What a 10% Unemployment Rate Really Means

“Profit Confidential” Column, by Michael Lombardi, CFP, MBA

Well, it’s official.

This morning, the October U.S. job numbers came out and the unemployment rate in the U.S. has now moved into double-digit territory. Currently, 10.2% of American workers are unemployed — the highest level since 1982, when interest rates were also in double-digit territory.

I won’t get into the specifics of the job loss numbers, as this information is widely available on straight business news sites. (But I do want to draw to the attention of my readers that home builders continued cutting jobs in October, with 62,000 jobs cut last month alone — as I have been writing, the housing market is far from rebounding in the U.S.)

Here are two very important points on the job loss numbers that you will not read elsewhere this morning:

Firstly, and I don’t want to scare you with it, but if we had 10% unemployment in 1982, when interest rates were also at double-digit levels, by bringing interest rates steadily lower, the unemployment rate fell. Today, with interest rates at zero, how can we bring interest rates lower to stimulate the economy and to lower the unemployment level? We can’t. We are basically screwed.

Central bankers brought interest low after the 9/11 catastrophe to save the economy, but when the economy got better, they just kept reducing interest rates (which ended up causing the boom), as opposed to raising interest rates to tame the boom. So, what happened after the boom went to bust? Well, interest rates went down again; this time to zero.

It is my belief that the movement of interest rates by a central bank is the single most powerful “gun” it has to sway the economic tide. Unfortunately, our gun has no more bullets left, because interest rates cannot go any lower than they are.

The second important point for investors concerns the jobless rate: If anyone tells you that the worst is behind us for the economy because we are only losing half the number of jobs we were losing in the early months of 2009, don’t believe them.

Why? Simply because the economy is still so fragile. Take the Canadian example. In Canada, consumers and businesses were feeling “good” after the Canadian economy actually created jobs in the months of August and September. With currency traders believing that the worst was behind for the Canadian economy, they started to expect interest-rate hikes, thus moving the Canadian dollar close to parity with the U.S. dollar.

This morning, it was announced that the Canadian economy lost thousands of jobs in October — almost wiping out the job growth it experienced in the previous two months.

The worst is far from over for the unemployed of this country and for the economy. No one can tell me the economy is getting better.

Michael’s Personal Notes:

What’s it going to take?

Since late 2002, I have been yelling to my subscribers (and anyone else who would listen for that matter) to get into gold-related investments. Gold bullion was trading around $300.00 an ounce in late 2002, early 2003. This morning, the yellow metal opens at just under $1,100 for the same ounce. Hence, gold has gone up 267% in the past seven years — good compounded growth of about 20% a year.

Sure, the easy money in gold is over on the bullion side. While I still believe that gold bullion will surpass $2,000 in this cycle, that’s only a 100% gain from where we are today. But quality gold stocks could be trading at two, three or even four times than what they are trading at today if gold bullion does reach $2,000 an ounce. That’s because most of these gold producers have their mining costs fixed.

Unfortunately, only a small percentage of investors and analysts expect gold bullion’s price to keep rising. Why do I say this? Because, of the many investment newsletters we publish, it is our gold stock newsletter that is the hardest sell. If I had to put it into numbers, I would say about 95% of people who have some sort of investment portfolio have no exposure to gold-related investments.

So, what’s it going to take for investors to jump onto the gold bull market? Maybe they are waiting for the big mutual fund companies to start taking a position in gold stocks. Unfortunately, by that time, it will be too late.

Where the Market Stands:

The last few days, I have been writing about how too many analysts and advisors had been turning negative on the bear market rally that started in March of this year…with the consensus being that the rally was over. In fact, just this past Wednesday, I wrote, “Most of what I read today is that the bear market rally is over. Just remember, the stock market always delivers the opposite of what analysts and investors expect.”

Well, yesterday, the market delivered a big “opposite” for investors, as it experienced its single biggest day since July, with the Dow Jones Industrial Average up 204 points — up two percent in a single day. The Dow Jones, now up over the 10,000 level again, is up 14% for the year.

As I have been writing for days and weeks, I do not believe the bear market rally that we have been enjoying since March 9, 2009, is over yet.

What He Said:

“Home-building in the U.S. will enter a quasi depression state in 2008 and the construction industry will make 2008 a record year for pink slips. I predict a major homebuilder will go bankrupt in 2008.” Michael Lombardi in PROFIT CONFIDENTIAL, January 10, 2008. WCI Communities, the largest U.S. luxury homebuilder, filed for Chapter 11 protection on August 4, 2008.