Unemployment vs. Employment: What Really Matters

Unemployment vs. Employment

What Really Matters

Dear Readers,

I am going to show you something in this letter that will really make you think about your future.

But before I do that, let’s start with answering a question that I seem to have gotten a lot over the past year.

This one is from Ennio in response to my Letter, “The Reality of Canadian Debt Levels from last week. He writes:

“There appears to be a contradiction. On the one hand you recommend gold, as it is a hard asset can’t be printed. On the other hand you recommend US stocks which are just paper issued by the companies. How financially sound will these companies be when the US collapses due to the debt load? You are negative on gold in the short term? When are you looking for gold to move up?”

Those are very smart questions and one I get asked almost on a daily basis.

To keep things simple, I have been recommending – and still recommend – US stocks for one simple reason: they’re the easiest asset class to inflate. It’s really that simple.

Until there is stronger movement away from the US dollar and the current monetary system, shares of US companies can still be converted into cash, which can then be converted into goods and services.The trick here is knowing when to get out – and signals of that have yet to come.

If the US collapses under its debt load, I would be shorting the heck out of stocks but would be much more worried about the financial system, rather than individual company profits. Gold will act as a strong hedge against this scenario.

You may want to go back to my past letters to understand why gold will move higher in the coming years: CLICK HERE

My negative short term outlook on gold has been confirmed with gold falling below $1300.

But let me get back to this later because what I am about to share with you will really open your eyes to the realities of our future.

The Magic Behind Data

Job numbers came in and everyone is cheering. But they’re cheering for all the wrong reasons.

Sure, everything seems bright and dandy because the latest jobs report blew away expectations, showing a gain of 204,000 job for the month of October – more than double analyst expectations.

But as I mentioned in my letter, “Why the Fed Didn’t Taper,” employment numbers are getting better as a result of those leaving the workforce, not those joining it:

“While the unemployment rate has been falling over the past year, don’t be fooled; it was more the result of people leaving the workforce than actual jobs being created.”

Here is a chart from that Letter:

US Participation Rate

Source: Bureau of Labor and Statistics
Source: Bureau of Labor and Statistics

The rate was at 63.2% in August – meaning that 63.2% of Americans who were capable of working, actually wanted work.

As of October, this rate has dropped to 62.8% – the lowest since 1978.

That doesn’t seem like much, but put a head count to that figure and it shows an astonishing 932,000 Americans left the workforce. This marks the third highest monthly increase in people dropping out of the labor force in US history.

So America created 204,000 jobs, but nearly a million people left the workforce.

If people stopped leaving the workforce, unemployment would actually rise substantially.

The Fed’s Glorified Measures 

The declining labour participation rate actually bodes well for the Fed because as more people leave the workforce, unemployment numbers drop, which creates the illusion that the Fed is doing its job.

The Fed gets exactly what it wants: the illusion that their role is great for the world, while the world continues to engulf itself in its monetary system.

With all this talk of tapering, let’s not forget that this current round of QE is pegged at quantitative thresholds; removal of stimulus measures (low rates and asset purchases) will only be considered once unemployment reaches 6.5% or less.

Back in September, I did a little experiment that calculated how many jobs would need to be created for the Fed to reach its 6.5% unemployment target rate.

My findings showed that America would need to create at least 200,000 jobs every month for the next 12 months to reach an unemployment rate of 6.5% (see my PAST LETTER for exact numbers).

But as I mentioned, if the labour force continues to drop, the Fed could achieve their target much faster.

Using the same formula but changing the labour force participation rate to the current rate of 62.8%, America would now need to create 191,645 jobs per month – as opposed to September’s 197,222 – for the next 12 months  to reach the Fed’s rate of 6.5% (based on payroll employment); based on the change in household employment, 203,229 jobs are now needed, as opposed to September’s 209,588.

That’s a drop of around 6000 jobs per month.

Simply put, the more people who leave the workforce, the faster America will get to achieving a lower unemployment rate.

So let’s forget unemployment and look at employment.

A Scary Vision

Here’s a chart that paints an extremely eerie – but realistic – picture of what is happening in America.

Take a look:

us-populationvsuseomployment

This chart represents true US employment. It shows how many people are employed vs. the overall population.

It does a far better job at showing the reality of employment than the unemployment rate that every one talks about.

About ten years ago employment growth stalled, gradually widening the gap between total US population and US employment.

Stimulus measures were put in place as a result, and as Paul McCulley of Pimco put it, Alan Greenspan (needed) to create a housing bubble to replace the Nasdaq bubble.

While stimulus created a strong housing market – which eventually popped in 2007 – it didn’t do much to create new jobs, as you can see in the chart above.

Total US employment has actually been declining over the last decade, while population growth continues to expand (as it always will.)

Herein lies a major problem.

More resources and jobs are required to fuel population growth. We’ll need more food, more commodities…more of everything.

Americans need jobs to pay for those things.

But even with record amounts of stimulus over the past decade, America hasn’t been able to create more jobs. Stimulus hasn’t created jobs in over 10 years; it has only created the illusion of wealth through inflated asset prices.

This is a major predicament that has yet to be brought into the spotlight.

Instead, talking heads can continue talking about the unemployment rate, which – as I just explained – really has no merit.

With a declining workforce, low wage job creation, and growing population, the need for additional public expenditure grows dramatically.

Big Government Gets Bigger

Take a look:

governmenttransfers

This is a chart of government transfers to individuals, with the majority (nearly 90%) coming from income maintenance (entitlements based on poverty or income status), Medicaid, Medicare, Social Security, and unemployment insurance.

As this spending continues to grow, so will the need for government income.

But since government income generally comes from taxation (see How the Government Borrows Money), the hope of lowering public debt is practically non-existent.

Public debt will continue to balloon as the population grows while the workforce shrinks.

What’s worse is that I am not sure which sector will provide enough jobs to fuel population growth. As I mentioned in “A Really Big Problem”:

“Innovation is human evolution. Yet as we advance in technology, more jobs will be destroyed and replaced by more efficient robotics and digital technology. Movies where humans lose their jobs to robots and technology are no longer fiction – its reality.

Manufacturing has long moved to emerging markets where costs of production are far below anything in N. America. That means the technology created here are sent overseas to be mass produced.”

A Serious Flaw in Our Future

As the population grows, public spending must occur.

But where will this money come from, if not through taxation?

I’ve been seriously thinking about this over the past five years and the only realistic answer is central banks.

As the population grows, those who cannot find work – or longer care about work – will resort to entitlements, à la Obama, as shown in the chart above.

This will lead Obama, or whoever is in power, to pursue further spending to satisfy the growing population of the unemployed.

I haven’t even begun to talk about the Social Security problem that is already getting out of hand.

At the end of 2010, about 54 million people were receiving benefits from the Old-Age, Survivors, and Disability Insurance (OASDI).

At the end of 2011, OASDI was providing benefits to about 55 million people.

Last year, in 2012, it added another 2 million people – doubling the number that was added in the year prior and bringing the total to 57 million.

I am not really sure how this will play out but I know this problem will continue to grow.

Whether we see riots on the streets of America, or a future for our children reminiscent of futuristic movies like Judge Dredd, all are strong possibilities – more so in America, than in Canada.

For now, debt-spending is the norm because the world has joined in unison, with the world’s largest monetary figures printing trillions of dollars together (see The Flood Gates Have Opened.)

But what happens when other countries decide enough is enough? What happens when they want more US dollar for everything the US buys from them?

This will eventually happen and that means we will have to pay more for everything – not just art, collectibles, and gold.

That’s when we’ll feel the effects of hyperinflation – the same effects many growing countries are already facing.

Luckily – for now – America isn’t growing.

Gold and Gold Stocks 

The US Dollar continued to rally this week as a result of the jobs report (yeah, right), and is now right between its 50-day and 200-day moving average:

US-Dollar-Index-Nov-8-2013

I remain skeptical of the US Dollar at this point and see it eventually falling back below its 50-day.

Despite the fact there is so much working against the US dollar, the recent rally slammed gold, which now sits below $1300.

Gold stocks traded down immediately at the open on Friday. However, around 15 minutes into trading, a bottom formed and shares began to trade higher. A couple of hours before the close, gold stocks began to rally back, along with gold.

Here’s a look at the TSX Global Gold Index chart from Friday:

tsx-gold-index

I’ve been studying the charts and patterns on many gold stocks, and the gold mining indexes such as the HUI, NYSE ARCA gold bugs, and in particular the TSX gold miners.

I’ve noticed some peculiar trading over the last few weeks but couldn’t quite grasp what was going on.

Then a friend of mine, who has been charting for over 10 years and has made many great calls within the sector (and whom I am trying to convince to write with me), sent me this:

“Ivan – my sense of the market is that someone has undisclosed knowledge that will soon influence the future direction of gold stocks and is affecting the way that gold stocks are currently trading on the TSX.   See the chart, which shows some very strange open/close and close/open action over the past 18 trading sessions…..

I will go out on limb and say that, “something big is about to happen!!!” It is unclear to me as to the timing but the signs are already there in the marketplace.”

tsx gold iindex daily 2013 nov 6 2013

I agree with him and believe there will soon be some big moves for gold stocks, especially heading into 2014 – the question is, which way will they move?

We’re soon heading into what is sometimes referred to as the biggest delivery month for gold and silver, December.

I am not sure how this will play out, especially considering that we’ve seen so much peculiar manipulation-like trading in gold. But I do know that the last time gold fell below $1300, we witnessed a massive rush of buying support from the physical side (see Mother of All Bubbles).

Worldwide gold production will also come to a halt with gold prices below $1200 – especially if energy prices remain the same.

Short term prices are hard to predict, but there’s strong support as gold moves lower.

Keep a very close eye on gold stocks.

Until next time,
Ivan Lo

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