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Are We Going From the Frying Pan to the Fire?

The August Jobs Report

Fish in a frying pan

Unemployment increased by 330,000 in August, and the national unemployment rate increased 0.2% to 3.7%, the biggest increase since April 2020.

Black unemployment rose for the 2nd consecutive month from 6.0% to 6.4%.

Latino unemployment jumped from 3.9% to 4.5%.

You can read the full jobs report from the Bureau of Labor Statistics here.

No BS

I am not a doomer. The world isn’t ending.

You can win in any economy. You can make money in any economy. But you can’t if you can’t see what is really going on. Now is the time more than ever to ignore what politicians say about figures, and to look at those figures, in relation to other related figures.

With a few pieces of the puzzle together, one can get an accurate picture of what is really going on. I hope to assist you with that today.

Several key media outlets like CNBC and The Washington Post issued misleading and glowing headlines, focusing on the numbers that looked good. I call BS.

The USA Today headline was more factual, describing a “fall back to Earth”.

Combined with a historic streak of 15 consecutives months of negative annual real wage growth through July 2022, this is a disaster. And it’s only going to get worse.

Bad for the Economy, Good for the Stock Market

Man observing statistics graph

Let’s put this another way, a strong jobs report would be a disaster for risk-on assets. A better labor market would encourage Fed Chairman Jerome Powell to keep raising rates and thus continue cutting down the stock market. An awful jobs report, pushes back against Powell’s plan to raise rates.

The market acted appropriately, jumping over 1% within an hour of market open after the weak jobs report.

How Did We Get Here?

If you are like me and have only been an adult paying attention to the economy since the mid 2000’s, you have a unique world view. One could even say, a distorted, overly bullish view of stock market.

Since 2008, “Up Only” has become a meme.

The US economy is coming out of a period of unprecedented quantitative easing, a.k.a. money printing, from 2008 to 2021. Then in 2020 it, the figurative money printer went from the interstate highway to the stratosphere.

This is one of the major causes of the highest inflation in 40 years for the US and almost every developed nation.

A second cause is energy policies in the U.S. and Europe followed by a war on the continent have combined to make the bonfire of misery. Europe’s energy prices are making the US’s recent 100% increases look tame in comparison. Germany, France and the United Kingdom have never faced such an energy crises as they are heavily dependent on Russian oil and gas.

The third cause is obvious — world economies shutting of and then turning back due to COVID-19 lockdowns.

18 of the 23 of the “G20” nations, the richest countries in the world, have annual inflation over 5%, 14 have over 7%. Meanwhile, the US President cheered last months drop from 9.1% to 8.5% annual inflation.

Take note — energy prices DID go down, which is good. But they were somewhat artificially pushed down, by President Biden’s two Executive Orders to release oil from this finite stockpile in 2021 and 2022. As a result, those reserves are the lowest they have in 38 years.

Similar to paying your bills with your life’s savings, this is not sustainable. The current order issued on April 21 to release 1 million barrels of oil per day will last 6 months. According to my math that’s set to expire on October 21.

The effects of this expiry on U.S. energy prices and inflation will only occur in November, and the inflation report will come out in early to mid December, after the mid-term elections in November. This is a brilliant political strategy, but will it be beneficial of the U.S. economy?

Here and Now

tall bulidings and cranes - high rise construction

Ok, so back to the jobs report.

Economists and business news outlets have come to a consensus (that I agree with) that Fed Chair Jerome Powell has abandoned hopes of a “soft landing” for the economy. Instead he is targeting for a “growth recession” which is a nice word for a recession, but just not as bad. In other words, growth slows down.

As a note, a common simple marker for a recession that has been used by economics historically is two consecutive quarters of negative GDP growth, which the U.S. has experienced.

In fact, at Jackson Hole, the famous annual meeting of central bankers from around the world at the resort spot in Wyoming, Powell said that he would continue to raise rates to combat inflation. More pain was coming, and it was unfortunate but necessary.

Remember the smoking hot jobs reports from the last two months? Well, not so quite so hot, at least for June. According to today’s job report:

“The change in total nonfarm payroll employment for June was revised down by 105,000, from +398,000 to +293,000, and the change for July was revised down by 2,000, from +528,000 to +526,000. With these revisions, employment in June and July combined is 107,000 lower than previously reported.

Revisions are a normal routine action taken by the Bureau of Labor Statistics as they collect more data.

Again, to recap the August 2022 report:

Overall Unemployment

Overall Unemployment

Courtesy of St. Louis FRED

Latino Unemployment

Latino Unemployment

Courtesy of St. Louis Fred

Black Unemployment

Black Unemployment

Courtesy of St. Louis FRED

For more details of the breakdown by race, the BLS dives into this here.

Any way you slice it, zoom out. The U.S. labor market is weaker than before COVID lockdowns.

And the Fed is on a course to continue increasing interest rates, and thus unemployment.

This is bullish for commodities, and bearish for risk-on assets such as stocks and especially tech stocks.

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This content is for educational purposes only. It does not constitute trading advice. Past performance does not indicate future results. Do not invest more than you can afford to lose. The author of this article may hold assets mentioned in the piece.

Author

Alexandre Lores is a personal finance writer from Tampa Bay, Florida, with the goal to help one million people achieve financial freedom. He has spent over five years studying markets and economics, finding Bitcoin in 2017 and never turning back. He frequently appears on TV and in online news articles and is a regular Twitter spaces host.

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