel to get a straight answer.

I enjoy a good fundamental bull market and will be the first to applaud the occurrence of such but this isn’t one and the current market levels concern me.

Great article, great data collection and presentation.

Aug 10 02:04 AM

[Michael Clark:]

Great article. We all know that the cheerleaders simply resort to cheering when nothing else works. Eventually the cheerleaders will become vicious and start blaming the bears for the problem ('just shut up and pretend everything is ok.'). The cheerleaders don't understand concepts of ebb and flow, day and night, expansion AND contraction, because they see the world as a struggle of wills -- the weak will (negative thought) always losing. But the strong will loses when it stops perceiving reality and perceives, instead, only its own will. When the Will cannot influence the world with positive thought and cheerleading, it then becomes frustrated, scared, and dangerous. This is going to get interesting. Intolerance of the bearish view will gain momentum -- the alternative is to recognize their own complicity in the problem. To recognize this, they would have to give up the Hero role, the savior of the world through willful construction of the world. Modesty is not the strong suit of the 'Masters of the Universe'.

Aug 10 03:09 AM

[TCK:]

What a coincidence. This post looks exactly like the last 50 comments you posted on Seeking Alpha !




On Aug 09 05:46 PM Mad Hedge Fund Trader wrote:

> kjasdb.Looks like I am going to have to be the designated driver
> at this brewfest. The Friday nonfarm payroll showing losses of only
> 247,000 jobs, with upward revisions to May and June, is signaling
> to many that the bull market is back. We’re definitely getting worse
> at a slower rate. You might as well put a giant neon sign on your
> roof saying “party here tonight.” One can never underestimate the
> animal spirits here. I’m sure the newspapers are going to call the
> 0.1 % micro improvement in the unemployment rate to 9.4% as the beginning
> a major trend. But look at the chart below, which shows were aren’t
> close to a turnaround in the worst jobs turndown since the thirties.
> I don’t see any new consumers on this chart, and I was able to breeze
> through my favorite restaurant at lunch because it was still half
> empty. I think what is really happening here is that having priced
> in Armageddon in March, we are now pricing it back out. What’s an
> Armageddon worth? Some 3,000 Dow points, or 350 S&P 500 points,
> about where we are right now, sounds like the right price to me.
> Let me know when you’re ready to go home, and I’ll pile your inebriated
> carcasses back into the car. I’ll even take the breathalyzer test.
>

Aug 10 07:21 AM

[TCK:]

I compare the jobs data to jumping off a cliff. At some point you stop accerating, but the end result is the same.

Aug 10 07:23 AM