Funemployment Friday

Featuring an unlimited (unpaid) time-off plan...

Author

Drake Gens
February 03, 2023

Welcome to Funemployment Friday! What is funemployment (pronounced "fun-employment", kinda like the "fun" in "finance")? I'm glad you asked...

Funemployment is basically where you're unemployed but do fun things (like write newsletter blogs and build aggressively complex financial models) because you have the bandwidth and capacity to get into the nitty-gritty and dive into the weeds. I'd know all too well :) Anyways, yes, I am boiling the whole ocean and I'm loving it.

Well, anyways, seeing as though many individuals are receiving the boot outta the corporate door, I thought I'd take a (not so) quick look at funemployment statistics and what they mean for you and your stonks.

Today We're Sponsoring...

Before we get into it, I've got a dear friend who is running the Boston Marathon and is using it as an opportunity to raise money for the 3Point Foundation. Kaitlyn's been playing basketball pretty much all her life, including at Vanderbilt when we met; trust me, she'll school you on the basketball court and in the boardroom. I ain't much of a baller, but Kaitlyn's a real one and helped me see that bizness is truly a team sport. She's got a heart for using basketball as an opportunity to connect with and mentor kids, helping them learn valuable life lessons about how to become a leader, develop strong character, and pursue excellence. 3Point Foundation does just that - they run academic and athletic programs and summer camps with the mission of closing the opportunity and achievement gap caused by economic inequality for underserved, low-income Boston and Elementary schools.

If you'd like to support her and the 3Point Foundation, click here. Also, here's a sentimental picture of us at our graduation from Vanderbilt:

Okay, now let's dive in...

What Who Really Matters

I'm a big finance guy and my default reaction to any news, including layoffs, is to analyze those events through the lens of an investor, constantly evaluating their impacts on my investments, the market as a whole, and the economy at large. It takes effort and intentionality for me to take a step back and see the big picture (yes, larger than the entire economy), and I'd like to share those thoughts now.

As a society, we as individuals place a significant amount of our self-worth in our job titles and pay grades. I'd know. The consequences of this misplaced sense of self-worth may go unnoticed until that job title or pay grade gets taken out of our lives and we are left staring uncertainty, anxiety, and depression right in the face. Maybe that's why people who are laid off are 1.3 to 3 times more likely to commit suicide, two times more likely to become depressed, four times more likely to abuse substances, and six times more likely to commit violent acts (including abuse) (original research here). Experts say that it could take two years or more (depending on the circumstances and abruptness) to emotionally recover after losing a job, while the odds of developing a new health condition increase by 83%. I don't take this lightly.

If you're reading this and have lost your job, I'd like to formally welcome you to the funemployment club. Also, I'd like to give you a friendly reminder that you're worth more than your salary and the prestigious title you once had. Reach out to me if you'd like a more personalized encouragement :)

If you're reading this and are a business leader, I'd like to challenge you to exhaust other alternatives before laying people off (retraining, expanding job functions, furloughs, etc). Employees are already fearful of job losses; committing to them in a period of uncertainty will build deep trust with them for the long term. I understand that layoffs may be necessary, but I'd like to challenge you to go the extra mile, as it could pay dividends (financially and culturally) for the long term.

Okay, enough with my emotional TED talk. Let's get into some numbers...

Where We're At Right Now

There are mass layoffs at a lot of companies rn, with many who are soon to join in. Layoffs started within the technology space, but have since expanded to most industries.

To keep up with technology layoffs, check out this site.

To keep up with layoffs at all corporations, check out this site.

Here are some quick stats on layoffs below:

These numbers don't look great, but the labor market is still pretty tight relative to historical standards. Even Papa Powell mentioned that labor market data is still strong (though cooling off). Specifically, he said that "Despite the slowdown in (economic) growth, the labor market remains extremely tight, with the (f)unemployment rate at a 50-year low, job vacancies still very high, and wage growth elevated" (p.1). Some believe that the dramatic escalation of layoffs as of late was due to overhiring after the pandemic when everything was low-key, high-key pretty crazy.

In fact, employees quitting is still far more common than layoffs. My buddy FRED made this cool chart to illustrate that point:

Thankfully, savings have grown since the pandemic, so there is some cushion should widespread labor market issues persist.

How Do Other People Getting Canned Impact Me?

First off, assuming you're a person with emotions (sorry to my IB bros haha jk), you should acknowledge that those people are upset for a variety of reasons (unless, of course, they worked at a toxic company, then they probably won't be upset for long).

If you're wondering why there are layoffs to begin with, I'd beseech thee to read this article. It explains why economic growth (and hence company revenue) is falling. Layoffs are here and are increasing at an exponential rate, so let's get into how they impact you. For simplicity's sake, we'll approach it from how it'll influence the economy and then how it'll influence your beloved stonk market.

Economic Implications

Here's an aggressively oversimplified flow chart of how layoffs could impact the economy:

Here's how this narrative works:

  • Employers need to cut costs: Due to slowing economic demand as a result of quantitative tightening and high inflation, companies decided that they are going to reduce their workforce. Assuming that mass layoffs occur (which is what we are currently seeing at many companies) and former employees can't easily find employment, this will reduce their income (disposable income) materially.

  • Delayed consumer spending: Idk about you, but if I was funemployed (which I am), I'd cut my expenses by as much as possible. With a growing number of individuals joining the funemployment club, I don't imagine that I'm the only one tightening my belt in this economy (literally and metaphorically haha). I've grown to appreciate PB&Js.

  • Lower forecasted consumer demand: Biznesses are smart(ish), so they understand stonk science as it pertains to lower consumer spending following a weak labor market. They, in accordance with the lower projected consumer demand, may delay investments and growth initiatives. A combination of lower consumer spending and business investment will negatively influence GDP.

  • Federal Reserve notices the combination of lower spending and investment and decides to "plz fx": Enter the "Fed Pivot" argument. If my funemployment club gets too big and biznesses pass up investment opportunities (except INTC lol), that's a no bueno combo for economic growth. If the Fed flinches they could turn the economy into a hot mess express, but if they get scared and react then inflation could become entrenched. Be careful to not fall off the tightrope Papa Powell, it's a long way down... A perfect 10/10 performance would entail sustained, low (2%) inflation with positive economic growth; the likelihood of that happening is somewhere between "um... okay" and "yikes".

This, of course, is an oversimplification of what could happen if mass layoffs occur and the funemployment rate increases significantly. There are many other economic factors at play that, for the sake of brevity, I will not expound upon, but include:

I would continue, but I'm not (for now hehe) :)

Stonk Market Implications

Obviously, the relationship between funemployment, falling consumer spending, and reduced business investment is an overall bad scenario for the bottom line of most companies; the market, however, takes into account future forecasts and expectations, so changes to the price of stonks will be based on deviations from prevailing assumptions regarding the funemployment rate. Here are some prevailing funemployment rate forecasts:

BLS:

We're looking at projections of low-to-mid 4% from 2023 onward, with the longer-term funemployment rate closer to 4%.

What happens when those forecasts are different from the actual reality of the situation? Well, I'm very glad you asked.

On the one hand, having funemployment that is higher than projected is both a bad and a good thing, as a drop in consumer spending will likely follow higher funemployment (bad for stonks), though it would allow the Fed to cool its pace of interest rate hikes (less demand would encourage slower inflation - this is good for stonks). On the other hand, having funemployment that is lower than projected would be good because less people would be funemployed and that'd help economic growth (good for stonks), but would give the Fed reason to hold interest rates higher for longer (bad for stonks).

Said differently, having a tighter labor market (thus a lower funemployment rate) is good for economic growth, but could contribute to high inflation; this would be bad for stonks if a tighter labor market would result in more inflation that would cause the Fed to hold interest rates higher than the market expects for longer than the market expects.

Said slightly differently than before, a tighter labor market is good for stonks unless the Fed decides that it's actually bad for stonks, then it'd be bad for stonks because Papa Powell said so.

We can use this stonk science and apply it to today's labor numbers. The BLS reported a funemployment rate of 3.4% for January versus the 3.6% forecasted rate. The result? Treasury rates have increased due to the "higher for longer" narrative, while tech stonks dropped because they don't like higher interest rates. I do find it peculiar that most of the job gains were for part-time workers (Table A-9) - this could signal that the labor market is, in fact, softening despite the current funemployment rate.

I would encourage you to not place short-term trades, but I'd especially discourage day trading when those trades are solely based on funemployment information; there are many factors (as you know) that influence stonk markets and the information becomes valuable when we evaluate it in the context of a long-term investment plan. Funemployment rates, as we've seen today, are notoriously difficult to predict and we must view this information in relation to all the other things going on; frankly, this information shouldn't impact your investment decisions nearly as much as your long-term goals should (I will write about this more next time :D).

Overview

If you're reading this, you know of at least one person who is currently funemployed. I'd encourage you to have conversations with your friends and family should they face funemployment. All it takes is a phone call to prevent them from becoming another statistic. They aren't your responsibility, but you can make a difference :). As (lego) Batman once said, "If you want to make the world a better place take a look at yourself and make a change. Wooo".

Despite a plethora of layoffs starting in the tech community and expanding to all industries, labor markets are still pretty tight and the latest funemployment measures pointed to that fact. I do find it peculiar, however, that labor gains were generated from primarily part-time employment.

Though labor markets are V strong, the Fed has expressed its desire to soften labor markets through quantitative tightening, which will likely lead to future periods of growing funemployment. Growing funemployment could cause consumer spending to drop as consumers delay purchases, while simultaneously influencing businesses to pause or delay investment spending; the combination of which will negatively impact economic growth. This may cause the Fed to pivot, though pivoting could cause inflation to become entrenched.

Stonk prices are currently pricing in a gradual softening of labor markets (based on prevailing inflation forecasts). The influence of funemployment data largely comes back to the Fed over the short-term (it's all about Papa Powell), though growing funemployment has significant long-term costs that I suspect the market isn't pricing in.

For the sake of brevity, I decided not to talk about how funemployment influences FX, bond, or commodity markets, though I'd be happy to if you'd like - just let me know :)

In Conclusion... Yes, I'm Done.

  • Everybody be talking about mass layoffs and growing funemployment, but the numbers still be V strong.

  • Labor markets may be strong now, but the Fed's blaming labor markets (at least partially) for inflation. The Fed has made it a goal of theirs to increase funemployment. Thanks Papa Powell...

  • Economic forecasts are predicting growing funemployment rates, though those forecasts are extremely difficult to accurately predict.

  • Should funemployment rates increase, consumer spending and business investment could fall - this will negatively impact economic growth.

  • Over the short-term, your stonk prices will move based on the market's perception of how the Fed will react to funemployment numbers; over the long-term, the cost of funemployment on companies is high and shouldn't be overlooked.

Thanks for reading :)