How long oh Lord, how long?
Not that we're doing spirituals here but that is the question we want the answer to - how long? We know we're in the most terrible collapse in economic activity and what we want to know is how long is it going to last?
We have two major reasons for being interested as investors. The first is that a stutter in the economy doesn't make much difference to stock values. The value of a stock is the net present value of all future income from it and that doesn't change much if the current quarter isn't looking so good. A permanent resetting of the economy to some lower growth - and thus, presumably, profit - rate makes a huge difference.
A V shaped recession doesn't change stock values that much therefore.
The second is something that economists worry about. The longer any recession goes on then the greater the risk of permanent damage to the productive capacity of the economy. So, again, a short recession is good for us and stock values, a long one bad.
Unemployment claims
How many people are getting fired - people voluntarily leaving usually don't gain unemployment insurance - is obviously an indicator of how bad things are out there. We had a vast rise in this number and it's been falling these past few weeks:
In the week ending June 6, the advance figure for seasonally adjusted initial claims was 1,542,000, a decrease of 355,000 from the previous week's revised level.
Sure, that number's still much higher than the couple of hundred thousand a week we were getting pre-covid but that in itself was unusually low. Actually, when we look at it as a rate - so, a percentage of all workers, rather than the number itself - it was about half the rate of the late 1960s. It's even possible to argue, as I have, that it was too low, showing not enough change in the economy.
The important bit though is this:
The advance seasonally adjusted insured unemployment rate was 14.4 percent for the week ending May 30, a decrease of 0.2 percentage point from the previous week's revised rate.
More people are getting hired out of unemployment than are moving into it. That's important. For the usual sign of a recession continuing or getting worse is not that the number of people being made unemployed rises - although it does - it's that the number of people getting hired falls.
Don't forget, unemployment is a state, the stock of which depends on the flow in and the flow out. Increase the flow out and the stock falls.
(Unemployment claims from Department of Labor)
It's reasonable to assume from this that we've reached peak unemployment for this turn of the business cycle. It's not conclusive proof, true, but it's a reasonable guess from the available information.
We should also point out that unemployment is a trailing indicator. It keeps rising after the end of a recession, it only starts falling well into the recovery.
JOLTS
We've also got the JOLTS report which aids us in understanding what's going on here. Sure, it covers and earlier period but it's still indicative:
The number of total separations decreased by 4.8 million to 9.9 million in April, the U.S. Bureau of Labor Statistics reported today. Despite the over the month decline, the total separations level is the second highest in series history. Within separations, the quits rate fell to 1.4 percent and the layoffs and discharges rate decreased to 5.9 percent. Job openings decreased to 5.0 million on the last business day of April. Over the month, hires declined to 3.5 million, a series low.
Note that this all applies to 6 weeks ago and before. And it supports much of the above, the number being hired out of unemployment is the killer.
But note there were still 5 million jobs out there to fill and that's even before we start to see the results of areas reopening. The US economy still has a hunger for labor, meaning that this, combined with the reopening, should swiftly make a dent in that unemployment number.
My view
Given the speed at which matters develop at present I put much more weight on that slighter but more recent set of numbers, unemployment claims. The number claiming it for the first time is falling, the number being hired out of it is greater, the stock of unemployment is falling. That recovery is already well under way.
The Fed is still pretty gloomy, thinking that we're still going to be 6% or so down on the year for GDP. That could well be true if we think about the production that has been lost these past few months. However, if we think about GDP as a rate - and so take the Q4 number as an annual one - I think we might well be fully recovered by then.
Sure, this is crystal ball gazing but then that's what we're always doing when trying to make macroeconomic predictions.
The investor view
I tend to think that the markets are about fully valued at present. There is still risk that the recovery won't be as V shaped as I think it will be. It doesn't, at least, seem obvious that there's an underpricing going on, as there was a few weeks back.
We are, therefore, back to looking at specific situations. Macroeconomics isn't so much of a help to us now, microeconomics is where it's at, specific company situations and the like.
