While the disappointing job gain during the month is likely a statistical fluke and will eventually be revised higher, it does highlight an important point. Namely that after the temporary boost from the deficit-financed tax cuts fade later this year, job growth is destined to slow sharply.
With no more unemployed or underemployed to hire, fewer immigrants coming into the country to work, and the boomers retiring, job growth will significantly throttle back. By early in the next decade, months in which job growth comes anywhere near December’s 148,000 gain will be the fluke.
U.S. job growth slowed more than expected in December amid a decline in retail employment, but a pick-up in monthly wage gains pointed to labor market strength that could pave the way for the Federal Reserve to increase interest rates in March.
Nonfarm payrolls increased by 148,000 jobs last month, the Labor Department said on Friday.
…Average hourly earnings rose 9 cents, or 0.3 percent, in December after gaining 0.1 percent in the prior month. That lifted the annual increase in wages to 2.5 percent from 2.4 percent in November. The unemployment rate was unchanged at a 17-year low of 4.1 percent.
“Why aren’t wages picking up?” Kashkari asked in a blog post explaining his latest dissent. “In my view, the two most likely explanations are that the job market is not as tight as the 4.1% unemployment rate suggests and that people’s expectations for future inflation have fallen, which can become self-fulfilling.”
Kashkari believes low labor-force participation and other underlying pockets of weakness are still leaving workers in too precarious a situation to bargain for higher wages.
“One measure of the labor force — the participation rate for workers between 25 and 54 years old, typically called ‘ prime age’ — suggests that there could be more than a million workers still on the sidelines,” Kashkari said.
PG View: Kashkari has the same doubts about the so-called “transitory” nature of low inflation: “…the longer it persists, the more tenuous the transitory factors story becomes.”
Despite seemingly robust indicators, the world economy may not be nearly as resilient to shocks and systemic challenges as the consensus view seems to believe. In particular, the absence of a classic vigorous rebound from the Great Recession means that the global economy never recouped the growth lost in the worst downturn of modern times.
…While I have great respect for the forecasting community and the collective wisdom of financial markets, I suspect that today’s consensus of complacency will be seriously tested in 2018. The test might come from a shock – especially in view of the rising risk of a hot war (with North Korea) or a trade war (between the US and China) or a collapsing asset bubble (think Bitcoin). But I have a hunch it will turn out to be something far more systemic.
…At risk are the very fundamentals that underpin current optimism. One or more of these pillars of complacency will, I suspect, crumble in 2018.
PG View: If the age of investor complacency comes to a screeching halt, gold is going to scream higher.
Billionaire bond manager Bill Gross, who has long warned that low interest rates punish savers and banks, says the Federal Reserve is likely to be cautious with increases because the current environment leaves little room for error.
“Should a crisis arise because of policy mistakes, geopolitical crises, or other currently unforeseen risks, the ability to protect principal will be impaired relative to history,” Gross wrote in an investment outlook released Thursday. “That in turn argues for a more cautious and easier Fed than otherwise assumed.”
The difference between short-dated and longer-dated US Treasury yields has narrowed at its fastest pace since 2008, as investors anticipate a quicker rate of policy tightening from the Federal Reserve next year.
The difference between two- and 10-year yields has fallen 33 basis points to just 52 basis points over the past 30 days, while the difference between five- and 30-year yields has fallen 34 basis points, surpassing declines prompted by the European sovereign debt crisis in 2011 and reaching a pace last seen during the financial crisis, according to analysts at Citi.
It marks a pronounced “flattening” of the yield curve, with investors receiving decreasing returns for holding longer-dated bonds compared to shorter-dated notes — typically a harbinger of economic recession.
Instead of using traditional macroeconomic models, Rickards prefers to borrow one from physics: complexity theory. Using this framework, Rickards proposes a scenario in which the world shifts partially back to the gold standard, with an ounce of gold being valued at $10,000 per ounce.
PG View: The Rickards segment begins at 2:05 and ends at 11:13.
On Monday Caracas missed interest payments due on two government bonds and one bond issued by the state-owned oil monopoly known by its Spanish initials PdVSA. Venezuela owed creditors $280 million, which it couldn’t manage even after a 30-day grace period.
Venezuela is broke, which takes some doing. For much of the second half of the 20th century, a gusher of oil exports made dollars abundant in Venezuela and the country imported the finest of everything. There were rough patches in the 1980s and 1990s, but by 2001 Venezuela was the richest country in South America.
PG View: As the editorial board points out, any hope for restructuring Venezuela’s debts is very much dependent on the economy returning to growth. That is going to be very difficult if the government of President Maduro continues to cling to socialism.
One year ago Narendra Modi bypassed the Reserve Bank of India, locked his cabinet in a room and gave the country just four hours notice before announcing his arbitrary and unilateral demonetisation scheme. Overnight 86 per cent of the value of India’s currency was withdrawn from circulation.
The prime minister claimed his decision was aimed at wiping out corruption. Twelve months on the only thing he has wiped out is confidence in our once booming economy.
Demonetisation has wiped out 2 per cent of India’s gross domestic product, destroyed the informal labour sector and has wiped out many small and medium businesses. It has ruined the lives of millions of hard-working Indians. The Centre for Monitoring Indian Economy has calculated that over 1.5m people lost their jobs in the first four months of 2017 due to demonetisation.
U.S. labor force participation has been having a good run, but it slipped in October — possibly as demographics exacted a toll.
The participation rate had been trending up as people moved into the labor force and as workers with jobs hung onto them. Last month, however, the rate fell as 5.2 million employees dropped straight out of the labor market — the biggest number since the series started in 1990. That could have been a hurricane-induced change that will reverse as the effect of storms that slammed the southern U.S. abates. Or it could have happened as workers returned to school or retired.
Almost two-thirds say this is the lowest point in U.S. history—and it’s keeping a lot of them up at night.
For those lying awake at night worried about health care, the economy, and an overall feeling of divide between you and your neighbors, there’s at least one source of comfort: Your neighbors might very well be lying awake, too.
PG View: A more meaningful source of comfort might be found in gold. It may help you sleep a little easier, knowing at least a portion of your wealth is protected.
The US economy expanded a robust 3% in the third-quarter, the Commerce Department reported on Friday. That’s a second quarter of growth above the 2% pace that has persisted for much of the economic recovery, and well above Wall Street’s expectation of a 2.6% rise.
But there are a few important details in the numbers that economists, including those at the Federal Reserve, will look at. They paint a more subdued picture.
That’s Yellen’s typical response to a long litany of data that shows the U.S. is in the grip of a powerful disinflationary trend that may lead to outright deflation — a central banker’s worst nightmare.
The Fed has a publicly announced 2% inflation goal, which they consider to be price stability. In fact, 2% inflation cuts the purchasing power of the dollar by 75% in the course of an average lifetime. The Fed would tell you to ignore that.
…The Fed has created $3.5 trillion of new money since 2008, yet there has been no appreciable amount of inflation for nine years.
PG View: Rickards believes that rate hike expectations will deteriorate in the months ahead and that Yellen will be reluctant to do another rate hike as her last act as Fed chair.
As market probabilities catch up with reality, the dollar will sink, the euro and gold will rally, and interest rates will resume their long downward slide. — Jim Rickards
Broad revisions to Britain’s main statistics on Friday showed the economy has performed worse than previously thought since the Brexit vote, although household finances are significantly stronger.
Year-on-year growth in the second quarter was revised down from 1.7 per cent to 1.5 per cent, the Office for National Statistics said, with slower growth than previously recorded in the last three quarters of 2016.
…Consumer debt continued to rise at a near double-digit pace in August, increasing 9.8 per cent from a year earlier, adding to the Bank of England’s fears that there is a “pocket of risk” in lending on credit cards and car finance.
PG View: So, does the BoE still hike rates in Nov as Carney has suggested?
Business Insider CEO Henry Blodget spoke with Bridgewater’s Ray Dalio about the current circumstances of the US economy.
In my opinion, the risks are asymmetric on the downside. In other words, if you tighten monetary policy, certainly by more than is discounted in the market — and what’s discounted in the market is very minor rising market — that will reverberate through asset class prices, as well as then you can have a situation in terms of the economy. So, what’s similar in that: interest rates are close to zero, not much room on the downside, obligations are large, there was a political division, there is more populism. Therefore there’s more conflict. And therefore we need to be very careful at this moment. — Ray Dalio
What to do? This is not as an innocuous question as one might think. For most American families, who have to balance their living standards to their income, they face this conundrum each and every month. Today, more than ever, the walk to the end of the driveway has become a dreaded thing as bills loom large in the dark crevices of the mailbox.
…The burden of debt that was accumulated during the credit boom can’t simply be disposed of. Many can’t sell their house because they can’t qualify to buy a new one and the cost to rent are now higher than current mortgage payments in many places. There is no ability to substantially increase disposable incomes because of deflationary wage pressures, and despite the mainstream spin on recent statistical economic improvements, the burdens on the average American family are increasing.
…Beginning in 2009, the gap between the real disposable incomes and the cost of living was no longer able to be filled by credit expansion. In other words, as opposed to prior 1980, the situation is quite different and a harbinger of potentially bigger problems ahead. The consumer is no longer turning to credit to leverage UP consumption – they are turning to credit to maintain their current living needs.
There are currently clear signs of stress emerging from credit. Commercial lending has taken a sharp dive as delinquencies have risen. These are signs of both a late stage economic expansion and a weakening environment.
PG View: This is a rather distressing assessment of the current situation and goes a long way toward explaining why growth remains anemic with little prospect for improvement.
European Central Bank President Mario Draghi said protectionist policies pose a “serious risk” for growth in the global economy.
At a gathering of central bankers, economists and others in Jackson Hole, Wyoming, on Friday, Draghi said the global economy is firming up. He told the audience in a speech that “a turn towards protectionism would pose a serious risk for continued productivity growth and potential growth in the global economy.”
The comments come at a time when President Donald Trump is taking a hard look at the U.S.’s trade agreements around the world, pushing to reduce trade deficits and make conditions more favorable for American manufacturers.
Federal Reserve Chair Janet Yellen had a clear message for the Trump administration in what could be her final Jackson Hole speech: Undoing the hard work of reforming the financial system after the financial crisis could have dangerous consequences.
…In her keynote address at the high-profile conference in the Grand Teton mountains of Wyoming, Yellen was not holding back — in a way that potentially suggests she is not holding her breath for a reappointment from Donald Trump. Yellen’s term as Fed chair expires in February, and Trump is widely expected to nominate Gary Cohn, ex-president of Goldman Sachs and head of the president’s National Economic Council, to replace her.
“Fed Chair Janet Yellen’s passionate defence of the post-crisis tightening of financial regulation isn’t going to go down particularly well at the White House,” wrote Paul Ashworth, economist at Capital Economics, in a research note following the speech. “Donald Trump has made rolling back regulation the centre-piece of his presidency.”
When Donald Trump won the race for the White House last year, markets rallied. The so-called “Trump trade” rested on the hope that the US president would deliver business friendly reforms that would boost growth. This was a bit of a misnomer: what executives and investors have really been betting on for most of this year is a “Cohn trade”.
…The question that investors and executives are asking is whether that “Cohn trade” still works. It certainly looks like a higher risk bet. Never mind the fact that Mr Cohn and John Kelly, the president’s chief of staff, failed to stop Mr Trump from making his inflammatory comments this week about the Charlottesville protests. What is most telling is that this disaster happened at the very moment that Mr Cohn’s star was supposed to shine.
…This does not necessarily mean that all the investor optimism around the Cohn trade has disappeared. Stock markets are still flushed with oodles of central bank liquidity and boosted by moderate economic growth. And one important detail about the Cohn-cum-Trump trade that is often forgotten is that markets did not merely rally because business hoped reforms would get done. Executives were also excited about what might not occur under Mr Trump — Barack Obama-style regulatory creep.
“Anglo-Saxon political angst” is spurring a shift in investment from U.S. and British equities to Europe, according to the latest survey of fund managers by Bank of America Merrill Lynch.
The most important market news of the day.
Money managers of $587 billion polled from Aug. 4 to 10 cut allocations to the two nations to a post-financial crisis low, while boosting positions in European shares. They cite the risk of policy blunders by major central banks as their foremost concerns, followed by a bond crash and escalating tensions with North Korea.
The momentum of the first half fizzled away last month after the country’s leadership listed financial risks as major threats to the health of China’s US$11 trillion economy.
A slowdown in property investment and home sales, along with an easing in overseas shipments, point to further weakness down the road as President Xi Jinping seeks to cement his power at a key Communist Party congress this year and push ahead with a long-delayed economic restructure.
Yao Wei, chief China economist at Societe Generale, said Beijing’s efforts to curb risks would be clearer after the congress and this was a fundamental reason to be cautious about growth in China.
“Deleveraging and lowering risk in the financial system are now clearly among the top medium-term objectives of the Xi administration,” Yao said.
Growth in China’s exports came in last month at the slowest rate since exiting contraction in March, with the rise in value of shipments to most major trading partners decelerating markedly.
The dollar value of outbound shipments from China climbed 7.2 per cent year on year in July, according to the General Administration of Customs, slowing from growth of 11.3 per cent a month earlier and coming in well below a median forecast of 10.9 per cent growth from economists surveyed by Reuters.
Growth in exports to most major trading partners was down visibly, with those to the US falling more than 10 percentage points from the previous month to notch year-on-year growth of just 8.9 per cent in July.
The strong U.S. jobs numbers don’t look sustainable but wages are likely to increase, said Jan Hatzius, chief economist at Goldman Sachs.
Hatzius spoke after the Labor Department said Friday that the U.S. economy added 209,000 jobs in July and the unemployment rate fell to 4.3 percent from 4.4 percent, the lowest since March 2001. The number of employed Americans hit a new high of 153.5 million.
“All of it looks quite solid from the demand side but what’s not sustainable is to see these kinds of numbers with the unemployment rate as low as it is, U6 as low as it is,” Hatzius said Friday on CNBC’s “Squawk on the Street.”
“I’m not saying it’s going to stop in the next few months but we’re not going to be able to sustain that kind of job growth in the long term. I think the trend is probably below (100,000).”
The savings rates in the US and the UK are dropping, and economists are trying to figure out what that means.
When the US government released its annual revisions to economic growth last week, it made sharp downward revisions to the personal saving rate. Savings as a share of disposable income was 4.9% last year, not 5.7% as earlier calculated, the Bureau of Economic Analysis said.
The update showed that incomes were less than previously reported, while consumption was higher.
Albert Edwards, a Societe Generale strategist and permabear, published the doomsday interpretation of this data in a note on Thursday. For Edwards, it’s the eve of the financial crisis all over again.
“Every day more evidence mounts that almost exactly the same debt excesses that caused The Global Financial Crisis (GFC) in 2008, are present today,” he said.
Slumping savings rates in the US and the UK were last seen in 2007, “just before the bursting debt bubble blew the global economy and financial system to smithereens.”
Britain’s economy grew by just 0.3% in the second quarter of 2017 after what government statisticians called a “notable slowdown” in the first half of the year.
The expansion in the three months to June followed 0.2% growth in the first quarter and was in line with City expectations for the eagerly awaited first estimate of the economy’s recent performance.
…Darren Morgan, head of national accounts at the Office for National Statistics, said: “The economy has experienced a notable slowdown in the first half of this year. While services such as retail, and film production and distribution showed some improvement in the second quarter, a weaker performance from construction and manufacturing pulled down overall growth.”
The IMF on Sunday lowered its economic growth forecasts for the United States to 2.1% for this year and the next, down from the 2.3% for 2017 and 2.5% for 2018 that it had predicted in April.
That’s a far cry from the 4% growth President Trump promised on the campaign trail, and significantly lower than the 3% growth he has targeted since assuming office.
The global financial institution cited the “uncertainty” over the Trump administration’s policies as the main reason for the downgrade.
“The major factor behind the growth revision, especially for 2018, is the assumption that fiscal policy will be less expansionary than previously assumed, given the uncertainty about the timing and nature of U.S. fiscal policy changes,” the IMF said in its latest World Economic Outlook released Sunday.
Let the West worry about so-called black swans, rare and unexpected events that can upset financial markets. China is more concerned about “gray rhinos” — large and visible problems in the economy that are ignored until they start moving fast.
The rhinos are a herd of Chinese tycoons who have used a combination of political connections and raw ambition to create sprawling global conglomerates. Companies like Anbang Insurance Group, Fosun International, HNA Group and Dalian Wanda Group have feasted on cheap debt provided by state banks, spending lavishly to build their empires.
Such players are now so big, so complex, so indebted and so enmeshed in the economy that the Chinese government is abruptly bringing them to heel. President Xi Jinping recently warned that financial stability is crucial to national security, while the official newspaper of the Communist Party pointed to the dangers of a “gray rhinoceros,” without naming specific companies.
Chinese regulators have become increasingly concerned that some of the biggest conglomerates have borrowed so much that they could pose risks to the financial system. Banking officials are ramping up scrutiny of companies’ balance sheets.
Last week the Fed raised the white flag on further rate hikes. There won’t be any for the foreseeable future.
No rate hikes are coming at the July, September or November Fed FOMC meetings. The earliest rate hike might be at the December 13, 2017 FOMC meeting, but even that has a less than 50% probability as of today. I’ll update those probabilities using my proprietary models in the weeks and months ahead.
…Tight money, a weak economy, and a stock market bubble is a classic recipe for a stock market crash. It’s time for investors to go into a defensive crouch by selling stocks and reallocating assets to cash, Treasury notes, gold and gold mining shares.
PG View: Rickards sees potential for a “20% decline in stock prices at best, and possibly a 30% market crash before the end of the year.” It may be prudent to heed his advise and take profits in stocks and move some of that capital to the safety of gold.
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