- Employment's weakness from different angles.
- The Fed is extremely misguided about unemployment causes.
- Erratic markets across the board, period.
If one hasn't noticed, the "job-full-less-whatever" report is becoming less and less important, and the American public has become as familiar with the labor force participation rate as it is with bacon and eggs, although the edible latter is easier to understand due to our animalistic instincts.
I recently came across the intriguing revelation that the jobs report "is a rear view indicator of the economy." Nooo! Really? The last time I looked, all statistics were about the past, and much like crime statistics, absolute numbers examined in a vacuum don't tell us much about the future. However, when the numbers are processed within a certain context, such as the supposition of employment being influenced by the maniacally monumental band-aid without healing properties named QE, there's something to be derived. If the number is not improving markedly when it should as compared to non-QE times, then statistics are very useful. As a matter of fact, if crime is increasing while more police officers are hired and police presence in the community increases, something is amiss.
From a micro-term stock market perspective, here's how the jobs report plays out. There are forecasts, and then bets are placed that the actual number will be above, below or on the mark. Once the data is published, we're off to the races, and often times, bad news behaves as good news, and vice-versa, which is dependent on the bet flow. If anyone doesn't get this, please exit the casino immediately and take your chips, because you're looking for something that isn't there.
It has come to my attention that a new refrain is being played by some Fed members in yet another attempt to drive the spotlight away from the institution's inefficiencies. Philadelphia Federal Reserve Bank President Charles Plosser shared with us that:
Labor force participation rates can also decline for demographic reasons.
In addition, he added that:
We are seeing a mismatch of skills in the workforce and the jobs that are being created.
Considering that the Fed has over 16,000 employees, why didn't anyone see the demographic and skills discrepancies until recently? And why did they insist on QE and low rates when that policy does not make babies or deliver diplomas, the purported perpetrators? And if demographics and STEM (training in science, technology, engineering, and math) issues were known, why engage in QE galore knowing full well that it couldn't possibly work? In addition, and please slap me silly, where are the results of over $1 trillion in student debt, especially when a 4-year degree only takes … 4 years?
This is why I would love to have some of these people on the witness stand under oath, with the perjury penalty being that the individual would be sent to an atoll in the Pacific so they could deliver endless speeches to a coral reef - forever. Ah, the always-denied simple pleasures in life!
On the lack of STEM trained workers, here's an informative chart, indicating that there will be one STEM job created for every 1.55 persons with an applicable degree, and
for every two students that U.S. colleges graduate with STEM degrees, only one is hired in a STEM job.
In addition, there's a wage issue that the illustrious minds in charge appear to miss, and I shall provide the reminder that according to economics 101 (the field of specialty of these so-called experts), low supply and high demand, causes prices to rise.
As Costa indicated in the previously cited article, "average wages in the computer and mathematical occupations for workers with at least a bachelor's degree" barely moved from 2000 to 2011 when studied in 2012 dollars (i.e., in constant dollars). Using Current Population Survey data he found that average hourly wages had moved from $37.27 in 2000 to $39.24 in 2011, an average annual increase of about 18 cents an hour.
An increase of 18 cents translates into $1.44 per 8-hour workday, and that may be why Starbucks (NASDAQ:SBUX) is doing so well. Like Clara Peller would put it, "Where's the beef?" Explanations abound for the reduction in the labor force participation rate to the lowest level in 36 years, but there's probably one that is as simple as the fact that pigs can't fly because they don't have wings: Not enough jobs. Wow, why didn't I think of that? Can I get the Nobel Prize for Gumption?
But wait, because there's yet another plausible explanation! The origin of the word "employ" is "from "the Anglo-French empleier, emploier, emplier to entangle," which is turn means "to involve in a perplexing or troublesome situation." Now we know why it is so hard to get out of this employment funk. Nobody wants to be entangled, and that's an economic theory that hasn't been explored. Maybe we can get our politicians to reallocate funds from the shrimp treadmill study to entangled shrimp research.
But not all hope is lost, and "Atlanta Fed Tool Suggests Full Employment Could Be Reached In Six Months." Yes, you read that right, and they even have a trademarked app for that, named the Jobs Calculator, a product from the Center for Human Capital Studies at the Federal Reserve of Atlanta. I'm not certain as to what they are actually studying, but it isn't human. As an example, and to illustrate the calculator's silliness, if one projects unemployment to reach 4% in 24 months, while the labor force participation rate shrinks another 2.8% to 60%, (due to demographics because I doubt that people will stop moving to fishing streams), we only need to lose - yes, lose - 20,156 jobs per month. If the participation rate drops to 55%, we need to eliminate 497,970 jobs per month to reach 4% unemployment. What are we waiting for? We cannot deny ourselves the opportunity to break out the champagne to celebrate, and also help the French economy. The Fed's dilemma is that they don't know what to make of it, as if they ever knew.
Let's look at additional statistics, namely the Job Openings and Labor Turnover Survey [JOLTS], which unfortunately was only started in December of 2000.
Since January of 2006, and prior to the well-known economic debacle, population and the labor force have grown 8.74% and 4.13% respectively, but job openings have declined 5.62%, and that cannot be explained by demographics or STEM a whopping eight years later. The suggestion that people are leaving the workforce to pursue bird watching has absolutely nothing to do with the fact that there are fewer jobs.
Furthermore, while there were 41 people for every job in 2001, there are now 62 people for each position, which is an increase of 50%, even after the improvement since 2009. But if all else remained equal, and the labor force participation rate returned to 2001 levels, there would be 85 people for every job, not 62.
Another look at the statistics tells us that the growth of employment vs. labor force is even, but employment growth vs. civilian population growth shows a deficit of 7%, and that group of "excessive" people not only needs to be fed, clothed and housed, but also lacks spending power.
Although it is only one major piece of the puzzle, let's refresh the macro picture. Exporting jobs overseas, an ingenious and myopic short-term strategy that came back to bite the hand that fed the corporate world, took its toll over time. When the lure of cheap labor became so enticing, did they think about the other side of the equation and who would buy their products on a sustainable basis? After all, the main source of consumerism that drives the global engine hasn't changed. Do you see how we have close to a 30 million job deficit since 1990, and it is growing? There's no magic massaging here. The following picture, which I would use to instruct young people - no PhD required - is the way to summarize the American condition that has slowly developed for over two decades.
But credit must be given where credit is due, and the St. Louis Fed pointed out the employment-to-population ratio [EP], a "key input in a standard growth accounting framework," which stands at 58.9 as compared to 63.4 in December of 2006. Here's their conclusion, which goes to that 7% of "excessive" people mentioned above:
Until the growth of the EP ratio strengthens, the pace of the economy's growth will remain quite modest. That is, assuming population growth remains constant, if labor productivity growth doesn't accelerate, neither will economic growth.
The other factor is consumer sentiment, and one my favorite surveys, yet less popular, is the IBD/TIPP Economic Optimism Index because it provides a quick visual, unlike other sentiment readings, and, what do you know? Negative it is and hasn't improved much.
It's not very complex, and eventually the next generation, which is composed of today's teenagers, will deliver the stabilizing effect - in a decade or so - and give birth to another macro boom, because they will not have a recollection of what just happened. Until then, we'll just bob and weave, trying to avoid incoming punches, which is an extremely effective boxing technique. Ironically, Janet Yellen conveyed to Congress that reducing the Fed's balance sheet
would probably take somewhere in the neighborhood of five to eight years to get it back to pre-crisis levels."
I'm right there with you, Ms. Yellen, but it could be longer, because you'll be tempted to unleash a perpetual QE-Turbo as the econometrics don't measure up.
Markets have been erratic at best, with the Fed and ECB providing no clues as to what is going on, which in itself points to them as being clueless. But having thought about it, long and hard, I must rephrase. The Fed and ECB may not be entirely clueless. They're simply trying to remain relevant by convincing earthlings that they actually can influence and tweak the economic engine, because that is what they have been mandated to do. Can you imagine if they pulled the politicians to the side and confess that central banks are powerless? Pink slip, please.
The ECB is closer to negative rates, which is not a good sign, as everything economic is becoming questionable. The euro (NYSEARCA:FXE) was sinking and the market was rising, which is not how it was playing a while back. Other unusual developments are the dollar and oil rising in tandem, and copper looking north while interest rates subside. See, the more I know, the more I need to know, and, more importantly, adjust. While there's always a ray of hope that the light at the end of the tunnel is not an oncoming train that is about to run us over, there's a prevailing state of denial of what the reality truly is. People want to believe that the worst must be over, with historical references constantly being used. But history that covers a few decades is hardly a guide.
Then there's talk of a typical S&P 500 (NYSEARCA:SPY) head and shoulders formation (chart above), but these eyes see the Hunchback of Notre Dame, which continues to sway. Without a doubt, subjectivity reigns supreme in technical analysis, and that's why markets function - a difference of opinion. Someone recently inquired about my philosophical approach to markets. I'm it for the game, not the money, because when the game is understood and reasonably well-played, while staying humble, the money follows.