So what is to be done, as Lenin once queried? In a word it is this. Fire the Fed. Attend to supply side policy. Let market capitalism do the rest. The cult of central banking is dead in the water.
"I have certain rules that I live by... My first rule - I don't believe anything the government tells me." - George Carlin
In an asset management context, US Treasury interest rates tend to trend lower when there is an output gap and trend higher when there is an output surplus. This simple, yet overlooked rule has helped to guide us to stay correctly long US Treasuries over the last several years while the Wall Street community came up with any reason why they were a losing asset class. We continue to think that US Treasury interest rates have significant appreciation ahead of them. As we have stated before, we think the 10yr US Treasury yield will fall to 1.00% or below.
According to the National Bureau of Economic Research (NBER), the official recession arbiter, the US economy is currently at its fourth longest expansion in history. By the sheer nature of a capitalistic society with its inherent cyclicality it is a safe bet that a new economic recession will hit in the not too distant future. We have argued since June last year that the next recession is imminent and we now feel increasingly confident that our prediction will come true before November’s Presidential Election. Even mainstream forecasters seem to jump on the increasingly likely recession-bandwagon.
At the top, with annual price increases over 9% and as high as 11.9% in the case of Portland, we also find Seattle Denver and - of course - San Francisco. On the other end are Washington, Chicago and oddly enough, New York. We wonder if Case Shiller used the UMich "random" telephone directory to calculate that NYC home prices rose at precisely the rate of core inflation in the past 12 months while ignoring the dramatic moves in the ultra luxury high end segment.
It is quite evident there is something amiss about the BLS’ employment reports. Is the disparity simply an anomaly in the seasonal adjustments caused by the depth of the financial crisis? Is there an exceptional and unaccounted for margin of error in the surveys? Or, is it something more intentional by government-related agencies to keep “confidence” elevated as Central Banks globally “paddle like crazy” to keep global economies afloat.
The mainstream view of the unemployment statistics suggest that any weakness in the US economy, manufacturing or beyond, will be temporary and shallow because employment growth remains robust. In fact, the payroll reports are irrelevant. Actual economic analysis and fruitful interpretation lies only in ignoring them. Viewing the economy only through the lens of the BLS figures leads to a world that just doesn’t exist; it’s why policymakers, economists, and the media can’t seem to gather that the recovery ended years ago.
The biggest catalyst for overnight markets, first reported on this site, was the announcement by Kuwait that its oil workers had ended their strike which disrupted oil production in the 4th largest OPEC producer for 3 days cutting it by as much as 1.7 mmb/d, and had served to offset the negative news from the Doha debacle. Kuwait Petroleum also added that it would boost output to 3m b/d within 3 days, which in turn has pressured the price of oil overnight, and the May WTI contract was back to just over $40 at last check, sliding 2%. Not helping things was a very dejected Venezuela oil minister Eulogio Del Pino who said at a conference in Moscow that he sees oil prices returning to lows in 3-4 weeks if oil producers can't make a deal. For now the algos - and central banks - disagree.
The lesson to be learned here is that, while minimum wage laws are bad, uniform minimum wage laws imposed across dozens of diverse economies are much, much worse. Naturally, imposing minimum wages at the statewide level leads to the same problem, but on a slightly smaller scale. If politicians wanted to increase real wages, they'd instead focus on lowering the cost of living and increasing worker productivity.
First the AtlantaFed (with occasional shoulder-tapping exceptions) created a mini revolution in the way GDP was tracked on a day to day basis with its GDP Nowcast, one which spawned the NYFed to create its own version (influenced by Goldman's own economic models as the Atlanta Fed's number were seen as too pessimistic), and now the same Atlanta Fed is casting serious doubt over the government's official inflation numbers, with its own "sticky-price" CPI tracker.
What's a Couple Hundred Trillion Benjamins Between Friends?
The unintended consequences of a minimum wage hike in a weak economic environment are not inconsequential. Furthermore, given that businesses are already fighting for profitability, hiking the minimum wage, given the subsequent “trickle up” effect, will lead to further increases in productivity and “off shoring” of jobs to reduce rising employment costs. So much for bringing back those manufacturing jobs.
Following three consecutive weeks of increases in initial jobless claims, which pushed the series to its highest level since the start of February, according to the BLS the last week saw a 9K decline in the number of claimants which dropped from 276K to 267K. This was fractionally below the 270K expected print, and suggests that recent concerns about an inflection point in job trends may have been premature.
With a $15 minimum wage becoming a reality across most states, McDonalds is increaingly thinking of next steps... such as the zero wage McCafe Coffee Kiosk.
Cast your mind back to Friday - when payrolls confirmed everything for everyone and enabled more crowing from an establishment clinging to smoke and mirrors. It appears The Fed disagrees with the 'awesome' jobs market that BLS proposes as today's Labor Market Conditions Index continues to push to its weakest since 2009, drastically divergent from the seemingly all-impotrant non-farm payrolls data.