Beware the unemployment rate. It went down during the Obama administration because people dropped out of the labor force, not because job growth was strong. To illustrate, assume 100 people are in the labor force (working or looking for work and unemployed, non-institutionalized, and greater than 16 years of age). Assume 5 people are unemployed (actively searching for a job but don’t yet have one) which makes the unemployment rate 5% = 5/100. Now assume that 2 people become discouraged looking for work and quit looking. They would no longer be counted as unemployed or as being n the labor force. The new unemployment rate is approximately 3% = 3/98. See what I mean. The decrease in the unemployment rate, which we are taught to believe is a good thing is really reflecting a bad thing.

Something similar is happening now. The market cheers a good employment report and a low unemployment rate as though it is a good thing, but what is really being measured? In essence, trade protection through tariffs decreases specialization and trade. Moreover, the increased inefficiency requires more resources which decreases the unemployment rate even though output is decreasing. Increased inefficiency means we are doing more of what we are not as good at as our competitors or that we are using higher opportunity cost resources than our competitors. From the individuals point of view this is good as employment and wages go up while the unemployment rate goes down. But because of the less productive or higher opportunity cost of relatively scarcer resources, what we imported is never fully replaced so output, both at home and globally, continues to shrink. Consequently, we are worse off (except for the Chinese IP issue, of course). The increased unemployment from resources that used to engage in exports, such as in agriculture, shipping, and related industries, has yet to show up, but it will. Once that starts, there is nothing that can stop it either. To sum up, the Trump administration has figured out that if we are more isolationist and inefficient, it will absorb resources, at least in the short-run. Eventually, this strategy will backfire and a major recession will occur. Luckily, resources do not re-allocate from exports to unemployment very fast or we’d already be in a recession. In the meantime the only thing propping up the economy is the consumer (investment and trade have decreased because of tariffs) and the market appears to have fooled itself into a rally mode as it always does before a recession.

Stocks that are good for the next 90 days or so include: HTZ, FRO, DHT, INSW, IMPUY, and CMRE for growth. Dividend growth stocks are ABBV, NGLOY, BBAR, CNXM, ARCC, FSK, GSK, and VZ. The best ETFs are XLK, XLP, and XLI. Good investing . . . for now at least.