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A closer look at US unemployment

June 8, 2013

US economy cartoon

The big news of the past week in financial markets were  the US unemployment numbers. On the surface, the 175,000 jobs added in May and the implied unemployment rate of 7.6% were good enough news to suggest a recovery yet not good enough for the Federal Reserve to tone back its money printing fest. As a result, the stock market again took off to the upside on Friday while bonds sold off.

Looking closer at US unemployment, it is clear that unemployment is much larger and structural in nature than commonly presented. Take a look at the mean duration of unemployment below.

Mean duration of unemployment

Furthermore, check out US labor force participation that historically averages 65.8%.

Labor force participation rate

When applying the employment figures to the average 65.8% participation rate, we currently arrive at a 11.3% unemployment rate rather than the posted 7.6%. This does not even take into account the underemployed that are working part time. To sum this up, the unemployment situation in America is much worse than commonly reported. I look forward to the day when I won’t need to point out these nuances of the US labor market.

Implied Unemployment rate

The Stock Market

As for the stock market, I found this 140 year chart depicting stock prices, earnings, dividends and interest rates. Clearly, the long-term trend of an expanding economy is good news but this chart certainly look a little scary in terms of valuation. Why did the S&P500 experience a near parabolic upmove in the past thirty years? The answer can be found in the massive leverage that was introduced in the 1980s and has expanded balance sheets to the extreme.

Long Term Stock Performance

(The past three years are missing in this chart and stock prices are at all time highs now)

One way to lever up is to borrow and “invest” a multitude of the amount taken in(fractional banking). As a result, there is a lot of economic activity as long as increasing liquidity is pumped into the system. Reversing this trend and returning the economy to a more rational amount of leverage would clearly devastate asset prices, thus the Federal Reserve prints and prints and prints… You may have heard of the Federal Reserve “taper” implying less money printing in the near future. I doubt that this can/will happen as the delevering effect would cause large dislocations in asset markets slamming stocks and bonds simultaneously.

Is our current fiscal and monetary policy working? I don’t think so as we are creating more debt than growth and at some point that situation will lead to a dire situation that will severely affect all of us and the next generation. Look at the bottom line GDP expansion in comparison to debt expansion. Swiping your credit card might make you feel better/richer in the short run but the eventual credit card statement will look that much worse…

Bernanke GDP vs. Debt growth

Google images


As for the financial markets, the current lull in volatility will likely end no later than this fall when Germany votes. Mr. Abe might also rock the boat prematurely with his “revolutionary” economic plan in Japan. America’s problems are structural and for now being papered over with fresh money taken from savers and future generations. At this time, Europe and Japan take center stage in the global economic drama. In the end, the industrial world needs to find a structural growth strategy that delivers or the financial markets will eventually reprice that part of the global economy. The clock is ticking…


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