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Mark's Market Blog

7-17-10: Unemployment and the new Unspeakable Truth

By Mark Lawrence

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Last week I said, "I can make a decent argument that this is a bear market rally, we'll bounce off the underside of the 200 day moving average, then drop like a rock." That's what happened. Personally, I was completely in cash on Friday when the market dropped 3%, and another 2% after hours. I believed in this possibility enough to cash out on Tuesday, but not enough to short the market. Oh well. As you can see in the chart below, by my favorite measure the market is already oversold and might be expected to rebound on Monday. Don't believe it. This market will continue down on Monday - we've seen clearly lately that the market doesn't do anything for a single day. After that? I doubt this is the beginning of the end of times - I expect the market will bounce around for a few weeks between perhaps S&P 1000 and S&P 1100. Of course, you would do well to remember that the market has surprised me two weeks in a row now.

S&P 500 January 16 2010 to July 9 2010

Why did the market crash on Friday? Why does the phone always ring when you're in the bathtub? Market volume was very low, we can't take this too seriously - unless we had a lot of money in the market. The "official" reasons were that bank profits were down a bit, and consumer confidence was down a lot. Here's another thing to keep in mind: your heart beat is normally a bit irregular, there's a chaotic component to your heart rate. When your heart rate gets perfectly regular, doctors know to call for a crash cart, you're about to have a heart attack. Normally there are a lot of components to the overall market: gold, metals, tech stocks, transportation, health care, utilities, foods, currencies, and they all move in different directions. 18 months ago they were all moving together as one. The last few weeks they are again. Not a good sign. This is not a healthy market.

You can calculate the probability of default from the CDS spread on bonds; based on this we get the following table for the market's assessment of the following state's probability of default:

State Probability of Default Probability of non-default
Virginia 12.30% 87.70%
Texas 15.00% 85.00%
Ohio 20.90% 79.10%
Massachusetts 22.00% 78.00%
Nevada 32.00% 68.00%
Michigan 33.80% 66.20%
New Jersey 34.70% 65.30%
New York 35.30% 64.70%
California 39.30% 60.70%
Illinois 41.20% 58.80%

We can multiply the numbers in the last column together, and we get the market's prediction that none of these ten states will default in the next year or so. The result: 3.12% chance of no default, nearly a 97% chance that at least one of these states defaults, at least according to the bond market. Obama is trying to push a $50B state bailout through congress this summer, but even the Democrats are tiring of bailouts. After the November elections, it's unclear that any further bailouts will pass. On the other hand, our banks have enormous vulnerability to state bond defaults. If a big state goes it's going to be Mr.Toad's Wild Ride. Will a state default? I think this is an interesting question.

Currently the states are playing a semi-involuntary game of chicken with the Feds - bail us out or we'll bring the system down. It's not clear the population will stand for another massive bailout, especially with weekly news reports these days on overpaid civil servants (this week's: the city manager of Bell CA makes $890,000 per year with guaranteed raises of over $100,000 per year for the next five years). It's also not clear that our economy can realistically survive the collapse of several states and hundreds of cities. This debate will heat up in the fall, and become a critical issue early next year. The talk will be about police, fire departments, schools. The real issue will be retirements and over paid bureaucrats.

Consumer sentiment plummeted in the past two weeks to the lowest levels since Lehman. The index from the University of Michigan fell from 76 in early July to 66.5 in late July. A 9.5 drop has happened only 6 times in the 32-year history of the survey, according to MarketWatch:

My own business was running along all year matching my performance from 2009 until about June 1st; my sales were off 45% in June. People sense that something wicked this way comes and are hoarding their cash, what little they have.

The US government is suing Arizona for, um, well, I'm not really clear. . . enforcing the law? Harassing future democrats?

Back to one of my favorite topics, unemployment. How's it looking these days? John Maudlin calls this "the new normal," and I agree. Joe Weisenthal says there's an "Unspeakable Reason That Manufacturing Has To Be Part Of A US Economic Turnaround," which is without low-skill manufacturing and construction jobs, unemployment will never come down. I agree. First, how's housing look? Dismal. Delinquencies, foreclosures, and housing overhang (unsold houses being help off the market waiting for better days) are continuing to get worse:

Fannie Mae Delinquencies 1998 to 2010

Unemployment seems to have bottomed out as of this year, but has not improved. Things are going to dip down this summer as the 400,000+ temporary census workers are laid off.

Percentage of Working Population Employed, 1960 to 2010

Similarly, people working part time is holding at a dramatically high level. Well over half of these part time workers would jump at the chance to work full time.

Workers Employed Part Time, 1960 to 2010

People who have been unemployed for less than 6 months are starting to find work. These are largely the people with some education and some salable skills. People who have been unemployed for more than 6 months are doing not so great.

Average Duration of Unemployment, 1969 to 2010

This recession is deeper and dragging out longer than any other in our lifetimes. Jobs are leveling out at a very low level. "Recovery," where we create 8 million new jobs and get people back to work, is not even on the horizon.

Unemployment in Recessions, 1948 to 2010

And finally, my favorite graph, chances of getting employed are decent if you have a college degree, poor if you have only a HS diploma, and miserable if you're a HS dropout. Curious that we're turning away Indians and Asians with engineering degrees who want to immigrate here, but Washington is all hot to give citizenship to 13 million uneducated illegal Latinos.

Unemployment Rate By Education

Conclusion: we used to employ 8 million plus laborers hammering nails, sawing boards, turning screws, inserting component A into slot B. With the aging of our population and the babies being born largely coming from the uneducated lower classes, we won't be building many more homes this decade. Low level service jobs (e.g. fast food) are not increasing, and will most likely decrease as more automation and touch screen or mobil interfaces work their way into these areas - soon you'll type in your order on your iPhone or Android phone as you walk from your car, and it will be waiting for you when you get to the counter. Assembly jobs are being handled by robots, or shipped to Asia where workers make $100 - $250 per month, $0.60 to $1.50 per hour. And in the US, attitudes are arrogant and entitled. Fifty years ago you pulled into a gas station and one guy pumped your gas, another checked your oil level, another checked your tire pressure. Today you would find it nearly impossible to hire Americans at $9 per hour to do these jobs.

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