Are you a little befuddled that with every record-breaking unemployment claim, the S&P 500 surges higher? After 6.6 million jobless claims on April 9, 2020, the total number of jobless claims in 2020 stands at roughly 17 million or 10% of the working population.
With a once working American population of ~158 million, I’m now wondering how many Americans will have to file for unemployment before stocks stop rallying.
Is the inflection point at 30 million unemployed? 50 million unemployed? Or how about 100 million unemployed?
Nobody knows for sure, but what we do know is that stocks rally after dismal unemployment figures because investors expect the Fed and the Government will provide even more monetary and fiscal stimulus. The worse the numbers, up to a certain point, the more monetary and fiscal stimulus.
Given I’ve got plenty of extra time to think and write during the lockdown, I thought it might be interesting to see what life would be like under maximum unemployment of 70%. 30% of the American working population still needs to work in order to run the government, provide food, shelter, clothing, energy, and technology. So let’s just agree that 70% or 110 million people is the maximum unemployment level.
Given we already have 17 million registered for unemployment, at a rate of 6 million unemployment claims a week on average, we will get to 110 million unemployed in 16 weeks, or by July 30, 2020.
Similar to Governor Gavin Newsom’s bold proclamation on March 18, 2020, that 25.5 million Californians will get coronavirus by May 14, 2020, I will make the assumption that by July 30, 2020, 110 million Americans will find themselves unemployed if lockdowns extend until then. This is a possibility since the decision of how long we should shutdown is being made entirely by extremely wealthy people who are getting paid either way.
For those wondering, as of April 9, roughly 19,131 Californians or 0.07% of the Governor’s estimate have gotten the coronavirus. So with only 25.49 million more people to go, I guess presidential hopeful Gavin still could be right just like how I still have a shot at making the NBA.
Maximum Unemployment For Maximum Returns
As an investor and an 8+-year unemployed veteran, I am qualified to take on this subject.
When you’ve been unemployed for as long as I have, staying unemployed no longer scares you. When you’re at rock bottom, there’s nowhere to go but up! In fact, I start to think about the positives for all the newly unemployed:
- $600 more a week of unemployment benefits
- Leaving a crappy job that sucked your soul every day
- Receiving a severance package on top of unemployment benefits if you negotiate properly
- Time to rest and relax
- Time to go back to school
- Time to travel
- Time to spend more time with family
- Time to finally start something entrepreneurial
- Time to finally start a website
- Time to look for a new line of work
- Time to heal your mind
- Time to get in shape
- Time to live life on your own terms
Since my unemployment began in 2012, the stock market has provided a positive return except in 2018 and now in 2020. Overall, it’s been a good experience not working a day job while also seeing my investments grow.
As more people lose their jobs due to our aggressive countrywide lockdowns, there will most certainly be some short-term suffering. But in the medium-to-long run, maximum unemployment could be an incredible thing.
My hope is that the more people who leave work, the more people will decide to live a better lifestyle that’s more true to themselves. Only until you experience extended unemployment will you get comfortable making money in different ways.
If unemployment claims rise to 110 million, the government should provide maximum unemployment benefits for probably at least a couple of years if not much longer. They’ve already promised that they will do anything and everything possible to take care of citizens most affected by the pandemic.
With the government already providing $600 more in unemployment benefits a week and the PPP paying for 2.5 months of payroll, there’s a high chance the unemployed in a maximum unemployment scenario should be able to make close to 100% or more of his or her income.
In California, an unemployed person can now receive a maximum of $1,050 a week, or $4,200 a month. That’s not bad. What’s more, the coronavirus relief bill offers an additional 13 weeks of benefits, up to a maximum of 39 weeks. 10 months is surely enough time to find a job if we see a recovery by the end of 2020.
Prior to the economic crisis caused by COVID-19, the average worker collected unemployment benefits for about 15 weeks, according to Labor Department data.
If you are making close to 100% of your income, it is rational to assume the majority of the unemployed will prefer to take a break from the grind. After all, plenty of surveys have shown that most Americans are disengaged at work anyway.
During the 2008 – 2009 financial crisis, the government instituted 99-weeks of unemployment benefits. This was a time for millions of Americans to finally get away from the hustle and bustle.
In 2020, the unemployment benefits, although not 99-weeks, pay much more. Further, if we get to the point where 110 million are unemployed, the government will likely provide even more than 99-weeks of extra unemployment benefits.
Now let’s look at a maximum unemployment scenario from the investor’s point of view. The more people who file for unemployment, the more the S&P 500 goes up. By the time we have 110 million unemployed, there’s a chance the S&P 500 could be at all-time highs! Ludicrous you say!
But here’s why there is a chance: productivity and efficiency gains.
During the lockdown period, companies will have discovered they didn’t need as many employees and as many office buildings to create the same amount of product. I know this because I’ve been writing at home for years. It takes about 3 hours of work from home hours to complete about 9 hours of work from office hours.
As a result of this efficiency gain, company profitability goes way up. Companies with higher operating profit margins get revalued higher, thereby creating a lift to the overall market.
Think about it, if every company had the 85%+ operating profit margin of a magnificent personal finance blog that was growing in the double digits every year, the S&P 500 could zoom to 10,000, greatly surpassing our 3,386 highs!
Thanks to the Fed’s ability to print endless amounts of money and buy an endless amount of assets, investors have the greatest safety net of all.
We now have a scenario where 110 million people not only don’t have to work at their crappy jobs but also still receive healthy pay. Meanwhile, investors are getting to earn incredible returns. Further, there’s no reason why an unemployed person can’t also be an investor and receive the best of both worlds.
At the end of the day, we could face a world where everybody wins. The main fear is that the government gets too powerful and America turns into a socialist country.
Let’s Face Reality
Of course, there is only a small chance of my positive scenario coming true. But so long as there is even a 1% chance, there’s still a chance.
Unfortunately or fortunately, the breaking point for when the S&P 500 starts to plummet is likely well before 110 million Americans become unemployed. Such high unemployment will probably cause crime to skyrocket and the S&P 500 to crash to 0 as the government takes over all publicly listed companies.
Intelligent people don’t believe Governor Newsom’s 25.5 million coronavirus prediction in California or the federal government’s projections of 240,000 coronavirus deaths in America. But they are thrown out there to shock us into conformity. No other time has the U.S. government been more powerful than right now.
This thought exercise helps explain why the stock market is curiously booming with record-high unemployment. It also helps you see the good in a terrible situation. Most of all, I want this thought exercise to help you assess the importance of your job, your money, and your freedom.
For me, freedom is everything. To ensure my freedom, I’ve got to protect my money, which is one of the reasons why I think and write so much. Learn to think for yourself and don’t trust everything you hear or read.
For those buying the big bounce please be careful. The market is already celebrating a victory with three quarters left to play!
Readers, how high do you think unemployment claims would have to go before wrecking the economy and causing the S&P 500 to plummet? What do you think society would be like if 110 million people were unemployed? Are you buying this rally?