Private Payrolls Post A Surprisingly Strong Gain In January

Dollar Soars, Fed, BoJ and Obama All Benefit from Strong Jobs Number

Everyone from the Federal Reserve to the Bank of Japan and President Obama will breathe a sigh a relief after seeing today’s jobs report. Thanks to a 243k increase in non-farm payrolls, the unemployment rate has fallen for the fifth consecutive month to 8.3 percent, the lowest level in nearly 3 years. Going into this morning’s jobs number, everyone from economists to investors had expected job growth to slow but instead, it grew by 50 percent more than the previous month. The Federal Reserve had their gun locked and loaded and were ready to pull the trigger on QE3 if payrolls rose less than 100k but after seeing today’s non-farm payrolls numbers, they will be able to save their bullets for an European implosion. It is no longer necessary for the Federal Reserve to announce another round of asset purchases next month unless they felt that the U.S. economy desperately needed a jolt of stimulus but at this point if the Fed were to increase monetary stimulus, investors would question their credibility and wonder if there is more underlying weakness. Considering that many investors had expected the Fed to increase asset purchases next month, the sharp rally in the U.S. dollar following the jobs number reflects a rush to adjust expectations and positioning. The Bank of Japan and the Ministry of Finance will be rejoicing because the Japanese are the single biggest beneficiaries of today’s strong jobs number. If non-farm payrolls were abysmally weak, USD/JPY would have probably broken below 76, forcing the MoF to intervene in the Yen but now, the pressure to intervene has been instantly lifted. President Obama’s chance of reelection has also increased thanks to the decline in the unemployment rate. If come November, the jobless rate is below 8 percent, President Obama will be a shoo-in for reelection. Aside from the stronger rise in payrolls and the decline in the unemployment rate, average hourly earnings grew by 0.2 percent, up from 0.1 percent while average weekly hours held steady at 34.5.

Today’s jobs number shows a labor market and an economy on its way to recovery but given the grim forecasts of the Federal Reserve, we can’t help but look at the data with a tinge of skepticism. According to their latest economic forecasts, the unemployment rate this year is expected to be somewhere between 8.2 and 8.5 percent. With the jobless rate now at 8.3 percent, this means that the Fed has either underestimated the strength of the labor market or the positive momentum in job growth will begin to fade quickly. For the average American, it is still difficult to attain jobs and many would even argue that it feels like the U.S. is still in recession. Until this mindset reverses, the Fed will not be able to tighten monetary policy.

The U.S. dollar is trading higher against all of the major currencies following the non-farm payrolls report but we believe that once equities open for trading, risk appetite will lend support to the euro and other higher yielding currencies.

 

Bernanke to Savers: We don't owe you a living

In addition to the anticipation ahead of the jobs report and the Facebook S-1 filing, there was another big story yesterday --- the Fed's treatment of savers.  Fed Chair Bernanke testified before the House Budget Committee, responding to some illuminating questions from Committee Chair Paul Ryan (R. WI).  Joe Weisenthal, who is usually on the track of the biggest story, anticipated this one yesterday:

Ingredients for Inflation

The definition of inflation is a very hotly debated issue among investors, economists, and of course politicians. Long-time readers will know we’ve written about it many times before, but given recent developments feel the need to provide a brief refresher course to help investors understand the risks quickly emerging in financial markets.

Inflation was defined as expansion in money supply for years and years – and it still is by economists from the Austrian school of thought. However, in the early 2000s the Federal Reserve conveniently stopped keeping track of M3 – the broadest measure of money supply which most had used to gauge inflation.

To fill the void, most economists (including those at the Federal Reserve) substituted various metrics to track prices, the argument being that rising prices equal inflation. The truth being that these metrics were simply easier to manipulate. The problem is that the Fed’s presumption is untrue; rising prices don’t equal inflation, though inflation usually accompanies – though not always – rising prices.

The true nature of inflation as an expansion in the money supply has never changed, despite the trickery of the Federal Reserve. However, even if money supply expands, inflation only occurs if the velocity of money remains constant or escalates.

Huh?

In other words, despite all the harping from Ron Paul and the Tea Party, the Federal Reserve can print money until it is blue in the face; but if money isn’t circulating through the economy, inflation won’t result. And that’s exactly what has happened between 2007 and the present.

When the housing bubble burst in 2007, the value of assets collateralizing a HUGE amount of debt fell substantially. A lot of people who had borrowed money to buy homes and other assets suddenly found themselves with negative equity – the owed more than the underlying assets were worth.

Adding to this already horrific problem is that there was also a wave of defaults by people who had been convinced to buy assets using teaser rates or other adjustable rate lending mechanisms. So much excess supply had been built up on debt – and so much was being dumped back on the market – that prices fell precipitously.

It’s a process known rather calmly as debt deleveraging. In other circles it’s just called a cluster…

Fast forward four years, and the Fed has expanded its balance sheet by a few hundred percent in order to absorb assets that would have otherwise been dumped on the market, pushing prices even lower. While the Fed may not be using much ink for these operations, they are effectively printing money. Their saving grace – so far – has been that because the economy slowed to such a crawl, the velocity of money has fallen to and remained at historical lows.

Translation: The Federal Reserve has printed LOTS of money and put it all in the basement; none of the new bills have been making there way out to flow around the economy.

Now, friends, we’re facing a real problem. After years of extremely low velocity, the economy is picking up. More and more data shows that a very substantial recovery is on the way. What’s more, the Fed hasn’t yet contracted its balance sheet in anticipation. All that new money they created may be about to start making its way into the global economy.

Read: Helicopter Ben is cranking up the rotors. And if all the new money he’s created in the past 4-5 years starts making its way into the economy, all the ingredients have come together. Get ready for Jimmy Carter style inflation.

A wise investor would do well to prepare.

 

Dock David Treece is a partner with Treece Investment Advisory Corp (www.TreeceInvestments.com) and is licensed with FINRA through Treece Financial Services Corp. He provides expert content to numerous media outlets. The above information is the express opinion of Dock David Treece and should not be construed as investment advice or used without outside verification.

January Employment Report Preview

Friday's employment situation report is the big statistical release of the week. Billions in market cap will swing on speculative conclusions about preliminary survey data. The question is so important that we insist on making unwarranted inferences. This month we have a special treat. We have a timely update on how the BLS is doing with their estimates. If you (unwisely) choose not to think about the problems in the competing methods, then skip to the conclusion for some data you will not see anywhere else.

Continued Improvement For Manufacturing Activity In January

January looked a bit better through the prism of the ISM manufacturing index, which rose again last month to 54.1 from December's 53.1. That's the third monthly increase in a row. Readings above 50 are generally interpreted as a sign that the economy is growing. It's hardly a knock-out blow against analysts warning of high recession risk these days, but it's clearly a step in the right direction. At this critical juncture for the global economy, anything that doesn't bite us is a big help.

Some Names on My Radar

Yesterday morning, Europe was strong and we gapped up. The news out of Europe was the same as the news we’ve been hearing for 18 months. They finally got “some sort of a deal.” I gotta tell you. I don’t think I’m even going to mention Europe anymore because I don’t know what the heck is going on over there. It seems like every time they say they’re saved—they’re not. But the market couldn’t care less. As I have told you the market has completely ignored Europe.

De-mystifying the Central Bank Balance Sheets

One of the many reasons that individual investors are scared witless (TM euphemism by OldProf) is a complete misunderstanding of the role of central banks and a distortion of current policies. The critics of the Fed -- and now the ECB and other European banks -- have an easy path to page views and affirmation by readers who never took the class in Money and Banking. This has the usual result.  Anyone who is willing to spend a little time while keeping an open mind can gain a significant investment advantage. The Current Scare

Golden Cross Can Lead To Golden Loss

A golden cross occurs when a market’s 50-day moving average crosses above its 200-day moving average. We believe conditions have improved since central banks have cranked up the printing presses, which means the recent “golden cross” in the S&P 500 may turn out to be golden for investors. At the 15:08 mark of a January 17 video, we noted in 2008 emerging markets were “decoupling” from the economic problems in the United States, much as we are told the U.S. is decoupling from Europe today. While the emerging markets were acting as market leaders in ‘08, as the U.S. is today, the index experienced a golden cross (see below).

As you can see from the chart below, a golden cross can be followed by bearish outcomes as well. In fact, the emerging markets had already peaked when the golden cross occurred in May 2008. Therefore, it is important we keep an open mind about developments in Europe and the possible outcomes in the U.S. after the S&P 500’s recent golden cross.

Back home in the present day United States, we have high levels of bullish sentiment and an extended market. As we noted in the January 31 video below, the S&P 500 may make another charge higher. The outcome between current levels and 1,343 may set the tone for the next three to six weeks.

 

 

We have heard for weeks “a deal is imminent” between Greece and its private creditors. Despite the brave face, the situation is far from fully resolved according to the Guardian (01/31/2012):

Greek officials launched a vociferous behind the scenes attack on European Union and International Monetary Fund negotiators as talks in Athens over the country’s mounting debts appeared to stall.

Before a deal can be finalized, the European Union (EU) and Greece must agree on the terms of the next bailout payment. In those negotiations, the EU is turning the austerity screws again with Germany applying the most force. Getting additional cuts passed in Greece is no walk in the park. From the Guardian:

Prime minister Lucas Papademos told aides that a crisis meeting of party leaders would be called as early as Thursday to thrash out a response to an increasingly intransigent negotiating team sent by Brussels, which is demanding severe austerity measures before sanctioning a further €130bn (£109bn) of bailout funds.

“The troika doesn’t appear to be willing to accept any concessions whatsoever on reducing the minimum wage and scrapping bonuses,” said the government aide. “No political party is willing to move either, saying wage cuts are a red line they are simply not going to cross. You tell me how this is going to be resolved. We have no idea and we’re very worried.”

While both CCM market models have jumped back into bull market territory, the Bull Market Sustainability Index (BMSI) is approaching levels that are typically associated with market corrections (see arrow right side).

Stalling at Key Levels

It may have been a mixed day for the U.S. dollar yesterday, but there is no question the rally in the financial market is beginning to run out of steam. Currencies and equities have stalled at key technical levels and without a fresh dose of good news, we could see gains turn into losses.   Investors are running out of patience and unfortunately Greece has yet to reach a deal with its creditors and according to the Guardian, the Prime Minister is calling for a crisis meeting, in a sign that the talks may have hit a brick wall.