Without New Jobs, the Landscape Is Totally Different

Without New Jobs, the Landscape Is Totally Different

Excellent post by Sham Gad from RealMoney. I had to link this one. I truly believe every word he says.

The longer this rally persists, the more confident market participants will become. In fact, the self-reinforcing bias can fuel a rally for a lot longer than fundamentals warrant. That’s why I penned a piece in June advising readers that despite the 40% rally up to that point, it wasn’t a good idea to be a hero and go short the market. And just two weeks ago, despite the 60% rally at that point, I made some consideration as to why this rally could continue.

The fact that I have been right thus far is partially due to luck. I didn’t write those pieces because I’m a hopeless bull, but rather because this market is being supported by fiscal and monetary forces never before seen in the U.S. And add in the human emotional factor — the longer the market goes up, the more folks on the sidelines want to get in immediately after any pullback — and you have a recipe for big, big upside. But eventually we’ll have to deal with a big, big headwind — unemployment.

The stock markets are built on cycles. The greatest rallies in market histories have occurred after the most dramatic declines. The opposite is also true: After the 20-year bull market that launched in 1982, we had a disastrous pullback in 2000 followed by several years of unchecked upside that lead to 2008.

So while I am on record as still saying that you are brave soul if you think shorting the market might be the prudent thing to do, I am also on record as saying that I get more and more concerned as this rally continues without the creation of jobs.

The two words that frighten me most right now are “jobless recovery,” but that’s exactly where we are going. Even the positive forecasts I read don’t suggest the unemployment rate will be lower next year or even the year after. The International Monetary Fund is forecasting global GDP growth of 3.1% next year, no doubt led by China’s 7%-10% growth.

While I applaud the efforts our government is pursuing, job creation needs to be at the top of list — even above health care. According to the Bureau of Labor Statistics, since the recession officially began in December 2007, the number of unemployed has doubled to 15.1 million from 7.6 million. That makes the reported unemployment rate 9.8%. However, the oft-ignored U-16 figure, which includes folks who have stopped looking for work and part-timers seeking full-time employment is now over 16%.

The staggering job loss numbers alone are frightening enough. But what really concerns me is that these jobs may be lost forever. Most of the job losses, unsurprisingly, are coming in areas like construction, manufacturing and retail — those industries have been hit hardest, and as consumers continue to eliminate many forms of discretionary purchases, these sectors are likely to remain depressed for some time.

And as these businesses learn to cope with a reduced workforce, the likelihood of all those jobs coming back diminishes greatly. And while these workers remain idle, they are not being trained with new skills that may be required over time. The result is permanent job loss, and the effects are devastating — consumers continue to operate in fear mode, saving every penny, which is bad for businesses everywhere.

We can get out of this recession and on our way to a lasting recovery if the government succeeds at gradually substituting its consumption and spending for private consumption and spending. This transition won’t happen right away, but job creation is the best tool for tipping the scales. Instead of simply flooding the market with stimulus dollars — many of which seem to be going nowhere — the government might consider using those funds to incentivize private business to hire more workers.

Private businesses do the best job of maximizing efficiency. If they are induced to hire more people, that’s more people who are learning new skills, more people paying taxes, and get this — more people with health insurance.

I certainly don’t have all the answers, but the longer this recovery continues without a strong signal that jobs are being created, the more you can expect an economic future that the folks at Pimco dub “the new normal” — an environment characterized by a permanent reduction in corporate profit growth, rising unemployment, fewer investments and more reliance on government aid.

Such a scenario would be terrible for the market and would essentially negate the long-term investment thesis of a lot of excellent businesses. I would no longer want to own excellent companies like FreightCar America , TravelCenters or Mueller Water , knowing that while they all represent long-term bargains, their catalysts will have been weakened under such a scenario.

Instead investors would have to accept a future of reduced market returns with quality names like Wal-Mart and Johnson & Johnson being the best places to put capital to work.

Keep an eye on the employment numbers — sustained weakness in the labor space will have far-reaching effects implications for many otherwise quality investments.