Making Some Sense of Unemployment and the Markets
6 March 2009A 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.
6 Responses to “Making Some Sense of Unemployment and the Markets”
March 7th, 2009 at 7:02 am
The Dow is back to 1966 levels (inflation adjusted) so the rewind may be greater than you imply. I don’t have the more appropiate S&P500 figure but guess it may be similar. To my mind there are other insidious factors that have been at play over the last decade or two.
One is the reliance on far too much gearing rather than raising good old fashioned equity capital. The second is taking out insurance for every possible eventuality to protect management from their own incompetence, laziness.
Guess what, insurance doesn’t come free and premiums are expenses that directly hit the bottom line. In my 30 years experience of running (my own) companies I never took out credit insurance to cover risks I took giving terms to my customers. Maybe my suppliers had insurance against my default but they didn’t raise the subject with me. Nobody didn’t get paid in full so insurance premiums would have been money down the drain for all concerned.
This is exemplified in the extreme by CDS bets which are now seeing are at the heart of difficulties in restructuring Wall Street.
http://blogs.ft.com/maverecon/2009/03/the-feds-moral-hazard-maximising-strategy/
So, in summary I guess I’m saying that the culture of relying on insurance (betting) needs to be rewound as well as the lost years if we are to get corporations and management that are worth investing in.
In a more general sense the financial services industry has been skimming (and scamming) profits from the economy. Until it stops you may not see average PE ratios recovering sufficiently to get back to where you’d like to be.
Tim
March 7th, 2009 at 9:11 am
Job losses in previous downturns (pic)
http://www.nytimes.com/imagepages/2009/03/07/business/07jobs.graf01.ready.html
March 8th, 2009 at 11:56 am
WTF, another example. How about taking the extra discount and paying the legally required vehicle insurance?
Insurance markets in everything
Hyundai is gaining market share:
Besides the Genesis, Hyundai is also benefiting from a novel scheme, launched in January, in which it offers to buy back cars from customers who lose their jobs within a year of their purchase. (The company essentially offers a smaller discount and then uses the money to buy an insurance policy.) This has proved so successful in stimulating sales that General Motors said on March 3rd that it was considering a similar scheme.
http://www.marginalrevolution.com/marginalrevolution/2009/03/insurance-markets-in-everything.html
March 8th, 2009 at 10:32 pm
Tim properly addresses two areas I have not hit on completely: first, that the market declines are due to more than earnings drops, even though earnings improvements may be what ultimately brings stocks back; and, that the basic problems, because, as a group, are deeper than usual economic events, are worse than simple re-allocation.
Even so, I hope that my primary point is clear. As the Seattle Times front page healine the day after this posting said: “Many jobs are not coming back.” What they failed to mention was that, because they were fake jobs to begin with (such as Vampire Investor jobs), they shouldn’t come back.
But CEO packages, and “collateral damage” both lead to job losses beyond this class, and this is the kind of economic destruction that everyone is trying to avoid, and why I argued earlier for CEOs to be slower to fire than they have been.
March 9th, 2009 at 6:51 am
President Obama’s Implied Future For Derivatives
Derivatives have the potential to create a rent-seeking structure that is unparalleled in human history. No society can afford to allow that kind of financial system to operate. Either we figure out how to make it much more transparent – and amenable to outside review – or the re-regulation process currently in the hands of Senator Dodd and Congressman Frank needs to consider more radical alternatives.
http://baselinescenario.com/2009/03/09/president-obamas-implied-future-for-derivatives/
Simon Johnson, in final para excerpt above, puts more elegantly my point in comment 1. I’m guessing President Obama does subscribe to Baseline Scenario and Simon knows it:-)
March 16th, 2009 at 10:07 am
Doug Noland, in his hopeful voice, comments as below. His chilling final comment is “The worst case scenario unfolds when our creditors and the marketplace turn against these government obligations.” What is the ace-in-hole against such an nightmare?
http://prudentbear.com/index.php/commentary/creditbubblebulletin?art_id=10202
“I suppose I’ll for now reside in the camp that believes the system is perhaps not today as acutely unstable as many fear. The unfolding Government Finance Bubble is – until it isn’t – a major stabilizing force. Government finance by its nature will not exert sufficient stimulus to rejuvenate deflating asset markets, but it is nonetheless playing a major role in underpinning wages and incomes. Moreover, the massive inflation of government finance is thus far bolstering the markets’ perception of “moneyness” for tens of Trillions of Treasury, agency debt, MBS, municipal, corporate and household debt securities, along with another ten Trillion or so of bank deposits and money fund liabilities. This “bolstering” of “moneyness” is also likely central to the resilience of the dollar. But such extraordinary stabilization does not come without a heavy price. I am firmly in the camp that believes that Washington is now trapped in a massive inflation of government obligations – the latest round of historic Credit inflation captured clearly throughout the Q4 2008 “Flow of Funds” data. The worst case scenario unfolds when our creditors and the marketplace turn against these government obligations.”