How High Can Unemployment Go Before We Derail?


The S&P 500 index has rallied 40%+ from its March 2009 low, and is up 8% Year To Date. Despite this solid performance, unemployment has surged to 9.7%, and many forecast the increase will continue until 11-13% unemployment. We’ve got 12% unemployment here in California already.

The question I have is: How high can the unemployment rate go before the bull market derails? Is the level 15%, or is the level as high as 20%? I cannot imagine being unemployed and desiring employment in this market. There’s just so little out there and the competition is tremendous. For those who are already employed, things seem hopeful that with earnings rebounding from 2008 and less people to pay, 2009 could be a big year.

Is the market currently being driven by the “90% employed” segment of the population who thinks the other 10% doesn’t really matter to the economy’s bottom line? With consumer spending consisting of 70% of GDP, how can we ignore the fact that 1 out of every 10 are not working, and likely another 10% are underemployed and looking for more work to survive? Am I looking backwards, since unemployment is a lagging indicator, and the stock market is a leading indicator?

It absolutely perplexes me that euphoria is back in the markets. We shouldn’t be surprised if we double dip in 2H09, and see a long drawn out recovery until mid 2010. Personally, I’m raising cash by pulling money out of the market. We’ve had a great rebound and I don’t want to get greedy.

Readers, where do you think unemployment levels are heading and what are your arguments if you think the markets are going higher?

Update: At 10.2% unemployment as of Nov 7th, 2009, apparently very high!

Keigu,

Financial Samurai – “Slicing Through Money’s Mysteries”

The Less You Have, The Less You Lose

In October of 2008, Warren Buffet lost about $9.6 billion on paper. Put it another way, that’s a freaking a lot of money! To also put it another way, in my chase to match Warren’s wealth, I caught up to him by about $9.599 billion dollars.

Many of us have lost a lot of money in this market, but we could have lost more if we were already very wealthy. I am absolutely positive that it hurts much more for some poor rich CEO losing $50million of his net wealth, vs us losing $50,000 of our own.

Now is absolutely the best time to be relatively young and buy all the assets we can. And since we have such a wonderful opportunity, it makes wasteful spending that much more expensive because of the potential returns down the road.

Who knows whether we are going to double dip in the 2nd half as unemployment marches to 11%+. What I do feel strongly about is that if we don’t buy some distressed asset now, we are going to be kicking ourselves in 20 years. Personally, my site is set on a vacation property in Nevada, Lake Tahoe. I hope to pick up a foreclosure that is 50% off of peak values, and that can provide a 8% rental yield vs. the current government risk free 10 year treasure of 3.54%. In 8-10 years, i plan to move there and pay 0% state income tax, vs. 9.6% here in California.

INVESTMENT PLATFORM RECOMMENDATION

Invest In Ideas Not Stocks: Motif Investing is a terrific company based right here in the San Francisco Bay Area. They’ve raised over $60 million dollars from smart investors such as JP Morgan and Goldman Sachs because they are innovating the investment landscape with their “motifs.” A motif is a basket of 30 stocks you can invest in, which are aimed to profit from a specific idea or underlying theme. Let’s say you think new housing construction is going to quicken in the US next year. You could buy a housing motif which might contains Lennar, KBH, Home Depot, Bed, Bath, and Beyond, Zillow, and more in various weightings.

You can buy a basket of 30 stocks for only $9.95, instead of buying them individually for $7.95 through a typical broker. You can build your own motif, buy one of the motifs created by Motif Investing, or buy a motif by a fellow Motif Investor with a great track record. You can even buy retirement motifs, much like target date funds, except you don’t have to pay the 1% management fee. You get up to $150 free when you start trading with Motif Investing. Given my focus on buying winning long-term ideas and ignoring the short-term volatility, I really like Motif Investing’s value proposition for retail investors.

Updated on 12/1/2014. Let the bull market continue. Just don’t forget to rebalance.