Stock Market Recovery Based on Lies and Ignorance

Dear Reader,

+829.18…that was the number staring back at me when I checked the overnight market action on Saturday morning.

The Dow was sitting at 27,110.98 points…a mere 8% below its February peak.

And, last night it edged another 461 points closer to that peak.

My immediate thought on the 800-plus point rise was how is this possible?

Flick to my news updates and there it was written large in The New York Times:

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Source: The New York Times

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Better-than-expected US unemployment numbers?

Apparently, an unemployment rate of only 13.3% was good news.

How was this unexpected drop in the unemployment rate possible?

To quote from the NYT article (emphasis added):

employers added 2.5 million jobs in May, the Labor Department said Friday [5 June], defying economists’ expectations of further losses and offering hope that the rebound from the pandemic-induced economic crisis could be faster than forecast.

Stocks on Wall Street shot higher on Friday, with the S&P 500 coming close to recouping all of its losses for 2020 so far, after the federal government reported a surprising pickup in hiring in May.

The S&P 500 rose more than 2 percent. The index is now about 1 percent below where it started the year, and less than 6 percent away from its high point in February.’

Headlines are one thing.

But, as they say, the devil’s in the detail.

So I hopped onto the US Labor Department Bureau of Labor Statistics (BLS) site for the real story…or, at least as real as you can expect from a government department.

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The devil hiding deep down in the report

After a bit of searching there was the devil hiding deep down in the report.

If you want to read the BLS Employment Summary, go here.

The last paragraph in a section marked ‘Coronavirus (COVID-19) Impact on May 2020 Establishment and Household Survey Data’ (emphasis added):

If the workers who were recorded as “employed but absent from work due to other reasons”: (over and above the number absent for other reasons in a typical May) had been classified as “unemployed on temporary layoff”, the overall unemployment rate would have been about 3 percentage points higher than reported (on a not seasonally adjusted basis). However, according to usual practice, the data from the household survey are accepted as recorded. To maintain data integrity, no ad hoc actions are taken to reclassify survey responses.

Even though you are ‘temporarily’ laid off and not at work, you are counted as employed.

Had the BLS not been so imaginative in its definition of what constitutes real employment, the US unemployment numbers would have been ‘3 percentage points higher than reported’.

But wait, it gets worse.

The latest ‘better-than-expected’ unemployment rate is 13.3% of a (shrinking) labour force.

Since January 2020, the US labour force has reduced from 164.6 million to 158.2 million.

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Source: US Bureau Labor Statistics

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Where have 6.4 million workers gone?

The way the BLS works, they are defined as ‘no longer looking for work’. On a practical level you’d expect that when an economy is shuttered.

However, statistician theory says ‘you’re out’.

How convenient.

If we include those 6.4 million people, it adds another 4% to the unemployment number.

Let’s do some quick maths…Official number 13.3%-plus ‘temporary’ lay-offs 3% plus labour force shrinkage 4%, and we have a US unemployment rate exceeding 20%.

Now that’s starting to make sense.

And, we haven’t even included any of the 22 million on the Paycheck Protection Program (PPP). The PPP (similar to JobKeeper) covers small business payroll costs for up to 24 weeks…regardless of whether the employees are working or not.

How many of the 22 million will end up permanently unemployed? One quarter to one half?

The problem with the official numbers is it masks the real unemployment situation in the economy.

ShadowStats — go here — produce an alternative Un and Underemployment rate for the US.

The ShadowStats numbers are based on (emphasis added):

The seasonally-adjusted SGS [Shadow Government Statistics] Alternate Unemployment Rate reflects current unemployment reporting methodology adjusted for SGS-estimated long-term discouraged workers, who were defined out of official existence in 1994. That estimate is added to the BLS estimate of U-6 unemployment, which includes short-term discouraged workers.

According to ShadowStats, the US ‘Unemployment Rate’ (net of BLS errors) is 36.5%.

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Source: ShadowStats

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The ShadowStats number is certainly not going to push markets up. But that’s the reality of the situation.

When you strip away the ‘known’ lies in the unemployment data, it paints a far bleaker picture than the headlines portray.

The more realistic numbers are on par with the Great Depression

The Journal of Economic Perspectives ‘Employment and Unemployment in the 1930s’ published the following table on US unemployment.

The table includes two sets of data — Lebergott and Darby.

Stanley Lebergott counted ‘work relief’ jobs (a bit like the temporary layoffs) as unemployed in his numbers.

Whereas, Michael Darby’s data included these ‘jobs’ as employed.

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Source: Journal of Economic Perspectives

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What’s interesting about the Great Depression unemployment numbers is the 1930 figure, 8.7%.

In the immediate aftermath of the 1929 crash, the financial destruction and loss of confidence had not fully worked its way through the economy.

In 1930, both sets of numbers (with and without work relief jobs) were identical.

Which explains why, after the Dow’s initial plunge, there was a five-month (suckers) rally on the Dow Jones Index.

The 1930 investor mentality was the same as we see today.

Buy the dip. Return to normal.

Human nature is such a predictable thing.

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Source: Macro Trends

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Then the reality of what was happening in the economy took hold.

The underlying damage caused by the popping of the Roaring Twenties debt bubble gradually worked its way through the system.

The unemployment numbers continued to increase, finally peaking in 1933.

The difference in the Lebergott and Darby data sets shows that ‘work relief’ jobs remained in existence right throughout the 1930s.

Which is why we can expect the current ‘temporary’ measures to be more permanent than temporary.

To further illustrate just how ridiculous (and misleading) government data can be, the next table is the ‘Net Birth-Death Forecasts’ from the US Bureau of Labor Statistics site.

Contrary to what the title suggests, this is NOT human births and deaths.

It’s actually business births-deaths.

The numbers are in the thousands (‘000).

Apparently, in May — yes, the month just gone when US COVID-19 death rates rose rapidly — the BLS forecast the business ‘birth-rate’ for the US economy was…345,000 (that’s the 345 figure down in the bottom right-hand corner).

No, I have not made this up.

That’s the official BLS forecast.

Which makes me wonder whether BLS is actually short for…bulls**t, lies and stats.

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Source: BLS

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What sector apparently gave birth to the newest businesses?

‘Leisure and hospitality’ accounted for 162,000 of the new business births.

This sector was hit the hardest by the lockdowns…people not going on holidays or to theme parks, hotels, bars, restaurants or cafes.

If pushed, I’m sure the BLS could reason this away with something like…the immaculate conception.

In all seriousness, why would you publish this rubbish and insult people’s intelligence?

My guess is the BLS unemployment and business birth-death numbers are going to be revised downwards in the coming months.

But as they say in the classics ‘don’t let the truth get in the way of a good story’.

Which is why (the same as it was in early 1930) the US market is on a roll pushing the index higher.

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As reported in the Wall Street Journal on 4 June 2020 (emphasis added):

The market is probably ignoring incremental bad news because momentum has control. All those who missed the rally are buying in now that lockdown is easing, pushing up prices. The S&P 500 had its best-ever 50-day gain from the March lows to Wednesday. The prospect of a new high helps too: the Nasdaq-100 index dominated by big technology stocks briefly broke to a new high on Wednesday, while the S&P 500 is down only 3% this year (and less than 8% below its high). The pink bunny says none of this, or anything else, matters. Just look at the Fed: Easy money makes up for a lot of lost earnings. But market momentum always breaks eventually…

I would change ‘The market is probably ignoring…toThe market is definitely ignoring…’

Markets tend to rhyme

It’s tempting to say there is no rhyme or reason for the market’s recovery, but that’s not entirely true.

Markets do tend to rhyme and the reason for that is always the same, human nature.

The psychological profile holds true for all markets…dating back to Tulip Mania.

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Source: Dr Jean-Paul Rodrigue

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The duration and extent (height and fall) of each phase varies, but the pattern is highly repeatable.

The fervour of the current return to normal mood has taken seasoned market players by surprise.

Can people really be that pig-ignorant to what’s happening in the economy?

Apparently, they can be aided and abetted by the rubbish published by the BLS.

But, as the WSJ article states, ‘market momentum always breaks eventually…

When momentum does break to the downside, the bulls**t, lies and stats will be exposed by the harsh truth.


Vern Gowdie,
Editor, The Rum Rebellion

Vern has been involved in financial planning since 1986.

In 1999, Personal Investor magazine ranked Vern as one of Australia’s Top 50 financial planners.

His previous firm, Gowdie Financial Planning, was recognised in 2004, 2005, 2006 & 2007, by Independent Financial Adviser magazine as one of the top five financial planning firms in Australia.

In 2005, Vern commenced his writing career with the ‘Big Picture’ column for regional newspapers and was a commentator on financial matters for Prime Radio talkback.

In 2008, he sold his financial planning firm due to concerns about an impending economic downturn and the impact this would have on the investment industry.

In 2013, he joined Fat Tail Investment Research as editor of Gowdie Family Wealth. In 2015, his book The End of Australia sold over 20,000 copies and launched his second premium newsletter, The Gowdie Letter.

Vern has since published two other books, A Parents Gift of Knowledge, all about the passing of investing intelligence from father to daughter, and How Much Bull can Investors Bear, an expose on the investment industry’s smoke and mirrors.

His contrarian views often place him at odds with the financial planning profession today, but Vern’s sole motivation is to help investors like you to protect their own and their family’s wealth.

Vern is Founder and Chairman of The Gowdie Advisory and The Gowdie Letter advisory service.

The Rum Rebellion