Patrician Economic Report: November 2009

Well, November has come, and with it, the Patrician Economic Report for the penultimate month of the decade.



Not much has changed since one month ago, when the Dow was over 10 000 and the S&P 500 was at 1100. Between then and now, there has been a 6.5 percent downturn, which was promptly met with a spike back to 1100, which has since stalled back down to 1090.

The Dow has hit a new high of over 10 300, but the S&P 500, which is a broader measure of the market, has only briefly cracked the old high of 1101, to hit 1105, before sinking back down.

On the 1-year chart, you can notice that since the July rally, each successive phase of the market trend has become more volatile, with bigger swings up and down over time.

However, I believe that the trend belies a market and economic condition which is much worse than it appears. First of all, here is a 2-and-a-half month chart of the S&P 500, with volume (the amount of shares traded) being shown at the bottom of the chart:



Notice that volume is heavier on the downturns, and lighter on the upturns. This implies that when trading activity is vigorous, there is selling pressure on the index. This is not a good sign. Anemic volume on the upside and heavy volume on the downside indicates that the uptrend is, for lack of a better term, a farce, and thus not sustainable once heavier volume kicks in (and it inevitably will at some point).

This is also how all previous bear market rallies have ended -- heavy volume at the beginning, waning volume at the peak, and heavy volume taking it back down. And yes, we are still in a bear market, at least until the current rally has proven itself to be a real bull market, which it cannot do in a mere 9 months.

Secondly, there is the matter of unemployment. The official rate as reported by BLS (the U3 rate) is 10.2 percent. Yes, it has finally cracked that "10 percent" threshold every American has talked about.

However, as I have outlined previously, the U3 rate is a very inaccurate picture of the jobs situation. It excludes discouraged workers, and others "marginally attached to the labor force", who are in fact unemployed (i.e. out of a job).

If we include these people, the rate has been over 10 percent for months. In fact, the October statistics show that this rate (which is recorded as the U5 rate) is now at 11.3 percent, and has been rising for 15 months, adding a full half percentage point from September to October.

But the situation is even worse than this, if the underemployed are included in the unemployment rate (which they were from 1949-1994) to compare apples to apples. If the people working part-time for economic reasons, those who are considered not in the labor force but want a job now and cannot find one are included along with the truly unemployed, the October figure shoots up to 20.9 percent, unchanged from last month.

The underemployment rate may be unchanged, but the real unemployment rate is worsening quickly, signaling an economy which is far weaker than it appears, despite the fact that government GDP data showed a rise of 3.5 percent in Q3 2009, confirming the "third quarter recovery" stock traders were looking for. However, if the number is adjusted for real inflation (an underestimation of 2.7 percent), and government spending (cash for clunkers and other stimuli) is taken out, then Q3 GDP was, in fact, essentially flat.

Lastly, a check on September's inflationary factors:

- Stock market continuing a rabid runup with no supporting facts. Maybe (stocks have stalled)
- Doubling of the money supply. Check.
- Gold continuing to rise. Check (new record high of 1120)
- Commodities in general shooting up. Check (though at less of a pace)
- Weaker dollar. Check (still on verge of new low)
- Higher inflation. Check (inflation is accelerating)

So basically, all is mostly as it was in October. The next report, the last of the decade, will come in December.