While the gain in the number of new jobs was a bit below forecasts, it was right at the trailing 3-month average. Pre-pandemic, an addition of over 500,000 jobs per month would have been considered extraordinary. However, in a world just opening back up, growth at that rate is a bit disappointing and probably delays the time of full employment until well into 2022. For stock investors, however, a slightly slower pace of recovery means more slack in the labor market for longer. That in turn means less upward pressure on wages, less inflation, and lower long-term interest rates. At least that’s the theory.
While cynics attribute the lukewarm employment growth rate to extended unemployment benefits lasting in many states until late summer, other factors are at work. Semiconductor shortages have crippled the auto industry recently and slowed production. In some cases, plants were idled, and idle plants lay off workers. The shortage is a bit less severe today than a month ago. Over 20,000 new jobs were added last month in auto manufacturing, but production is still far short of demand.
The biggest factor is probably a skills mismatch. In recent months, there has been a surge in entry level jobs created. You see this mostly in the retail, restaurant, and hospitality industries. But the surge hasn’t been enough. Again, the extended unemployment benefits are a partial answer, but only a partial one. The sharp drop in teen unemployment suggests a willingness to go to work although many cannot work full time until school sessions end. Many lower level employees in the above noted industries were laid off for extended periods during the pandemic. In a labor market that has gotten tighter, some have moved up the ladder to higher paying jobs, often with full benefits. The restaurant looking to reopen at full capacity is forced to limit operations either by offering fewer seats or limiting hours. That will be corrected in coming months but many low end jobs will need higher salaries to attract workers. Economically, there is nothing wrong with that.
Certainly, some jobs lost during the pandemic won’t return. Some businesses closed, others adapted and changed, eliminating some job functions while adding others. At the other end of the spectrum, we all know of companies and businesses that experienced accelerated growth during the pandemic. At the low end, food delivery demand expanded. That isn’t a high skilled job, but it may require the worker to have a car available. At the higher end, many job opportunities require technical skills that job applicants don’t have.
Mismatches will be cured over time. Job training, either by companies themselves, community colleges, or third party trainers, will fill that gap. Higher salaries will induce change. Last Friday’s employment report showed a year-over-year growth in wages of just 2.0%. On the surface that seems low. It is, but it is also misleading. The biggest growth in jobs is at the low end. In addition, retirees make a lot more money than entry level workers. The actual growth in hourly compensation was almost certainly significantly higher on an apples-to-apples basis. That’s good and exactly what the government and the Fed wants to see.
The fact that employment growth was spot on the four month average suggests that at least until the extended unemployment benefits end, we should expect average monthly net job creation of 500,000-600,000 jobs. That will lead to a slow decline in the unemployment rate, now at 5.8%, and at least another year until we can say full employment is at hand. That means wages will not create inflation above the Fed’s targeted range for at least another year, supporting the Fed’s current strategy.
I want to switch topics and talk briefly about meme stocks and Bitcoin. Meme is the name given to stocks that are the focus of a group of retail investors chattering together and pooling resources to drive stock prices up beyond anything that could be supported by company fundamentals like revenues and earnings. The poster child for the first move in January was GameStop. Today, the leading name is AMC Entertainment. From trough to peak, its shares have risen over 3,000% this year alone. Perversely, that has helped the company, allowing it to raise new capital at a very cheap price, first to stave off bankruptcy, and later to build a war chest for future opportunities. Some high profile business media are even trying to make a case for AMC. It is the cover story of this week’s Barron’s, a highly respected publication.
However, I would contend that the AMC mania is nothing more than an extension of Bitcoin mania. Even though trading platforms like Robin Hood allow you to buy a fraction of a Bitcoin, prices of $30,000-$60,000 are a bit daunting. $10 seems more enticing.
Bitcoin serves no economic purpose. Yes, there are Bitcoin pundits who look and sound very sophisticated on CNBC telling you why Bitcoin will replace gold, why it will become the world’s reserve currency, and the wonders of Blockchain. But these are all half-truths being peddled as the cure for problems that may not exist. The reality is that no one you know has ever bought anything with Bitcoin, it isn’t a store of value it if gyrates in price 5%+ each day, can be hacked with relative ease by sophisticated hackers, is unregulated, and leaves no clear trail of ownership. It is a solution that has been around for over a decade looking for a problem to solve beyond money laundering and criminal enterprise.
AMC (or GameStop) is a legitimate business. But movie theaters are not a growth industry. Many will argue that in a world where streaming demand grows, it is a shrinking industry. Most major movie theater chains have either gone bankrupt at least once or flirted with bankruptcy. At worst, there are too many theatres, and some will need to close to restore balance. That is hardly a good backdrop for a company whose stock is up 2000%+ this year alone.
So, why are Bitcoin and AMC stock flying to the stratosphere? In a word, the answer is momentum. Since neither pays interest or dividends, the only reason to buy either is the expectation that someone will pay you more when it comes time to sell. That could be 5 minutes after you buy it, or years later. It takes miles to stop a fast moving freight train. In financial markets, momentum doesn’t peter out suddenly, but ultimately it ends. In order to keep values elevated, there have to be more buyers. Once the buyers disappear, momentum wanes and values retreat just as fast as they went up. We saw that with GameStop in January. From peak to subsequent trough, the stock fell by over 75%. Yes, there has been a second wave. But GameStop hasn’t returned to its January highs and probably never will.
Manias aren’t just a forum for unsophisticated investors. Listen to the day traders on CNBC. Yes, they are playing AMC too. They want you to believe that trading is different from investing. They can read charts and decipher future stock prices, or so that is what you are to believe. As I noted, in momentum trading, as long as someone is willing to pay you more than you paid the guy before, you’re a winner. Perhaps I will stop right there.
My conclusion is that buying and selling assets with no intrinsic value is a sport I will leave for others. It isn’t unique to 2021. It happens during every bull market and is fed by all the excess cash floating around. The fastest growing major asset today is money market funds, not because earning 0.01% on your money is particularly attractive, but because they are a convenient place to park money until a better opportunity arrives. For some, that opportunity is Bitcoin or AMC stock.
Ultimately, fundamentals do matter, and ultimately, prices reflect fundamentals. If AMC’s future profits are 10-20x historic profits, buyers of shares today will be rewarded. But IF is a much bigger word than two letters would suggest. Maybe Bitcoin will find a purpose that justifies its value. Maybe. But until then, trade if you will. If you win, you won’t be a genius, you will be lucky. Of course, that won’t stop some reporter from interviewing you to find out the key to your success.
Today, Allen Iverson is 46. Mike Pence is 62. Singer Tom Jones turns 81.
James M. Meyer, CFA 610-260-2220