Employment Report Supports Low Bond Yields


  The employment report was issued today by the BLS showing a 0.1% increase in unemployment as more people returned to the workforce. New jobs were 208,000. The problem is that roughly 3.5% of the working age population gave up and dropped out of the workforce in 2009 and now they are coming back in, thus increasing the unemployment rate.
   The big mystery of the past several years is what happened to the missing 3.5% of working age population who disappeared during the recession of 2009. This absence accounts for about 90% of the reasons why unemployment went down from 10% to 6.1%. The other 10% of the 3.9% improvement (a mere 0.4% of the workforce) was due to economic growth as a result of gigantic stimulus. During this time bond yields have gone down. Usually an increase in employment is inflationary, resulting in higher interest rates. The reason why the “improvement” in unemployment didn’t increase interest rates was because much of the reduction of unemployment (perhaps as much as 90%) was due to people leaving the workforce. Of those who left probably 2.5 percentage points of the missing 3.5% were discouraged workers and didn’t voluntarily seek to retire. That’s about 2.5/3.5 = roughly 70% of the reduction of unemployment was due to phony “early retirement” during the severe crash of 2009 by those who couldn’t afford  it, instead of natural retirement by a well-capitalized retiree in his senior years. About 30% were bona-fide retirees.
   The idea that a moderate net worth person, upon seeing his nest egg cut in half in the crash of 2009, would suddenly be brave enough to take early retirement or even retirement at a normal age of retirement is ridiculous. What happened is they were pushed out of the work force by a severe recession and couldn’t handle the job hunting rejection so they allowed themselves to be classified as “retired”.
  Labor slack is still present. Is the increase in employment an inflationary threat? No, because these hardcore unemployed people returning to the workforce are mostly moderate income people with a shaky work history and too much debt so when they do get a job they can’t qualify for a loan and thus can’t cause inflation. Getting a loan is more inflationary than getting a raise. If someone gets a raise the employer has probably figured out that there may be a direct real time offset to that: either more productivity or raise prices or cut profits. By contrast, getting a loan increases the money supply enabling the worker to borrow to buy durable goods that will be amortized over time. This means they are consuming something today yet earning the money (and producing goods) over a long time. That means they consume using newly printed money without adding an immediate offsetting contribution of production to the economy which is the essence of inflation.
   When someone has a weak financial history they may not be able to get a bank loan and would instead seek financing from a non-bank lender who raises funds by selling bonds. This type of lending is not inflationary because the funds are supplied by a saver who bought the bonds and thus gave up consumption. By contrast, a bank loan didn’t come from savings but was instead funded by an increase in the money supply, which is inflationary. The new hiring of hard core long term unemployed people may lead to more non-bank lending which is more restrictive due to higher rates and is non-inflationary.
  The old paradigms learned during the Keynesian era of 1930-80 when workers had power don’t apply anymore. The workers with greatest earnings and inflationary potential (those who are in the top 20%) and tightest labor supply have enjoyed a full employment economy for two or three years and the economy hasn’t become inflationary. By contrast, the weak, moderate income people who have had a hard time finding work are much less likely to cause inflation, so their future improvement in the labor market will not be an inflationary threat.
    The future in the next five to 15 years will be politicians will finally buckle under pressure from fiscal conservatives and cut excessive government benefits thus compelling more workers in both private and public sector to work longer before retirement and save more, thus increasing the supply of labor and decreasing consumption and decreasing consumer confidence. This is disinflationary.
   When the truth comes out about excessive unneeded real estate development in China and other EM countries then there will be less business in the U.S. selling things to China and thus a slower U.S. economy. This type of pattern never existed during the Keynesian 1930-80 era. People should look to the pre-Federal Reserve era before 1913 or pre-Keynesian era before 1930 for an example of the future. It will be one of low inflation, smaller government, deeper, longer crashes, weaker power of workers, lower wage growth, less government safety net, etc., which will encourage more saving and less private sector spending. All of this implies low growth and low inflation, which supports bonds and hurts stocks.

   Investors need independent financial advice about the risks of a stock market crash during a phony employment recovery. I wrote an article “The mystery of the missing millions” about the hidden unemployed.



About the author

Don Martin, CFP®

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