11%, 12%, 13% and Counting

The S&P500 pushed 2.3% higher last week, on no meaningful news.  The volume dropped yet again, suggesting that the price rise did not have a lot of conviction behind it.  The VIX (or fear index) barely budged, also suggesting that the price increase may not hold.

While there wasn’t much economic data released last week, most of it was negative.  Initial jobless claims dipped to 502,000 but remain stubbornly above the 500,000 for almost a year now.  The Treasury announced that it incurred a deficit of $176 billion for the month of October, the worst deficit on record.  Government receipts fell 18% yoy to $135 billion.  So the deficit was a staggering 130% of receipts!   The September trade deficit came in worse than expected and worse than the August deficit.  Finally, consumer sentiment fell to 66.0, far lower than the projected increase to 71.0.

Technically, the daily charts are suggesting a rise that might be sputtering.  The weekly charts are also forming a long-term topping formation that began several months ago.  Prices have been rising but numerous technical indicators are diverging bearishly;  these indicators turn down, as they are doing now, ahead of an actual price downturn.

Almost two weeks ago, the nation’s unemployment rate rose to 10.2%, the highest level since April 1983.  But the mainstream media and the purveyors of green shoots propaganda keep drilling into our heads that this is OK.  No need to worry because unemployment “always lags” in a recovery from a recession.  And since GDP has just turned the corner with a positive 3.5% third quarter, then the unemployment rate should start to go down over the next quarter or two–this being the lag.

But what if it doesn’t go down?  What if it goes up–a lot?

David Rosenberg, from Glusking Sheff, lays out the highly likely scenario where economic stability will cause job losses to grind to a halt.  That’s good news.  But the bad news is that employers will not start hiring for many years.  As formerly discouraged people (currently not counted as unemployed) re-enter the labor force to look for jobs, they will get counted as unemployed, driving the unemployment rate higher.

Why won’t they get re-hired immediately?  Mr. Rosenberg explains that employers will first boost the workweek for existing employees; but simply returning to pre-recession workweek levels would be the equivalent of hiring two million people.  Next, employers will reduce furloughs, turning part-time workers into full-time workers; this will also be the same as hiring millions of additional workers.

So employers will not need to touch the vast pool of unemployed folks, or the 100,000+ of typical monthly entrants to the work force, for a long time, perhaps years.

How high can unemployment rise?  Mr. Rosenberg thinks 11% is nearly a certainty and that the final level will reach 12% to 13%. 

If this is a normal lag, or nothing to worry about, then we’d better call our doctors and stock up on some OxyContin.  If we can’t avoid the impending damage, we might as well try to numb the pain.

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