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What They Don’t Tell You

There are 2 points I’d like to make about today’s economic data. The Bureau of Labor BS released the official unemployment rate this morning. It was 7.6%, which is bad enough. The first point I want to make is that what they don’t emphasize is that the real unemployment rate is 15.4%. This rate includes discouraged workers and those working part time because they cannot find full time work.

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This is a statistic that the Bureau of Labor BS has kept since 1994. Only recently, since the economy has begun to tank and bloggers and non-mainstream publishers like yours truly have been featuring this data point, has the mainstream media picked up on this number. It’s usually down around the 4th paragraph of page 2 of the article. This is by far the worst reading in this indicator since they began tabulating it in 1994. The next worst reading was 12.8% at the inception of the data in January 1994. January is always the weakest month of the year, but this month’s increase of 1.9% was by far the worst on record.

The second point is that the stock market doesn’t discount squat. It does not “price in” the expectation of future events and trends. The market is composed of individuals, most of whom are trading very short term trying to beat the next guy out of a buck. Others are money managers trying to run with the crowd. While some of those individuals have brass balls, especially those who show up on CNBS talking their book, none have crystal balls about the future of the economy. They buy stocks when they have extra cash, and they sell them when they need cash. Then there are all those machine driven arbitrage and hedging trades that have absolutely nothing to do with anything other than pricing inefficiencies.

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Sometimes stock price trend changes precede unemployment trends, sometimes they change direction concurrently, and sometimes changes in employment trends precede stock price trends. The unemployment rate was a leading indicator of the stock market in 1994 and again in 2007. The stock market led the turn in the economy in 2000. It was roughly concurrent at the 2003 low. And it was way, way behind the economy as it was in its final bubble phase throughout 2007. This chart proves that the idea that the stock market is a discounting mechanism, or “prices in” future events, is just more Wall Street bullshit.

The stock market moves with changes in liquidity. So does the economy. When they do not move concurrently it can mean only one of two things. Stock market speculators are either wrong, or they ran out of money before the impact was felt in the real economy. In 1994 the economy was getting demonstrably better for the entire year. It took the players until 1995 to begin to move in the same direction. They panicked in 1998 when there was no cause for it, then in 2000 the money just ran out, and they had to stop playing. Economic activity was right behind that. The reversals in the market and the economy were concurrent in 2003.

In 2006-2007, the real economy ran out of gas and was weakening. Stock market gamerz were dead wrong about the future for an entire year because at that point the Ponzi game was still in its final blowoff.  Both the economy and the market began to fall apart in late 2007, but the divergence in the unemployment rate was clearly the leading indicator throughout 2007. “Da boyz”, including Wall Street pigmen, driven by insane greed, just got it wrong. It’s pretty clear that the criminals running the game had no clue what lay in store for them. If they don’t know, who does? OK, we bears knew, but we don’t count. We’re not the market, we’re just the lunatic fringe.

So the next time one of the shills on CNBS repeats the line that the market is “discounting” or “pricing in”, consider the source. The market isn’t capable of knowing the future. It simply measures how much excess cash is available in the system, and whether the players are “in the mood” or not.

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  9 comments for “What They Don’t Tell You

  1. Radhe
    February 6, 2009 at 8:16 pm

    Lee,

    Very thoughtful of you to write this piece.

    I never believed the nonsense, that market is a discounting mechanism.

    But it is always nice to see, someone more smarter than me, feel the same.

    Best to you
    —Radhe

  2. Jeff B
    February 6, 2009 at 8:32 pm

    Lee, all the CNBS shills were giddy with bullishness tonight. They are all predicting a huge week next week. How do you think this squares with the $73 billion in new supply coming online next week. They have to be aware of those numbers, don’t they?

  3. Andy Bebut
    February 6, 2009 at 10:57 pm

    Very valuable info.

    If, instead of employment you take the GDP curve the result will be pretty much the same – the stock market is not discounting anything.

    Or get corporate earnings – the fact that many corporations make huge 20%+ moves after announcing earnings is the simple prove that the market is unable to discount even the past quarter properly – I’m not talking about the next quarter.

  4. February 6, 2009 at 11:03 pm

    Jeff- I will be in a state of stunned disbelief if they can overcome that. And no, they have no clue about what I see as an obvious cause and effect relationship. I guess next week we will find out who the idiot is, them or me.

    And I sure hope it’s not me. 🙂

  5. amy
    February 6, 2009 at 11:27 pm

    I just came across a very helpful website on the current economic downturn and employment http://www.RecessionInfoCenter.com

  6. Jason H
    February 7, 2009 at 4:31 am

    Great stuff, Doc. You da man!

  7. MalpaX
    February 7, 2009 at 6:01 am

    Unfortunately you are using some good logic to sell the no-discounting nonsense. Each cycle has three stages being innovators, imitators, and idiots. It always feels bad to be innovator and it feels good when you do whatever everybody else does. You are pushing people into third. Being perma bear is nothing to be proud of. Even broken clock is right twice a day. Bulls make money, bears make money, pigs get slaughtered.

  8. MalpaX
    February 7, 2009 at 6:31 am

    Let me also make one point about your no discounting argument. You are not telling the people that economic data for a given period are released after that period yet you overlay them with stock charts as if they were available simultanously. So for equities January was the worst January in 113 years, but miserable January employment was release in February which is AFTER the market already tanked.

  9. jim
    February 7, 2009 at 1:22 pm

    Watch USO crater this week as they are forced to sell the near term oil contract and roll out to the next month.

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