Friday, June 1, 2012

Friday, June 1, 2012 - Weak Jobs Report - What's Next? - by Sinclair Noe

DOW – 274 = 12,118
SPX – 32 = 1278
NAS – 79 = 2747
10 YR YLD - .11 = 1.47%
OIL – 3.27 = 83.26
GOLD + 66.10 = 1627.30
SILV + .97 = 28.78
PLAT + 32.00 = 1451.00

Yesterday we set the stage for today's jobs report; anything under 150,000 jobs gained would be considered bad. Mitt Romney called it devastating. In fact it was not quite as devastating as the 598,000 jobs lost in January 2009. The economy isn't losing jobs, just not gaining enough. Nonfarm payroll employment in May increased by 69,000. The unemployment rate ticked up to 8.2%. This was a weak month, and the previous two months were revised down. The change in total nonfarm payroll employment for March was revised from +154,000 to +143,000, and the change for April was revised from +115,000 to +77,000; combined that works out to 47,000 fewer jobs than originally reported. The Labor Force Participation Rate increased to 63.8% in May. This is the percentage of the working age population in the labor force. This means more people felt good enough about economic conditions to jump back into the labor market and look for a job; the bad news is that they didn't find many jobs. The U6 rate, which measures unemployed and underemployed was 14.6%.

JPMorgan reported today: "Taking down the US growth projection has almost become a summertime ritual, and in keeping with tradition we are shaving our 2012 GDP outlook (Q4/Q4) from 2.3% to 2.1%. Over the first five months of the year the labor market has steadily lost momentum and we are now confronted with a global growth slowdown which will provide a further headwind to the economy. As such, we are taking Q3 growth from 3.0% to 2.0%, with much of the downward revision accounted for by an expectation that the pace of export growth will slow.”
Just some quick math, on the back of the envelope, JPMorgan lost $3 billion through their gambling division in London; if you took that money and paid people $50,000 a year, you could hire 60,000 people; which is like hiring an army of people. Think about what you could do with 60,000 people working for the next year. Surely they could put the money to better use than JPMorgan, which just gambled the money away. Poof, it just vaporized; which seems to be a specialty of JPMorgan – making money vaporize. I digress.
Morgan Stanley's chief economist said: “Any optimism related to the improvement in labor market conditions seen during the winter months is now fading away, and financial conditions have tightened significantly since the April Federal Open Market Committee meeting. The Fed is likely to do what it can to provide some support.” They peg the odds at 80% that the Fed will start a new round of money giveaways.
Meanwhile, Bank of America's Economics Group notes that "May's unemployment report was a disappointment" with evidence of a weather reversal and weakness concentrated in construction, leisure, and temporary help. Pointing out that "This is the recovery of fits and starts", BofA believes we are entering a slow patch in the second half of the year. They do not see this report as sufficient to prompt Fed action in June, but it makes August QE increasingly likely. The weakness in the US data is overlapping with an intensifying crisis in Europe, which means the risk-off trade continues. The big line here is that the Fed will not sit idle as the economy slows.
And so today, with a risk-off trade slamming equities and commodities, we saw gold jump higher. The situation in Europe will likely lead to the European Central Bank injecting liquidity into the financial system. The weak jobs report in the US will likely lead to the Federal Reserve injecting liquidity into the financial system; it's just a matter of timing. As more people and some of the larger institutional buyers step up, there is a good chance you can see gold spike. Think of it like a balloon being held under water and you keep pumping air into the balloon; in this example the air is institutional demand.
The other area that posted gains today – US Treasuries. The yield on the 30-year long bond dropped as low as 2,5089%, the lowest level since 1953. Yield on the 10-year note dropped down to 1.44%.
When the unemployment rate moves higher it touches the stone cold hearts of the bankers and their first response is to instruct the Federal Reserve to crank up the printing press and the helicopter. Of course throwing Federal Reserve Notes at the banks will do nothing to improve the jobs picture. Bernanke has even acknowledged that there are limits to monetary policy; those limits probably won't prevent him from passing out more money to his banker buddies, but at least we know not to expect improvement.

And this is the problem; even if the Fed lowers interest rates, how low can they go? The overnight Fed Funds Rate has been at zero for more than 3 years. If the Fed hasn't been able to accomplish a strong economic surge with QE 1&2 and Operation Twist and all the TARP and TALF, what makes you think more of the same is going to produce a different result. Further, the Fed is holding back, waiting for something in Europe to break.

Meanwhile, don't expect the politicians to respond; the know-nothing, do-nothing, nattering nabobs of negativity appear to bought bought and paid for by the bankers, every bit as much as their central bank brethren. And so we are getting warnings that there will be another round of accommodative policy, or quantitative easing, or liquidity injection. Yes, right this moment we are seeing a deflationary environment, however the response will be to flood the financial system with capital, even if there is very little chance the capital will actually flow all the way over to Main Street, you can be sure the negative effects will flood the average citizen.

Yesterday, Bill Gross of PIMCO issued a warning; today, former Federal Reserve Chairman Alan Greenspan issued a warning. Gross says the higher risk and lower quality of U.S. Treasuries could spur investors such as China and firms like PIMCO to drop them for more profitable investments such as commodities and real assets, a move that could disrupt the current dollar-based credit system. With yields so low, he is looking for alternatives.

And on a day when the market was wrapped up in the jobs report, Greenspan was more concerned with the fiscal cliff of the budget deficit and he reminisced about, and drew comparisons to the 70's when the 10-year note was yielding about 9%, only to bolt much higher in a very short period of time. Greenspan thinks we could see interest rates move sharply higher. Maybe. They won't be moving much lower from here.

The fiscal cliff is in the back of most peoples' minds but you should forget the need for austerity – now is not the time to put a malnourished man on a diet. And don't worry about inflation; not now, and if it is a problem in the future you can deal with it then. Instead try to remember all the little things that could pile up to create massive problems, for example: the Spanish bank run ($100 billion in capital is fleeing Spain), the Euro-bank fire sale ($2 trillion in assets up for sale at bargain prices in order to recapitalize), the Greek bank run (hard to believe there are still Greek banks), the Greek elections, and the inability of the US markets to trade on anything resembling fundamental information not correlated to the Euro-crisis, sprinkle with a big dose of insider shenanigans and Facebook cynicism, and add a splash of uncertainty regarding our own elections in November, top it off with China and India in definite decline, emerging markets faltering, and don't forget the perpetual problems of the Middle East and their effect on energy prices – and we are left with the reality that this month's jobs number is not the determinant factor in the market or the economy. The number was weak, it wasn't devastating but it was weak. The economy is grinding along; not great; not terrible. We are likely to grind along for much of the summer, unless something breaks, which might happen on any given day.

I'm not trying to sugar coat the jobs report. It is weak and it includes bad news for the average family. The median wage continues to slide, adjusted for inflation. Average hourly earnings in May were up 2 cents – an increase of 1.7 percent from this time last year – but that’s less than the rate of inflation. The average workweek slipped to 34.4 hours in May. What's really happening is that most of the job growth is in part-time jobs.
Corporate profits are still solid for now, but much of that is because because companies have found ways to keep payrolls down – substituting lower-paid contract workers, outsourcing abroad, utilizing new technology, and hiring part-time rather than full-time. But that’s exactly the problem; when they cut payrolls, they cut the money in their customers pockets. The Federal Reserve can push interest rates to nothing, they can flood Wall Street with supply, they can push on the string till kingdom comes. This doesn't mean that there is no need for stimulus; the need is as strong as ever. The Fed doesn't have the tools to make up for the shortfall in consumer demand.

So, will the weak employment report prompt action from policymakers? First lets identify policymakers. Will we see action from the Fed? How about action out of Congress? Stop laughing.

Action from the Fed? 1) No, not unless the Euro turns to dust, or 2)Yes, the Wall Street crowd is already popping the champagne and accountants for the 1% are already calculating tax breaks.

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