“There are only nine meals between mankind and anarchy.”
- Alfred Henry Louis
That is a quote I can somewhat relate to. I’ll get to why in a moment, but to lay the groundwork … in July/August of 1990 – the summer after my freshman year in high school – I had the opportunity to go to the Hurricane Island Outward Bound program for 22 days of backpacking and canoeing through the backwoods and Allagash Waterways of Northern Maine. As a Gen X latchkey kid, I was already extremely independent, but, at the time, my stepbrother was an Outward Bound instructor and preached about the self-reliance virtues of sending kids through the program, so my stepfather signed me up, and off I went.
I look back at those 3+ weeks with nothing but awesome memories now, and I fully intend to send my own children for some self-reliance building when they reach that age, but the reality is that history has a way of turning youthful hardship into fond nostalgia. At the time, calling it arduous was an understatement. It was one of the hardest, but most rewarding, things I have ever done.
One of the program’s core tenets of teaching self-reliance was the program component called the “solo”. Roughly midway through the program, the solo consisted of being dropped off alone (by canoe) at a remote location on the riverside and left for three days in the wilderness with only a handful of bare necessities. Those necessities consisted of a tarp to build a lean-to, an empty water bottle with an iodine dropper to render the river water safe to drink, and the following food: one block of cheese roughly 1-2” cubed, an orange, and about two fingers worth of “gorp” (basically trail mix: grape nuts cereal, peanuts and dried fruit) in a ziplock bag. All in all, it was about enough food for a hobbit to call it second breakfast, or maybe “elevenses”.
We were covering 20-30 miles per day, split between overland backpacking with 40-50lb packs and canoeing in our 60lb Old Town fiberglass canoes which occasionally needed to be portaged (overhead) over land between waterways. The solo came as a welcome physical respite, but shortly after being dropped off I did the one thing I should not have done. I ate the cheese and about 15 minutes later I ate the trail mix. Knowing it was all I had left, I decided to save the orange, no matter what. About an hour later, I ate that too. Then that was it. No more food. The next 71 hours of self-reflection were frequently interrupted by a progressing sense of hunger.
Nevertheless, three days (or 9 meals, technically 8 in my case) of fasting is not a big deal when you know there’s light at the end of the tunnel, but it’s not nothing either, and it does make you realize just how fragile society could become without the one truly essential commodity, food.
Back to the Global Macro Grind…
What does this have to do with macro market risk management? While not a great segue, the focus of today’s note is on the labor market and more specifically jobless claims, aka unemployment insurance.
Here’s a quick question. Do you know when America’s unemployment insurance program began? It was in 1932 following the start of the Great Depression. The first such program began in Wisconsin and offered unemployed workers 50% of their wages for a maximum of 10 weeks. The idea, of course, was to stave off hunger by giving people enough money to eat and keep society from breaking down.
The program evolved over the ensuing decades but took its largest turn most recently in the early days of Covid when the CARES Act made three large changes. First, it facilitated large Federal supplemental payments above and beyond existing State benefits. Second, it created an entirely new category of unemployment assistance, called PUA (Pandemic Unemployment Assistance), aimed at nontraditional workers (think gig economy) previously ineligible for benefits, and third (through later legislative packages) it extended the available duration of benefits beyond most states 26-week cap.
In the early days and months of Covid the enhanced unemployment program, combined with a myriad of loan forbearance programs, was a Godsend for many hardworking American workers and their families who found themselves out of a job – for a long time – practically overnight.
But today, roughly 15 months after Covid began, there are still 16 million workers collecting unemployment insurance. For reference, at the peak of the Great Financial Crisis, in May of 2009, there were 6.5 million workers collecting unemployment insurance. So, we are still at 2.5x the peak of the GFC in terms of the number of insured unemployed.
Meanwhile, in May of 2009, according to JOLTS data (Job Openings, Total Nonfarm) there were just 2.5 million job openings. Today, there are 8.1 million openings.
To be clear, job openings fell precipitously from 7.1 million in January of last year to a low of 4.6 million in April of 2020, but they have risen almost every month since then and now stand fully one million jobs higher than in January 2020. Yet the number of initial jobless claimants remains at 16 million or roughly 10x the 1.7 million in January 2020. Said differently, the number of insured unemployed today sits at a multiple of ~10x pre-pandemic levels while the number of job openings is higher by 1 million jobs from pre-pandemic levels.
There are several reasons for why such a stark disconnect exists today. One reason is that many would-be workers are afraid to return to the workforce due to Covid. Another reason is that many would-be workers have children who are not in school and childcare options are expensive or unavailable. Yet another reason is that many would-be workers earn enough from enhanced unemployment benefits that they do not have the economic incentive to return to work if working offers them only a few dollars more per hour than they are receiving from unemployment.
There are a few significant changes coming to the labor market in short order. First, a red state, blue state fault line of sorts has emerged in recent months and is now creating a true labor market rift. Many “red” states (21 as of the latest count) have announced recently that they will cease accepting Federal supplement unemployment aid effective between mid-June and mid-July. These 21 states – some large, like Texas and Ohio – account for over 112 million people or roughly 35% of the US workforce. This will end the $300/week supplemental payment that currently adds 50% or more to the underlying state benefit. Further, these states will curtail the extended benefits option. And, finally, these states will also cease accepting PUA benefits. All told, this will effectively end unemployment benefit eligibility for roughly two-thirds of unemployment beneficiaries in these states, or roughly 3.7 million people.
What will happen as a result? First, obviously, continuing jobless claims will fall precipitously over the next 8 weeks. Second, there is a very high probability that the jobs numbers will be very strong for the months of June, July and August as these beneficiaries find their way back into the workforce in increasing numbers. To be a bit more precise, four states equal to 4% of the US workforce will end their supplemental benefits the week of Jun 12th, six states equal to 5% of the US workforce end theirs the week of June 19th, nine states equal to 21% of the US workforce end theirs the week of June 26th and two states equal to 4% of the US workforce end their programs by the 10th of July. As such, the bolus of program expirations will peak at the tail end of June so it’s likely that June will see a large increase in the labor force, but July will see an especially large increase.
But wait, there’s more. As previously mentioned, one of the other reasons people are not returning to the labor force is a lack of childcare due to remote or hybrid schooling. As of March, only half of schools across the US were fully reopened. Consider the largest state in the country. As recently as two weeks ago, 55% of California’s public-school students, including those in charter schools, were still at home distance learning. One of the biggest changes to the labor force will likely come in September, when most schools across the country fully reopen to full time in-person learning. The Hedge Fund Brevan Howard estimated last Fall that 4.3 million US workers were likely to leave the workforce due to a lack of childcare options coupled with distance learning. While they had assumed 81% remote learning at the time – and today the number is closer to 50% - that still leaves ~2.7 million workers displaced. Many of these workers are likely to re-enter the workforce after Labor Day (or thereabouts) upon the full reopening of schools. That should make the September jobs report another exceptionally strong print.
Finally, dovetailing with this school reopening dynamic, the current round of stimulus provides for an expiration of the Federal supplemental payments effective September 6, 2021. However, a potential further extension is being contemplated as part of the latest round of infrastructure spending.
To contextualize this a bit, our call is for Quad 2 for Q2 followed by Quad 4 in Q3. However, the labor market is likely to see an extremely robust July/August/September for the reasons mentioned. It is also notable that this will dovetail from a timing standpoint with the late-August Jackson Hole Fed retreat, which has historically served as a turning point for monetary policy. That could well be the catalyst that ushers in the Quad 4 in Q3 policy-driven correction.
If you would like to learn more about my research team's in-depth investing research please reach out to .
Immediate-term @Hedgeye Risk Range with TREND signal in brackets:
UST 10yr Yield 1.60-1.73% (bullish)
SPX 4067-4232 (bullish)
RUT 2138-2267 (bullish)
NASDAQ 13,007-13,716 (bullish)
Tech (XLK) 131.22-138.93 (bullish)
Energy (XLE) 51.26-54.93 (bullish)
Financials (XLF) 36.60-38.46 (bullish)
Utilities (XLU) 64.08-66.85 (neutral)
Nikkei 27109-28958 (bearish)
DAX 15051-15565 (bullish)
VIX 15.73-26.49 (bearish)
USD 89.47-90.71 (bearish)
EUR/USD 1.206-1.226 (bullish)
Oil (WTI) 61.85-67.60 (bullish)
Gold 1 (bearish)
Copper 4.52-4.82 (bullish)
Silver 26.76-28.61 (bullish)
To your continued success,
Josh Steiner
Financials
Managing Director
