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“I want to be clear on something: less bad is not good”, “That’s not how President Obama and I measure success”  Vice President Biden, WSJ Saturday September 6th on last week’s unemployment number… 

The single biggest market story of last week was unemployment re-accelerating to new highs and the subsequent crashing of the US currency. In our investment process, what happens on the margin is critical, and on the margins of the US Employment data –the demographic and duration tails, the picture is becoming increasingly grim:


In the charts below we have taken the monthly unemployment figures compiled by the Department of Labor for the estimated total of individuals without work for a period of 27 weeks or greater and averaged it to quarterly for the past 60 years. Chart 1 illustrates the raw number, while chart 2 shows the same figures divided by the Labor Department’s estimate of the total working population. Note that in chart 2 we are now exceeding the early 80’s industrial-job death rattle for ultra long duration unemployment.

Stagflation: Where The Pain Is...  - a1

Stagflation: Where The Pain Is...  - a2


Looking at total employment ratio’s estimated by the Department of Labor shows that, on a seasonally adjusted basis 16-24 year olds had a very rough summer in 2009 with the figure hitting the lowest level since inception in 1948 and fewer than 50% working for the first sustained period since the draft ended (without seasonal adjustment that ration would be over 51%).

DOL methodology excludes military personnel from the labor force estimates but, with up a huge percentage of all men 18-21 drafted (or motivated to enlist by the draft) at periods between the end of WW2 & early 70’s, and furthermore with 72% of all Vietnam period veterans accessing GI bill benefits (significantly higher than WW2 & Korea vets, presumably because Vietnam vets were significantly younger as a group) it must have skewed this data immensely. Note that the prior Assistance Readjustment act of 1972 raised GI bill benefits for returning servicemen to payout levels exceeding many entry level salaries –essentially creating a huge incentive for veterans not to work during the subsequent recessionary periods. This all suggests that, on the whole, the employment picture for young Americans is significantly worse than at any point in the living memory of the majority of the population.

Stagflation: Where The Pain Is...  - a3

Obviously the data we are working with are only estimates, and we are making some big assumptions, but the data clearly seems to paint a bleak picture with more people unemployed for sustained periods and fewer young people with the disposable income that comes with a job. With a depleted currency, structural stagflation is becoming a legitimate risk.

Andrew Barber

Directordrew Barber