2011Feb6 Week In Review: Celebrate Unemployment?
“The fundamentals are precisely these: if you increase the supply of money, you bring about the lowering of the purchasing power of the monetary unit. This is what people whose private affairs are unfavorably affected do not like. People who do not benefit from inflation are the ones who complain.”
-- Ludwig von Mises: Economic Policy, pg. 48
With the unemployment number falling to 9%, shouldn’t we be celebrating? Yes, if you want to accept the media spin implying more people are working. No, if you want to look at how the decrease was calculated. The reported 36,000 new jobs aren’t even a third of what is required to employ new entrants to the work force. The real change is the BLS eliminating 2.2 million people last year from the “want to work” data column. That is jiggering the numbers. The U-6 unemployment number rose to more than 17%. Labor force participation has fallen to 1984 levels! And its 19 months since the recession ended.
Monday’s ruling by Judge Vincent that the new health care law is unconstitutional will end up at the Supreme Court. The Court may hear the case, or not. The Court could refuse the case and let the prior ruling stand. Time will tell.
However, several of the 26 successful plaintiffs, are acting on the ruling. Florida is returning the federal money it received to prepare the state’s Medicaid system for the new mandates. Others have announced abandonment of all work on implementation. Implementation required higher taxes and higher premiums either one of which would be an economic negative even in more robust times.
The primary beneficiaries of the current real estate market are mortgage brokers handling refinancing. While mortgage rates have ticked up a bit in recent months, they are still attractive. In recent decades, refinancing included an increase in debt extracting cash from a growing home equity. No longer.
Almost half of re-fis are “cash in” loans. Borrowers are adding cash extracted from other assets (savings or investments) to reduce the mortgage balance. The motivation may be due to falling appraisal values, to avoid paying the PMI or just lowering the payment to reflect reduced household income. No matter. The effect is a contraction of the money supply when debt is liquidated. That is deflationary. There is nothing the Fed can do to stop this decision by debtors. Debtors are choosing to not stimulate the economy with spending but opting for an increase in their personal financial security.
Most investors are aware of the Super Bowl indicator with an NFL winning team being bullish and an AFL winning team being bearish for the market. While you may have had a favorite team, for investors this year, it really didn’t matter who won. Both the Green Bay Packers and the Pittsburgh Steelers are original NFL teams. Remembering that the Super Bowl indicator is not correlated but coincidental, we could expect positive returns for 2011. Both teams have been Super Bowl winners before.
In the three years where Green Bay has won the Super Bowl, the S&P 500 has averaged a gain of 15.82% for the rest of the year with positive returns each year. For Pittsburgh, the results are even better. The Steelers have won the Super Bowl six times, and in each of those years the S&P 500 was positive for the rest of the year with an average gain of 18.78%. No matter who wins, the Super Bowl Indicator says the market will see additional gains from now through year end.
If that isn’t enough, add the world famous groundhog Punxsutawney Phil into the mix. The Groundhog Day Indicator says that in years where Phil does not see his shadow, the S&P 500 typically sees above average returns for the rest of spring with positive returns over 80% of the time. The combination of these two indicators should make it easier to be optimistic in spite of a huge employment hole and our massive debt.
Unless you own inflation protected bonds, the persistence of global inflation is not good news. While our government reports mild inflation, it excludes food and energy which most severely impacts low income households. With companies from Starbucks to Hershey to WalMart innovating ways to pass along increasing costs of raw materials, the price increases are bound to show up before long.
Potential defaults in the tax free bond market have already caused rates to rise. Recognition of inflation will cause another decline in valuations. The causative factor is the continuing expansion of our money supply debauching the Dollar.
“When the facts change, I change my mind. What do you do, sir?” - John Maynard Keynes
Our plan is “the plan will change.” What is your plan?
Relative strength measures the price performance of a stock against a market average, a selected universe of stocks or a single alternative holding. Relative strength improves if it rises faster in an uptrend, or falls less in a downtrend. It is easily applied to individual positions in your portfolio and to sectors and asset classes.
If you would like a free relative strength analysis of your portfolio’s asset allocation, sectors and positions, call us at 800-317-9119. The call is free. The report is free.