Could the trick to investing success be summed up in five simple words?
In business school, every wannabe executive is taught the power of a simple phrase.
“What gets measured gets done.”
It’s a simple idea. When we track the data tied to a preferred outcome, we are much more likely to get that outcome.
It’s why when the chief tracks the number of tickets his department writes… cops write more tickets.
It’s why when companies track a key metric like customer retention… customer retention tends to go up.
Of course, the side effects can be very painful.
After all, what’s the real metric we’re after? Do we want cops to write more tickets… or do we just want safer streets?
Do we want happy customers… or customers unable to get their money back if they want it?
Understanding this idea is key to making outsized profits in the stock market.
Especially a stock market that’s pumped full of freshly printed stimulus dollars.
You may recall that the fine folks at the Federal Reserve – in a nod to the five-word phrase above – have two numbers that they must track and manage…
Unemployment and inflation.
Both are troublesome ideas these days.
Years of unintended consequences are creeping up on us.
Take the nation’s unemployment rate, for example. It now stands at 6.7%… the same level we saw in December 2013. It’s a remarkably low number given a global pandemic and its massive economic impact.
The world today is much different – and far more economically endangered – than it was in 2013.
But remember… when we manage to a number, that number quickly becomes distorted at best and worthless at worst.
In this case, it’s the latter.
Thanks to a rigid focus on the unemployment number, we now have a new class of workers to track.
We call them ghost workers.
They go to work each day. But they’re not doing much. And the companies that employ them no longer fund their paychecks.
It’s a sad and scary idea.
The ghost class expanded mightily with the stimulus bill Trump signed into law late Sunday night.
Tens of billions of dollars will be handed out just to keep folks on the payroll.
For example, thanks to a whopping $15 billion provision, tens of thousands of airline workers will now get their jobs back.
Airlines won’t be flying any more routes. Demand won’t be rising anytime soon. But thousands upon thousands of workers will clock in each day thanks to a subsidy provided by Uncle Sam.
Instead of writing unemployment checks directly to each worker (an act that makes the unemployment number rise… and reelection hopes fall), Washington will simply send a few monstrous checks to the airlines and let their payroll departments spread the wealth.
Again, the numbers are huge.
In the first round of stimulus, Congress sent the airlines $25 billion. The cash came with rules that said airlines couldn’t lay off workers until October 1.
When that date came and Congress didn’t refill the relief coffers, the airlines stimulated the pink slip industry. American Airlines fired more than 19,000 workers. United let another 13,000 loose. And, earlier this month, Southwest said it would drop another 6,800 workers if Congress didn’t soon write it a big check.
Now that it has… many of those folks will be employed once again. Doing what, we’re not sure.
A Ghost Economy
Would it be cheaper and more efficient for Uncle Sam to pay these folks directly?
Would many of these ghost employees find more upward mobility if they were released back into the free market… where good ideas and hard work are rewarded?
But we’ll never know.
The folks in charge don’t look at those numbers.
The Fed cares about unemployment and inflation.
Politicians are even more myopic. They care only about one number… votes.
As investors, understanding these facts gives us a distinct edge. It ensures that our view of things isn’t clouded by fake numbers and the political shenanigans that get us to them.
The unemployment rate will likely fall from here. The government will pat itself on the back.
But the numbers are not a sign of a healthy economy. Oh no…
They’re a sign of an economy in trouble.
Thousands upon thousands of workers are getting paid with nothing more than freshly printed money.
That’s no good.
Wait until you see what it does to the Fed’s other coveted number… inflation.
Dow 100K… here we come.
More on that in a future essay.
P.S. It’s no coincidence Bitcoin is approaching $30K as all this funny money is being printed. It’s a haven for folks worried about the mess that’s brewing.
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