SERIOUS MONEY:The evidence suggests that liquidity-fuelled stock prices remain vulnerable, writes CHARLIE FELL

ERNESTO “CHE” Guevara, the Argentinian Marxist revolutionary, was executed in a Bolivian jungle on this day in 1967. More than four decades later, the release of US non-farm payroll data for September last Friday should have been enough to terminate the record-breaking “green shoots” rally, which was laid bare just like Guevara’s flawed political ideology.

The dismal employment data shook the diehard bulls from their torpor. This proved all too brief, however, and the liquidity- fuelled market pushed higher as performance-starved long-only investors appreciated, in a bizarre twist of Che’s final words, that the cyclical advance is “worth more to you alive than dead”.

But a hard look at the data reveals that this particular “emperor” has no clothes.

The employment report revealed that non-farm payrolls dropped 263,000 in September, the first sequential deterioration since May and still well above the average monthly drop seen in previous labour-market recessions. More than seven million private-sector jobs have been lost since December 2007, which exceeds the cumulative losses of the previous seven recessions combined.

The most severe labour-market downturn since the Great Depression follows a meagre 71-month expansion in which the private sector added little more than one million jobs a year, less than half the rate of the two previous expansions from November 1982 to July 1990 and from March 1991 to March 2001.

Effectively, there has been no net private-sector employment gains in almost a decade and conservative estimates suggest it will take at least eight years to eliminate the jobs deficit.

The unemployment rate edged up from 9.7 per cent to 9.8 per cent last month, the highest since June 1983. It would have jumped to 10.3 per cent had the labour-force participation rate not dropped from 65.5 per cent to 62.2 per cent.

A jump in the unemployment rate during a downturn typically arises not only from job losses but also an inability to absorb new entrants into the labour market.

A notable feature of this recession is that the surge in the jobless rate is attributable in its entirety to widespread layoffs. Labour-force growth has ground to a halt as scores of disillusioned Americans have simply given up looking for work.

The state of the labour market becomes even more disturbing when a broader measure of unemployment is used. The so-called labour underutilisation rate, which, in addition to all unemployed workers, includes those marginally attached to the workforce and those working part time for economic reasons, has more than doubled from a cycle low of below 8 per cent to a record high of 17 per cent.

In contrast, labour-market underutilisation was essentially flat at 9 per cent to 10 per cent following the business-cycle peak of 2001. Thus, the level of slack in the labour market is far higher than that indicated by the standard unemployment rate during the current recession compared with 2001.

Not only has the US unemployment rate risen faster than in previous recessions but workers unfortunate enough to lose their jobs are remaining unemployed for longer.

The mean duration of unemployment has soared to a record high of more than 26 weeks against a previous high of 21 weeks in August 1983.

The long-term unemployment rate, or the share of the unemployed who have been out of work for more than 27 weeks, has jumped to an unprecedented 36 per cent. While this is clearly a lagging indicator, the current reading is well above the previous cycle highs of 26 per cent in June 1983 and 24 per cent in March 2004.

The economic downturn has not only resulted in massive job losses but has also reduced the hours worked by those who are fortunate enough to remain in employment. The average working week last month fell back to the cycle low of 33 hours recorded in June, the lowest since the series began in 1964.

This suggests that a turnaround in the labour market is some way off. After all, businesses typically work their existing employees longer before they increase their headcount. Even then, they will usually turn to temporary workers before they employ permanent staff.

It is notable that, for all the talk of economic recovery, little respect is being given to the labour-market malaise or to two of the four indicators that the US National Bureau of Economic Research (NBER) monitors in determining a recession’s end – employment and real personal income excluding government transfer payments.

The labour market continues to shed jobs at a near-record pace while a 9.5 million private-sector jobs deficit by year-end means wage deflation in 2010 is a very real possibility.

The bulls may argue that this is not of major significance but history suggests otherwise.

Stock prices bottomed in advance of the end of all NBER-defined recessions during the latter half of the 20th century. But, in each case, the NBER’s four economic indicators troughed coincidentally close to the economy’s nadir.

This was not the case in 2001, however, and stock prices continued to struggle as the cyclical troughs in income and employment lagged the NBER-defined end of the recession by 16 and 21 months respectively.

The evidence suggests that liquidity-fuelled stock prices remain vulnerable to weakness.