Unemployment Numbers – Fake, or Really, Really Fake?

Ryan Cole, The Investment U Research Team

The latest unemployment numbers just came out, and they weren’t too good. Job losses, which had been slowing down for over a month, increased in speed again. The official unemployment rate, standing at 9.4%, looks set to increase when next released in early July.

But 9.4%, while bad, isn’t that bad, right?

After all, the Great Depression famously saw 25% unemployment at its height in 1932 and 1933. So this recession is bad, but nowhere near a depression… correct?

Sadly no.

You see, during the early years of the Clinton Administration, the way we measure unemployment changed. Discouraged workers – those waiting out the bad times – and the chronically unemployed – those who haven’t held a job in the past year – were dropped from the list.

Also, the underemployed were no longer counted. That means those with part-time work who wanted or needed to work full-time, couldn’t find better jobs. They might be paying the interest on their credit cards working nights at Denny’s, but they still need more work, and can’t find it.

Here’ what the new numbers mean to you and an easy way you can protect your portfolio from a prolonged economic downturn…

Same Unemployed, Three Different Numbers

All these categories of unemployed mentioned above were erased from the official unemployment rate – which the Bureau of Labor and Statistics (BLS) calls the U-3 rate. The BLS still uses a broader categorization of rates, which attempts to incorporate the underemployed workers back into the equation.

That rate? It’s called the U-6, and it stands at 16.4%.

That’s closer to the way we measured unemployment in the 1930s. But it still hasn’t gone all the way.

Economist Walter J. “John” Williams, graduate of Dartmouth’s MBA program and economic consultant to Fortune 500 companies, was invited to speak to the House of Representatives last year. His website, shadowstats.com, attempts to calculate economic figures in a manner consistent with past measurements.

For his unemployment charts, he adds in the last uncounted segment of unemployed workers – those who have been out of work for over a year. The range he’s arrived at, as of June 5, 2009?

Over 20%.

Frankly, it doesn’t matter how we count our unemployed – until we compare numbers to the past. But we’ve simply got to compare apples to apples to make real sense of the data. And when economists throw the 9.4% official rate against the 25% rate of the Great Depression, they are being ingenuous at best.

The truth is, we’re somewhere between 16% unemployed, and the low 20s which isn’t too far off from that 25% rate. And knowing that the number of people losing jobs is still increasing, is very sobering fact.

The Best Investors Today Believe in One Acronym – C.Y.A.

That only goes to show, during such a difficult and trying period as this, you shouldn’t put all your eggs in any one basket – i.e. cover your assets. Because betting on the market only rising is as foolish as betting that it will just fall.

That’s always true, by the way. But hard, volatile times only clarify the folly of market timing.

Here’s a strategy you can use to protect yourself, to a large degree. Take both sides of the bet.

For instance, say you own a fund that tracks the S&P 500. In that case, I’d recommend you also buy something like the ProShares UltraShort S&P 500 ETF (NYSE: SDS). This ETF does exactly what it sounds like it does – shorts the S&P. Actually, it double-shorts it – so if the S&P falls 1%, SDS should rise 2%, and vice-versa.

That way, you only need to invest half as much to balance out an S&P Fund.

But what good can losing money as fast you gain it do? After all, when one goes up, the other will always fall.

The key is in tight trailing stops. This is the purest way to enact the famous axiom: Cut your losers fast and let your winners ride. As long as the S&P remains in a narrow band, you won’t lose or make money – just as you wouldn’t by owning it outright.

But if it breaks hard one way or the other, your tight trailing stop will cause the losing half to sell early – while the winning side can ride the move to the top. Then, re-enter the other half the next day.

This isn’t a way to get rich quick.

Most of the time, your investment will tread water. But it is a way to greatly reduce your risk in a volatile market, while continuing to make gains every time the market makes a break up or down. And until the market is ready to show clear signs of a sustained drive in one direction, it’s one of the only ways to keep playing without gambling it all.

Good investing,

Ryan Cole

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