The Breakdown - 6 Things Jobless Claims Tell Us About the State of the Real Economy

Episode Date: June 19, 2020

Today on the Brief:  Powell says private companies shouldn’t be involved in Central Bank Digital Currencies According to former NSA head John Bolton, Trump told Mnuchin to go after Bitcoin Interest around Compound driving speculation around a DeFi-driven bull run  Our main topic:  This week’s U.S. jobless report brought bad news. Whereas economists had expected new claims to fall to 1.29 million from 1.57 million the week before, claims fell just 58,000 to 1.51 million. Continuing claims fared even worse. Economists predicted these claims would fall 600,000+ to 19.9 million. Instead, they fell a tenth of that - 62,000 - to leave total continuing claims at 20.5 million. In this episode, NLW breaks down what we can learn from these numbers when they’re combined with the previously released May jobs report.

Welcome back to The Breakdown, an everyday analysis breaking down the most important stories in Bitcoin, crypto, and beyond. This episode is sponsored by BitStamp and CipherTrace. The Breakdown is produced and distributed by CoinDesk. And now, here's your host, NLW. Welcome back to The Breakdown. It is Thursday, June 18th, and today our main discussion is about jobless claims, and more specifically, what jobless claims can actually tell us about the real economy. But before that, the brief. First up on the brief, Jerome Powell says private entities shouldn't help design central bank

digital currencies. So first, what happened? In testimony yesterday before Congress, Republican Representative Tom Emmer from Minnesota asked Fed Chair Jerome Powell about recommendations from Christopher Giancarlo's digital dollar project that any digital dollar be issued by the Fed but designed in partnership with the private sector. Powell responded pretty strongly that he did not believe that the private sector really had a role here. He said, I do think that this is something the central banks have to design. The private sector is not involved in creating the money supply. That's something the central bank does. He also went on to say that he didn't believe that the general public would be receptive to these sort of private actors being involved because private

employees who are responsible for the money supply are not accountable to what Powell called the public good. So why is this interesting? Well, the answer to how a digital dollar gets designed and more specifically what role the private sector has in it has a pretty outsized impact on both the shape and timing of when we'd see a digital dollar, to say nothing of the processes by which it was managed. So I actually think that this question of what role the private sector has to play in a central bank dollar is pretty instrumental in whether we see one and when and how it looks. So it's worth keeping track of where the conventional wisdom among policymakers is on this point. Paul, it's very clear is in the, this should just be the purview of the central banks camp. And moreover, he's still in

the kind of the camp of it not being a necessity at the moment. Next up, some juicy little details about President Trump and Treasury Secretary Stephen Mnuchin that relate to Bitcoin. John Bolton has a very controversial new book, which the White House is still actively trying to block. Bolton was the former national security. for the Trump administration, and this book paints the administration in particular its handling of foreign affairs, such as with China, in an extremely unflattering light. One little tidbit that was reported by the Washington Examiner has to do with Bitcoin. Apparently, after a very terse exchange about sanctions and tariffs with China, Trump said to Treasury Secretary Steve

Mnuchin, don't be a trade negotiator. Instead, go after Bitcoin for fraud. So why it's interesting? Well, one, it's interesting that they're having these conversations at all. Two, it's interesting that Trump is deflecting from Mnuchin's role in trade policy. Three, it's interesting because there's this kind of weird counter perspective on Mnuchin in this case. So I tweeted out this article this morning, and Nick Carter from Castle Island Ventures said, By doing nothing, has Mnuchin been our silent guardian this whole time? How the Turntables? I thought is an interesting point.

I'm not really sure that we can quite go so far as to call Mnuchin a guardian. and if you want more about Steve Mnuchin, you should go listen to Peter McCormick's four-part series on him that just came out on the Defiance podcast. But either way, an interesting and juicy little detail from a very controversial book. Last up on the brief, I feel I have to mention something about Compound and Defy. Compound's Compop governance token is now available and has been exploding in price, exploding in interest. We're seeing centralized finance organizations get involved with Defi to have access to it.

There's a listing coming on Coinbase, and you have people really talking about and debating and calling for Defy being the next huge driver of ETH value. There's a ton of debate about whether ETH will capture the value from DFI, whether DeFi is just restricted to ETH. There are questions about DFI as it relates to security. Just yesterday, Bankor was dealing with a big vulnerability, but you can't deny that from a narrative perspective there is a lot of energy around that space right now. The question will be, where does capital

come from to actually drive this bull market if this is indeed the catalyst for a bull market. This is something I saw Kyle Samani talking about with Luke Martin on his venture coinist podcast. There's just a real question about where the new capital for the space comes from. It is certainly a narrative worth watching and has potential implications for the crypto space writ large. So let's keep an eye on defy and compound in particular. And with that, let's shift over to our main topic. what data from jobless claims actually can tell us about the economy.

Every Thursday morning, we get a report about how many new people have filed for jobless benefits. And since the beginning of the COVID-19 pandemic, this has been one of the most watched and reported on and discussed signals in the economy. I want to talk today, after the most recent set of stats have come out, about what I think that jobless data actually tells us about the state of the economy. And I want to start by arguing for why I think this is an important topic. By nearly everyone's estimation, there has been rarely, if ever, this big of a gap and a disconnect between market performance and the crazy V-shaped recovery that we're seeing there and the

fundamentals from the economy. In fact, the way that Dimitri from Hidden Forces put it on his most recent show with Tony Greer was that it wasn't just a disconnect, it was almost a total rejection of the idea. that the market should be based on any fundamentals of the economy at all. It's a sort of totally different, nihilistic, all that matters is price approach to market. And in this context of this crazy disconnect between markets and fundamentals, the thing that is constantly held up as the other side of the market coin is joblessness, right? It's unemployment, it's claims for unemployment. At the beginning of this pandemic, you saw tweets every single Thursday, how can the market be up when

million jobs are gone or some variant thereof. It was one of the surest ways to get Twitter engagement was having some version of that message. I remember back at the beginning of those sort of tweets when people would respond, well, the answer is that the stock market isn't pricing what's happening today, it's pricing what's in the future. And that has been proven to be a totally bullshit answer in my estimation. Yes, that is theoretically what the stock market is supposed to do. But the reality is that the reason that the stock market has expanded in this extraordinary way and ripped right back up in what some people are calling not even just a V-shaped recovery, but a checkmark-shaped recovery, is not about some fundamental difference in

expectations about how the economy is going to recover. It has to do with this huge sort of Fed narrative, this belief that has been embodied in the Robin Hood Rally and the Davy-Day trader phenomenon, that the Fed will never let the markets go down. And frankly, the Fed has trained people to think that way over the course of a decade. And what's more in the most recent terms, has just continued to pile on, right? We've recently got the fact that now the Fed can go after individual corporate bonds. It continues to expand its special purpose vehicle apparatus to do these things which it was never mandated to do. And so, of course, the market is going to say, well, if there is no risk really, and there's no actual challenge in this credit, let's go all the way

with it. How long this belief that the Fed will be there forever can be borne out by reality, or moreover, how long the Fed can actually bear this out in reality is a totally different discussion. Regardless of that, the unemployment is the other side of this question. The unemployment is the embodiment of the real fundamentals of the economy question, because with a unemployment, unemployment comes everything else. With unemployment comes demand for consumer services, for retail, buying, for housing, for all of the things that make up our real economy that people live in and experience every day separated and divorced from financial assets. So here at this point, I want to actually talk about a theory that I just read by Peter Orszag in Bloomberg that is so perfectly

encapsulates the debate right now. And he called it the Cape Cod theory. And rather than trying to summarize this, I'm actually just going to read his first couple paragraphs outright. The economic impact from the coronavirus pandemic can be thought of in two different ways, with drastically different implications for the next several months. The first, articulated by a friend and former colleague, suggests it's like Cape Cod during the winter. The economy goes into a deep freeze, but then reopens the next summer. This few suggest there will be little lasting damage, and it's possible to return to the way things were with minimal long-term adjustment. The second perspective is that the pandemic is more like Cape Cod during a summer,

with a sudden series of shark attacks. As during the winter, economic activity plummets, but this stoppage was unexpected, and unlike during winter at the beach, it's not clear when it will be safe to return. There may be false starts in which it appears the water is shark-free, but the risk returns. Under this view, the economy probably suffers longer-lasting damage because of the direct and indirect effects of the lingering uncertainty and fear. Basically, Orzog's premise is that we have been treating, or rather, the administration and markets have been assuming it is the first. It is Cape Cod in the winter, a deep freeze, but then a reopen in the summer with everything the same. More and more and more and more, we are getting evidence that it is

much more like Cape Cod during the summer with a series of shark attacks, and that is borne out by growing numbers in different places that have been more liberal with their lockups and shut downs or whatever, you see growing numbers all around the country. And it may be something where it's much more about what we have to live with. This is also borne out by Beijing, now a couple months farther along the line in us, shutting down a huge percentage of travel in and out of Beijing because of resurgence of coronavirus. So this is a really great framework again for thinking about how we are dealing with the meta-context for this economy. BitStamp is the original global cryptocurrency exchange. Since 2011, BitStamp has been the

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you should start now. Learn more at cyphertrace.com. I want to get into now why we're having the discussion about jobs. right now? What is the reason to talk about joblessness right now? And for me, there's two kind of conflicting reports, the two most recent reports in some ways, or meaningful reports, are somewhat at odds with each other. They're telling us different things. The first is the May jobs report that we got two weeks ago, and this is different from the jobless claims. The jobless claims reports tells us who has filed for benefits in the preceding week, and it comes out

weekly. The jobs report is a monthly report from the Bureau of Labor Statistics that is more overarching and has the official or calculates the official unemployment rate. When the May jobs report came out two weeks ago, people were stunned. Most economists expected millions more lost jobs between 7 and 10, depending on who you were asking. Instead, we saw 2.5 million jobs added in May. Unemployment officially fell from 14.7% in April to 13.3% in May. Most expected it to rise to nearly 20% instead of falling. So these are huge. huge, huge changes. Importantly, later it came out that there's a pretty significant error in how they actually calculate this number, where they mistakenly counted about 4.9 million unemployed,

who were counted as being just temporarily furloughed rather than actually unemployed, even though they were actually unemployed, as employed. So that's a pretty big number. And if calculated correctly, unemployment would have been 16.1% rather than 13.3%. However, and this is really important, April would have been 19.5% rather than 14.7%. In other words, April was calculated with this same sort of mistake. So still, the overall trend of the numbers going down was there, and that was the thing that was the big surprise. So we had this relatively positive and kind of optimistic May Jobs Report. Follow that up with, however, today's Jobless Claims Report. So as I said, this is a report for people who are filing claims the week before, and the number was expected to fall

from last week's 1.57 million reasonably significantly. Economists had expected it to be around 1.29 million, so that's a meaningful drop. Still really, really high numbers, but in terms of the downward line, something that we could be at least a little enthusiastic about. Instead, it barely fell. It was really stubborn, it really stuck around, so it only fell to 1.5 million new claims. And that 58,000 number weekly drop. It was the smallest drop since claims began to reduce in early April. And that's just the number of new claims. The other number, which is really important, is continuing claims. And if anything, continuing claims were even more stubborn. So they had expected the continuing claims to go from around 20.5, 20.6 million to go down to 19.9 million. So that's the total number of people

continuing to expect or collect benefits. This time was only 62,000. less. So it went down still to 20.5 million. It was basically the same number. They expected 600,000 fewer people on continuing benefits and instead only got 62,000. That's a 10x difference in expectation. So these numbers are really poor, and they tell a very different story than the May jobs report. What is this all telling us about the actual state of the economy? Well, first, one very clearly, we have really mixed signals. The May jobs report. was better than expected. And I think, frankly, the part of it which we should take seriously is that it's embodied in something that I read that Jeffrey Snyder wrote, where he said,

what did you expect to happen? When we allowed things to come back on, some percentage of people are going to get their jobs back. And that is true, and that's what we saw. On the other hand, this week was worse than expected and suggests a real kind of persistence and intransigence in how difficult this economic environment is. I think that the lesson is that probably that both the pure bulls and the pure bears are getting it wrong for lack of nuance. It has become, like everything does in our society, a political statement about whether you're a bull or bear on the economic recovery. And it seems pretty clear to me that there's a lot to acknowledge and learn from on both sides. So that's the first lesson is that we have mixed signals. That's just the reality.

The second lesson, I think, has to be, and this is more from the most recent report, that the economic pain is not just a short-term shock. For some people, it is a short-term shock. It is that Cape Cod in winter, but for others, there is a lot more insecurity. And that same May report, we saw 2.3 million permanently lost their jobs. Those aren't coming back even as we recover. And there's this fear, which I think is very justified, that temporary layoffs become permanent. This is going to be particularly important in the context of the PPP program, right? The payroll protection program because that has loans that are tied to keeping people employed. The August and September jobs reports could be much more significant because that will be after the period at which a lot of

these loan benefits have run out. And so employers that aren't back up to full capacity might have to do another round of layoffs then. And that's still an open question. So number two is, I think it's clear that for some portion of the people, this economic pain isn't just the short-term shock. Which brings us to the third point, which is that we really don't yet know about demand destruction. Demand destruction is the idea that in this sort of job loss environment, in this sort of economic hit, some demand simply shifts away from those industries in ways that is never recoverable. I think for a lot of people, the main questions are things like, what is the sort of demand recovery for restaurants? What is the demand recovery for airlines? What is the demand

recovery for hospitality, hotels, etc. What is the demand recovery for business travel? What is the demand recovery for corporate real estate, right? For commercial real estate, rather. There are all these really big questions, to say nothing of the biggest questions, which have to do with retail. You know, we saw a slightly positive retail sale numbers. Actually, I guess the retail sales report said is the biggest growth ever. However, it's still way off year over year where we were before. And it's hard to imagine with this much economic insecurity that demand habits, especially after kind of the first bump month of you being allowed out again, are really going to pick up pace to where they were in February before this all went down. So this third point is really that we don't know yet about

demand destruction. And it's a really important variable. Related to this is that there may be more problems in store for other types of workers that we haven't really been as worried about yet. Bloomberg Economics did research recently that suggested that close to 6 million jobs in the U.S. are under threat, and there are really two main categories in this camp. The first has to do with higher-paid supervisor and management-type positions in the industries that were hardest hit, like restaurants and hotels. This is where that question of demand destruction really comes in. If you see a flagging and kind of continued anemic demand for eating out, for going to hotels,

for traveling, the next wave will not just be the frontline workers, the bartenders, the cleaners, the whatever, it will be the managers, it will be the upper management, right? It will be folks who just have to be cut out as part of general restructuring to reduce costs, and that's really important, right? There's a second order category effect as well, though, that would be for more white-collar professionals. You have a whole set of industries such as professional services, advertising, commercial real estate, all of whom rely on other businesses, right? These are B-to-B businesses. And when one of the Bs in that chain is having a really hard time, well, they're going to cut their spending on professional services. They're going to cut their spending on advertising.

They're going to try to reduce their real estate burden, especially in the new work from home environment. So all of these white-collar professionals are also potentially on the chopping block and threatened. So there are really this whole additional set of variables that aren't just that initial shock that are going to be much more about how well demand recovers than they are about this initial sort of jobless boost or job return. This gets me to a fifth point, which is that these short-term impacts have really long-term implications. As people have been unemployed or on temporary furlough or whatever, a huge number of loan payments are getting skipped. And governments have worked really hard to make that okay, but at some point they will come do. Most of the

programs that have to do with mortgage forbearance or rent stoppage or eviction stoppage or whatever, they don't say that you never have to pay the rent that you missed. You never have to pay the payments that you missed. It's getting moved somewhere. And that's going to be variable kind of industry to industry loan to loan. But still, it's worth noting the aggregate. A story today in the Wall Street Journal was all about this. And it said that the number accounts that enrolled in deferment, forbearance, or some other type of relief since March, and have remained in such a state, rose to 106 million by the end of May. That is triple the number at the end of April. These are stats according to TransUnion. So that's 106 million loans that are in deferment forbearance or some other

type of relief. The largest increase of those is student loans. That's 79 million accounts in deferment or relief status, which is up from 18 million in April. Auto loans that are in deferment doubled to 7.3 million, and then personal loans doubled to 1.3 million. These are really, really big numbers, And again, if we create a situation where people are less employed or just making less income than they were a few weeks ago, a few months ago, those are going to cause really serious problems when they come due. So that's just a fifth thing to think about is the long-term implications of short-term changes. Lastly, I want to talk about the relationship between unemployment and the markets.

There is this narrative, which I think is worth being skeptical of as. you are with all narratives, that what's happening with these unemployment checks or part of this Robin Hood rally is that people are pumping their government stimulus money into the markets. And I think there's certainly some good evidence, which you've gone over before, that suggests that's the case from aggregators that can look at where people are spending their money. But regardless of that, I think it's worth examining from the narrative perspective and why it's so resonant from a narrative perspective. The Fed's whole construction is the idea of trying to create a wealth effect, where you try to drive up asset prices, and then that benefit, by making more people and more businesses wealthy, trickles down effectively to the lower parts of the population, to labor.

It is the classic version of trickled out economics in some ways, and it's interesting because it is basically just the byproduct of two things. one, the Fed's mandate for full employment, but two, the fact that they only have capital markets as their tool. They don't have any tools other than capital markets, which means that really the only thing that they can do is try to work within capital markets, which means increasing asset prices or propping up asset prices. The problem is that the gains from asset prices do not make their way down to the labor class, to regular people. In fact, it's the opposite. These gains incentivize companies to do things that don't benefit workers, such as buybacks, over things that might, like reinvestment in R&D and building out more capacity. What's more, they make it harder and

harder for those same people to buy into the system, whether that means getting real estate and buying a house, or whether that means purchasing financial assets. It gets farther and farther away. This is a core cause of the expansion of wealth inequality that we've seen over the last 10 years. And in this light, you can sort of read people taking their government checks as the barbarians who are at the gate and who want to do something different. It makes sense that you have coordinated efforts like the folks at Wall Street Betts, who are totally rejecting the way that the rules of the game of the stock market have been written and trying to find loopholes. There was a whole Bloomberg Businessweek cover story before the COVID pandemic about how Wall Street Betts effectively tries to use call options to manipulate. the price in a way that benefits them. The traditionalists and traditional finance and traditional finance media especially are horrified. And they're horrified in the way that empire is always horrified

when they realize that the barbarians are already among them. When they see Davy Day Trader go after Warren Buffett, the most unassailable figure in probably all of American life, but especially in American financial life. This is an assault on some level. It is a reaction to being priced out and excluded from systematically the financial markets and the only mechanism for not just generating wealth, but saving anything in this economy. We say that everyone needs to participate in markets. Our policies effectively have the impact of pushing people further and further out on the risk curve, and yet we make it harder and harder to do so. So of course you're going to see a reaction like this. The story of the Robin Hood rally and unemployment are inextricably linked to me. And as

much as we see the economy as divorced from the markets, it is in fact the relationship between those two things and the fracture and the relationship between those two things that is the most significant economic force of our moment. And with that big ponderous statement, I will wrap for the day. Let me know what you guys think. I'm interested in other people's interpretation of these jobless numbers as well. Hit me on Twitter at NLW and until tomorrow. Be safe and take care of each other. Peace.