You are reading a sample from the Cash Only newsletter, in which Martin Jašminský, Zuzana Kubátová, Jiří Zatloukal and Jiří Nádoba comment on events in Czech business every Friday. If you are interested in Money only, subscription newsletter.
Unemployment of 4.3 percent does not seem like a real tragedy. But when the queue of unemployed people starts to expand significantly month after month, something is wrong.
So one of the minor laws that became a big deal this week read in a garbled translation as “Sahm’s rule”. The author of the lesson, the American economist Claudia Sahmová, is a woman, according to her, the increase in unemployment activities is a reliable tool of the entire recession.
Her observations are based on historical data, from which she can read when to call an alarm. The problem arises when the average unemployment rate jumped half a percentage point above the lowest number in the last year for three consecutive months. What happened now – in July 4.3 percent of people in the US were unemployed, the three-month average rose to 4.1 percent, the bottom of the previous year was 3.5 percent.
When unemployment jumped this quickly in the past, a recession, ie a decline in the performance of the entire economy, usually followed soon after. The public always bears heavily as a huge economic loss.
Interestingly, it makes sense – when a lot of layoffs suddenly start happening, something is up. And the numbers prove it. Claudia Sahm’s lesson applies to nine of America’s last eleven recessions.
Can this suspicion be confirmed by other economic laws? We will find at least five other important indicators that are now giving worrying results:
- Indirect yield curve. It happens when it is cheaper to get a loan for a longer period than for a shorter period. This has been happening in the US for two years now. The deciding factor is to compare interest rates between ten-year and two-year US government bonds. The ten-year bond has been cheaper since 2022, which simply means that many investors do not want to bet on the future years.
- The Buffett Sign. The famous billionaire Warren Buffett is known for relying on common sense. One of his small lessons says that it is a good idea to monitor the ratio of the market value of each stock on the stock exchanges against the actual performance of the economy, ie the gross output domestic US stocks are now almost double GDP, a historically large excess and a possible sign that a stock market bubble is bursting.
- Rule twenty. According to him, American stocks are now overpriced. A rational ceiling is said to be known by the relationship between share prices and company profitability. This multiple (the price-to-earnings ratio), when the annual inflation rate is added, should not exceed 20. For companies from the main American index S&P 500, it is the shares are currently worth 27 times. more than the earnings per share.
- National debt. An intuitive indicator that the economy is overheated is a doubling of the ratio of national debt to economic performance. In this respect too, the United States breaks records, as does most of the rich world. Before Ronald Reagan started an arms race with the Soviet Union in the 1980s, America’s debt was on par with that of the Czech Republic, about 40 percent of GDP. Now it is almost 130 percent.
- LEI index. The most famous American indicator, which includes ten sub-numbers, is proven by history as a timely indicator of the future development of the entire economy. The status of orders, consumer sentiment or the development of the stock market is reflected in the index. It has been going down for a yearalthough this year is at a slightly lower pace than in the second half of last year.
There are other important symptoms that come out normal or mixed in the US. After all, the world’s largest economy is still growing, inflation is falling gradually, and in the fall the American central bank is expected to support weak growth by cutting interest rates.
Nevertheless, due to the risks listed above, it is true that it takes a lot of confidence to buy shares at a discount with this week’s sales at this time.
Are you interested in energy trends, the plans of top entrepreneurs or building new companies? Subscribe to Cash Only and you will receive the complete newsletter in your inbox every Friday.
2024-08-11 08:00:00
#Money #live #edge #laws #market #News #List
