Poor Job growth, lagging wages, declining unemployment rate – what does that mean for stocks, bonds, gold, and currencies?
Peter Oberois
Mar. 10, 2007

Interestingly, as predicted in Indian Daily, nonfarm payroll increased by approximately 100,000 (actually it is 97,000). The wages declined after adjusting for inflation at the Consumer Price Index Level. But the biggest surprise was the declining unemployment rate.

How can a meager 97,000 more jobs in nonfarm sector create an unemployment rate of 4.5%. How could it drop from 4.7% to 4.5%?

The answer lies in the trend that started twenty-five years back. Underemployment causes qualified workers to opt not to work. Think about it the following way. If you don not get the money that will cover your commuting expenses to your job, is there any reason to accept a jog offer unless you want to do a community service? Low wages are making people start their own businesses instead of taking burger-flipping jobs.

As a result, the unemployment rate is falling because people realize that there are not enough jobs in the system for them. Poor Job growth, lagging wages, declining unemployment rate are signatures of underemployment. It is the sign of stagflation.

The biggest problem is that stagflation eventually transforms into deflation over time. Federal Reserve and other central banks can deal with stagflation through fiscal and interest rate adjustments. But they just cannot deal with deflation.

Deflation is causing trouble for the stock market. The market is and will continue to reverse after rallies fail. That is exactly what happens in deflation driven economies. It happened in 1929-33 and in Japan in the last eighteen years. Bonds should perform well. Gold should slump and Dollar should rise high.

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