Good jobs news will be a painful moment of truth
By ANATOLE KALETSKY
ACCORDING to George Soros, the legendary currency speculator, there is a “moment of truth” just before the climax of every financial bubble when investors realise that the story driving the market upwards is no longer believable.
[Every idiot likes to quote Soros as if if make the nonsense they are about to spew more believable - mish]
Although the markets usually continue to follow the bullish trend for a while, even after the “moment of truth”, they do it with increasing volatility and without conviction. This week could see such a moment of truth in many, if not all, of the world’s financial markets.
In the past 12 months the two most important markets in the world — the euro-dollar currency trade and the US government bond market — have experienced a bubble even larger and more allembracing than the 1999 internet boom. This bubble has been driven by two convictions, frequently discussed (and disparaged) on this page.
First, that US interest rates will remain near their present record lows for the foreseeable future, because the American economy is failing to produce enough jobs to satisfy the Bush Administration and the Federal Reserve Board. Secondly, that the European economy is now securely on the path of sustainable recovery and will therefore need no extra support from interest rate reductions by the European Central Bank. In the days ahead, both of these propositions could well be challenged.
Last week Jean-Claude Trichet, the President of the European Central Bank, delivered his strongest ever hint of an imminent rate cut, in a German newspaper interview. M Trichet’s comment was significant because it came less than a week before Thursday’s policy-making meeting of the ECB Council. It suggested that the Madrid bombing, combined with the popular revolt represented by the German and French regional elections, may finally force Europe’s policymakers to face reality and accept that the European economic recovery they were all predicting is turning out to be yet another mirage.
Even more importantly, M Trichet’s interview, backed up by comments from Otmar Issing, the ECB’s influential chief economist, seems to signal a change in European monetary philosophy. For the first time since the euro’s creation, these top ECB officials seemed to be admitting what has long been blindingly obvious to their counterparts in Britain, America and Japan — that interest rates must be used not only to control inflation but to promote economic growth.
[OK what do you do when you are in a recession at 0% - mish]
If the ECB follows through on this hint of sanity (always a big “if” with the ECB), this week’s council meeting could mark the beginning of Europe’s long convalescence after a decade of policy-induced economic stagnation. But the good news for European businesses and workers could prove very painful for the many bankers and investors who have been piling into the over-valued euro during the past two years.
The rising value of the euro has, in fact, been a far bigger problem for the European economy than the level of interest rates and it would be mainly by pushing down the value of the euro that an ECB easing could achieve its beneficial result. The trouble is that a sharply weaker euro would do serious damage to the multibillion-dollar bets taken out against the greenback by speculators around the world. That, in itself, would be no cause for regret, but the liquidation of speculative euro investments could coincide with an even bigger disruption to global financial markets, in view of this week’s second and even more important economic event. This will be Friday’s publication of US employment figures for March.
The US employment figures have acquired a totemic status for the global economy. This is because rapid jobs growth has been identified by Alan Greenspan as the final piece of evidence that the Fed needs to see before it can pronounce the US economy to be fully cured after its recent brush with recession and deflation.
Once the monthly employment figures are unmistakably rising, Mr Greenspan will have no further excuse to keep US interest rates at 1 per cent. That, in turn, could mean that a clear improvement in US employment, while it will be greeted with relief by American businessmen and workers, could be very bad news for investors around the world.
To judge by almost every available economic indicator, the US economy is booming. GDP is now growing at its fastest rate since 1983, with consumption, housing and car sales all hitting records. Employment, identified as the mysterious soft spot in this expansion, is also doing well.
[Employment is doing well??! WTF? What planet is this guy on? - mish]
The unemployment rate has been falling steadily for eight months and is much lower than it was in any previous economic recovery and is 1.5 percentage points below the corresponding point of the 1991-93 cycle (note the different, but matching, scales on the left and right-hand side of the top chart).
[Anyone using unemployment rates without looking at participation rates is an idiot - mish]
The number of Americans with jobs has been rising steadily for two years at exactly the same rate as it did in the last recovery (see middle chart). Weekly claims for unemployment benefits (see bottom chart), the most accurate and timely measure of the state of the US labour market, have also followed the same pattern as they did in 1991-93.
But amid all these indicators of robust growth, there has been one exception: the monthly payroll figures that measure job creation by surveying employers rather than the workers. These payroll figures started growing only last summer and have been rising by an anaemic average of just 60,000 per month. This contrasts with monthly growth of about 200,000 during normal steady economic growth. There are numerous theories about why payroll growth has failed to reflect the general improvement in the US labour market in the present cycle — most plausible is an upsurge in self-employment.
[This writer is as stupid as they come - Mish]
Whatever the explanation, the divergence between the figures will sooner or later disappear. At some point US employment will start to grow by 200,000 monthly.
[At some point yes. - Will it be 5 yars from now? Will it last more than 1-2 months? - Mish]
The last piece of the US recovery jigsaw will be in place and the fantasies of perpetually low interest rates that today sustain the structure of global asset prices will vanish overnight.
Once US employment growth accelerates to about 200,000, which is the normal rate for periods of economic expansion, the Fed will be forced to start raising interest rates — and it will have to move fast. In order to bring monetary policy back to neutral from its present ultra-stimulative setting, the short-term rate, which is 1 per cent, will have to rise towards the UK level, between 4 and 5 per cent. If the Fed refuses to move back to a neutral monetary policy, the fears of inflation in America will quickly grow.
Either way, today’s level of long-term US interest rates — just 3.8 per cent on ten-year bonds — will prove completely unsustainable once US employment figures rise. Assuming that US bond yields rise to around 4.8 per cent (taking today’s level in Britain as a reasonable benchmark), share prices on Wall Street will also be in for a very difficult period. The confirmation of US economic recovery, far from vindicating the present high equity valuations on Wall Street, could signal the end of the global stock markets’ bull run.
A similar warning could, of course, have been sounded on the first Friday of every month (and usually was). But that is exactly my point: investors are now so accustomed to “disappointing” monthly payroll figures that even a number in line with market expectations will come as a shock. Yet economic developments in America in the past few weeks suggest that the market consensus — which currently suggests a 100,000 payroll number — may well be too cautious.
Ian Shepherdson, chief US economist of High Frequency Economics, notes that the end of a supermarket strike in California should add 70,000 to the March payrolls, according to the Bureau of Labor Statistics (BLS).
[This horeshit is what really reeks in this article. We are going to count 70,000 returning strikers as "new jobs"? WTF? I would not put it past this govt to do so, but is this sustainable? Is it right? - what kind of nonsense is this anyway? Is the bond market supposed to act as if 70,000 jobs rae "created". Personally I d oubt it will if this reason is given - mish]
And the end of February’s harsh winter weather could easily create another 50,000 jobs.
[Ah yes, the return of good weather. Poor weather has been happering the US for going on 3 years now! when will this bad weather ever end? When it does we will no doubt see 500,000 jobs from it - mish]
Adding these figures to an underlying monthly gain of 75,000 leads Mr Shepherdson to predict that Friday’s figures will show 200,000 new payroll jobs.
[Lets see we add 70,000 jobs that were not created, assume we add 50,000 jobs to better weather and ta da..... we have 200,000 NEW jobs - yeah right - mish]
If this prediction is anywhere near right, the markets are in for a major shock since there has not been a single month of payroll growth of over 100,000 since February 2001.
[The only shocking thing is that no one figured out how to lie this well before - mish]
In truth, no economist can accurately forecast monthly blips in employment, since these are essentially random (according to the BLS any movement in payroll employment smaller than 108,000 should be regarded as statistical noise). What can be said with certainty is that monthly employment figures will eventually confirm evidence of rapid growth now apparent in all the US statistics.
[That can be said FOR CERTAIN? WTF? - mish]
At that point, politicians and businessmen may celebrate, but financial markets will face their moment of truth.
timesonline.co.uk
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This is about the stupidest article I have seen on this subject, but I do thank the writer for pointing out how 70,000 jobs that existed before will be "created" this month. It seems the solution to job creation is to encourage more strikes.
Mish |
