Making Some Sense of Unemployment and the Markets

A lot of silly things are being said, daily, about what various parameters really mean, how they should be interpreted (usually as a political litmus test), etc.  Almost all of this is silly talk.  Meanwhile, the most important of these figures, unemployment, continues to climb by any measure, in the U.S. and abroad.

I thought it would be useful to suggest a different way of viewing where we are now, what makes the equity markets move (it isn’t a Pew survey), and how we should interpret daunting ongoing unemployment figures. 

The equity markets, first of all, and contrary to everything on FOX – Fake news, are not a voting booth.  Most experienced analysts will tell you something like this: equity pricing tends toward a mean based on the sector, and on the company’s earnings (the price/earnings ratio in technology, for instance, tends to be in the 15-25 range, with wild variations around mavericks like Google).  The other inputs to equity markets are: expectations of general market trends, and the same of sector trends.  Both of these, usually, are accepted as being about six months “out,” or forward.  People say that the market tries to see six months into the future.

What about when there are no good signposts?  Fear and a lack of certainty are market enemies, and will drive prices down faster than usual.

In summary: equities tend to move with earnings, or, more accurately, with the expectations of company earnings six months out.  In times of great fear, they move faster down; in times of great greed, the reverse.

Unemployment is related but different: traditionally, it stems from a company’s falling earnings.  But in times like this, driven by fear, CEOs, mostly driven by their own (stock-priced) compensation packages, cut employment in minutes or hours, without waiting.  This behavior maintains their pay by (theoretically) keeping earnings up in the short term; in markets like today’s, they hardly even achieve that paltry goal.

But I would like to suggest a way of viewing today’s layoffs in a different light.  It now appears that we have been living on borrowed money, literally, since about 2000.  Whether you are looking at house pricing and the housing boom (and bust), or stocks, or commodities, or consumer items, it’s all basically true: the pricing of the last eight years was supported by too much personal (and corporate) debt.  Alan Greenspan gets most of the credit in the U.S. side of this story, but that’s a different tale.

In that sense, layoffs are not “bad.”  Our society tried to live beyond its means, we invented fake ways of making fake money, all built on debt and fake financial structures.  All of that now has to come down.  The jobs we are “losing” never really existed, by and large.  Rather, that level of employment, at least in the way those jobs were allocated, was itself, mostly, also fake. 

We are now rewinding back to 2000, like it or not, back to a time when borrowing was high but not exponentially approaching infiinity; when house prices were high in many places, but not doubling and tripling in short order; when stocks were expensive, but not hundreds of times earnings (and not fueled by borrowed fake money).

Once we have done this rewind, down to what you might call a “value base,” a base level of employment justified by a normal (and now temporarily reduced) workload, we can allocate jobs, work hours, and money for salaries all over again, as a society.  Guess what won’t happen?  All the smartest kids in physics won’t end up on Wall Street.  If they do, we’d better all move to some agrarian economy.

I can only imagine how hard it is on families to live through this Rewind Period, but I also suspect that knowing it is a Rewind, rather than an Infinite Collapse, should be helpful.  I hope it is.

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