JANUARY 11, 2009

The following qualifies as "voo doo" analysis, but I will put it forth anyway. It is "voo doo" because there is no "hypothesis", or measured empirical analysis to back it up. It is completely impressionistic relying on my memory, (hopes?), and observations. This does not make it wrong, by the way. It just makes it "what it is". Usually when economic graphs (price changes, for example) change at an unusually fast rate, that is an indicator that there is an over reaction occurring which marks the beginning of the end of that "trend". An example might be the NASDAQ in 2000, or the change in Oil prices, up and down, in 2008, or the S&P 500 in October, 2008. The chart below is the NASDAQ from the beginning of 1999 until today. The spike began in the beginning of 2000 until mid-2000, then reversed itself. A full 70% of the price increase occurred within a 3 month period of a 10 year rally.

The following Chart shows the price of an Oil ETF. It reflects the actual percent move in the price of oil, so do not be mislead by the stated prices.

Again, as with the NASDAQ, an enormous percentage of the original price move happened in a short time. About 80% of the increase occurred in several months. That was wiped out even faster. It probably has reached something near a bottom but who knows.

The following Chart is on unemployment.

Bureau of Labor Statistics Data

 

 

The chart does have similarities to the Oil and NASDAQ. Of course it is not a security or a commodity, but it is a function of economic behavior. The "rally" in employment lasted almost 4 years as unemployment declined from 6.3% to 4.4% from peak to bottom. Those gains were wiped out in 1/4 of the time. What is my point? Not that the bear market in employment cannot continue, but that it will likely sputter out and flatten out at some number sooner than we think. That number may be 8%, 9%, 12% or something else. But it will occur before year end. Absent new "new bad" information, this will mark the beginning of the recovery in employment. As mentioned in The End of Financial Armageddon? equity prices recover faster than unemployment. Arguably, this process has already been happening. 

My observations on our collective behaviors in the current market must be similar to others. These are reflected in the National Statistics as well. Savings are increasing as we seek to save money by spending less. This is understood by business so they expect to produce less. Workers are let go. Our behavior causes this and even risks our own jobs when and if our employer lets us take a hike. But the likely result of this is we can only save so much. Unless there is some kind of mass ascetic movement about to happen, we will reach a floor on spending reductions. This floor will represent the bare minimum to maintain our current life style with all the fluff gone. At that point or sometime after that point unemployment will peak. This process is occurring very fast today which is why my voo doo proposition is this will peak soon. The extra savings will help provide a foundation for real future investment and growth.

The fly in the ointment is the Government. It is unclear to me what its actions will cause. My sense is its actions are, oddly, "off to the side"---at least as far as individual behavior is concerned. How much it will impact the behavior of financial institutions I do not know. My best case on the stimulus is that it is a negative return investment for the economy as a whole, measured in present value economic terms, but does not result in a complete wipe out of the money spent. Just wealth transfer predominantly from productive to non-productive uses on average. Opportunity costs and unfairness are the primary costs, which are very real, but not a total wipeout, I hope. 

(posted at 12:26 pm by Mike Rulle)