Unemployment is over 10%. The Dow is over 10K.
I was on the Kudlow Report on Tuesday, and Larry made a savvy point about this. He said 10% unemployment is good for stocks in the short run.
Here is the logic: 10% unemployment is the number that gets everyone’s attention in Washington. Ten percent changes the national conversation. Ten percent affects the president’s popularity and that of his programs. Democrats from red districts are terrified of running on 10% unemployment in 2010.
But elected officials aren’t the only ones focused on 10%. The Federal Reserve considers it, too. Like it or not, they do look at unemployment. In a perfect world--in mine, anyway, or that of Kudlow, Steve Forbes and most of the better thinkers on monetary policy--the Fed should guarantee the stability of the dollar. That and no more.
But in 1978 the Fed’s mission was expanded owing the efforts two liberal legislators, U.S. Sen. Hubert Humphrey and Congressman Augustus Hawkins. The Humphrey-Hawkins Full Employment Act was signed by President Carter in October 1978 (nine months after the Humphrey’s death).
The Humphrey-Hawkins bill was an act of stupendous government meddling in markets and monetary policy. Here is an overview:
The Act explicitly instructs the nation to strive toward four ultimate goals: full employment, growth in production, price stability, and balance of trade and budget. By explicitly setting requirements and goals for the federal government to attain, the Act is markedly stronger than its predecessor. {An alternate view is that the 1946 Act concentrated on employment, and Humphrey-Hawkins, by specifying four competing and possibly inconsistent goals, de-emphasized full employment as the sole primary national economic goal]. In brief, the Act:
-- Explicitly states that the federal government will rely primarily on private enterprise to achieve the four goals. -- Instructs the government to take reasonable means to balance the budget. -- Instructs the government to establish a balance of trade, i.e. to avoid trade surpluses or deficits. -- Mandates the Board of Governors of the Federal Reserve to establish a monetary policy that maintains long-run growth, minimizes inflation, and promotes price stability. -- Instructs the Board of Governors of the Federal Reserve to transmit an Monetary Policy Report to the Congress twice a year outlining its monetary policy. -- Requires the President to set numerical goals for the economy of the next fiscal year in the Economic Report of the President and to suggest policies that will achieve these goals. -- Requires the Chairman of the Federal Reserve to connect the monetary policy with the Presidential economic policy.
The Act set specific numerical goals for the President to attain. By 1983, unemployment rates should be not more than 3% for persons aged 20 or over and not more than 4% for persons aged 16 or over, and inflation rates should not be over 4%. By 1988, inflation rates should be 0%. The Act allows Congress to revise these goals as time progresses.
The Humphrey-Hawkins bill was amended twice--in 1979 and 1990--but has never gone away. The legislation fundamentally changed the Fed's mandate, which is now:
The Fed has two main legislated goals for monetary policy: promoting full employment and promoting stable prices.
Which brings us back to the current U.S. unemployment rate of 10.2%. This is a big number, an alarming number. Contrast it to the Fed’s recent statements about inflation. On Nov. 12, the Fed’s resident inflation hawk, Philadelphia Federal Bank president Charles Plosser, said he was “not worried about inflation in the near term; my worries about inflation are in the immediate to long-term.”
Let's pause here. According to the two legislated goals for monetary policy, the Fed has done its job promoting stable prices. Inflation is currently low. The Fed needs to concentrate more on bringing down unemployment, which is high.
In other words, the Fed is biased to keep the printing presses running. The 10% unemployment number legislatively mandates it.
So expect the dollar to stay weak and the tide of all dollar assets, including stocks, to stay up in the short term. Stocks often get a lift in the early days of cheap money, and that’s what is happening now. Of course, eventually the piper has to be paid, but that’s a story for another day.
Whither China's Recovery The other set of big questions being asked this week are about China and the durability of its recovery. The billionaire trader James Chanos thinks China is cooking its books. Here is a must-read, skeptically tilted story from the Lone Star Times on China’s recovery. Pay attention to these two paragraphs:
Inconsistencies in Chinese official statistics--like the surging numbers for car sales but flat statistics for gasoline consumption--indicate that the Chinese are simply cooking their books. He speculates that Chinese state-run companies are buying fleets of cars and simply storing them in giant parking lots in order to generate apparent growth.
Another data point cited by the bears: overcapacity. For example, the Chinese already consume more cement than the rest of the world combined, at 1.4 billion tons per year. But they have dramatically ramped up their ability to produce even more in recent years, leading to an estimated spare capacity of about 340 million tons, which, according to a report prepared earlier this year by Pivot Capital Management, is more than the consumption in the U.S., India and Japan combined.
This negative view of China is not shared by the technology CEOs and venture capitalists I’ve talked to recently, including SAS founder and chief, Jim Goodnight and the legendary Silicon Valley VC, Dick Kramlich, who spent 18 months in Shanghai in 2008 and early 2009. They see a China in transition from low-cost manufacturing to higher value-added products and services, including computer networking and biotechnology.
Are the China bears extrapolating from China’s flat manufacturing numbers and missing the value-added stuff? I don’t know. But it’s always interesting when one successful billionaire, Chanos, disagrees with two equally smart rich guys, Goodnight and Kramlich.
Does a 10%+ unemployment rate perversely boost the stock market? Is China’s growth real or cooked? Post your comments below.
Of course China is cooking its books. And of course its banks are a train wreck behind the scenes. This all means that soon the Chinese won’t be able to buy our bonds even if they wanted to because they will be issuing their own.
And we’re cooking our books too. We haven’t had price stability over the long term. If you keep your receipts for several years just go into a shoe box and see what I’m talking about.
Stocks are going up because a profitable, diversified company that can shift assets overseas in a falling dollar environment is a better safe haven than Uncle Sam. And companies with large holdings of physical assets are safer as well.
Stocks are doing better insofar as corporations are more profitable than they were due to laying off workers and the cost cutting impact of selling down inventories rather than building to stock. Even if his top line revenues suffered the CFO was able to drive up his margin numbers, especially when compared with the last three quarters since this thing started. P/E ratios tell the rest of that story.
Interest and inflation are down together because this post-Keynesian, Supply Side economy has been deflationary for some years now. Low unemployment due to high productivity…due to outsourcing…masked the fact that our GDP slowed down to growth rates (2.1% since 2001) that were lower than we suffered during Stagflation (2.3%). The economy started hitting the wall just as George Bush took office. Same thing happend to Richard Nixon.
If the government was watching prices and employment rates more than GDP expansion then the government was taking credit for something they had nothing much to do with.
Our leaders said “Watch this” and told the dog to lay down after the dog already went to sleep. “See that? I did that!” Sure you did. Nice trick.
Of this we can be absolutely certain: The unemployment figure is artificially low, and the stock market is artificially high. Those two measures of economic performance are in for a serious and dramatic correction over the next 6 months. Unfortunatley the vast majority of U.S. politicains are in the business of lying for a living, and will be the last to acknowledge the painfully obvious: Real unemployment is already over 20% and rising, and the imminengt demise of the dollar imperils all dollar-denominated assets (i.e., the stock market). Why do you think India and China are dumping their dollars for gold? Our crooked politicians will also be the last to recognize how jobs are actually created and retained in this counntry via rational trade instead of irrational “free” trade. The latter spawned the biggest trade and budget deficits in our nation’s history, and birthed the worst credit crisis since the Great Depression. The U.S. economy is doomed no matter what happens next because the cards are stacked against it, and the slightest disturbance will cause the entire house of cards to cave in on itself. The U.S. government has become the biggest toxic asset in the world, and it is only be a matter of time before there is a run on the Federal Government, and by extension, on the Federal Reserve. Then it’s game over the USA, and the rise of the new Republics.
Red sky in the morning comes to mind. I’m grateful for the good run we had but I’m bracing for some turbulance and throttling back into the white arc. I wish I had an instrument rating for the economy because it’s getting hard to see through the smoke.
Somebody help me understand: what’s so high about 10K in the DJIA? Wasn’t it a lot higher just over a year ago?
I share the concerns of many about excess dollar creation and wildly irresponsible fiscal behavior in DC. Add to that the wildly expensive, inefficient – and plain stupid – items on the legislative calendar and it’s easy to believe we’re headed for trouble.
R.
The rise in the dollar denominated value of the stock market is a symptom of inflation, which is properly defined as an increase in the amount of money sloshing around the world; inflation is not the gummint provided CPI which is just as bogus as China’s numbers and as the 10% unemployment rate (which is really 20% or so). The nominal prices (non-inflation adjusted $) of gold, oil, industrial metals, stocks, farm commodities et al is an indicator of inflation, and they are all going to continue their upward trajectory.
If you can get some dummy to loan you money for 5 years at a low interest rate, take all you can get and put it into anything real – you will be paying the loan back with greenbacks that might be worth more as toilet paper.
To Rich’s question – “Does a 10%+ unemployment rate perversely boost the stock market?” Yep, with a Federal Reserve that abuses its immoral power to literally create trillions out of thin air, absolutely the stock market will go up. Warning – the longer this pretense of good times goes on, the worse the ensuing depression will be.
It’s pretty simple: until Americans are willing to pay the actual cost of the services and entitlements they receive — which would come in the form of radically hire taxes — our government will have no other choice but to print money. We can have one or the other.
Is China cooking its books? It’s a non-democratic society so I don’t believe anything ‘official.’
With respect to the Fed’s mission of working with the private sector to help achieve full employment, that sounds pretty good to me.
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