The September Non-Farm Payroll Report came in with a net increase of just
142k jobs. The unemployment rate held steady at 5.1% and the labor force participation
rate dropped to the October 1977 low of 62.4%. Average hourly earnings fell
0.04% and the workweek slipped to 34.5 hours. There were significant downward
revisions of 22k and 37k jobs for the July and August reports respectively.
Just as important as today's NFP report, but mostly overlooked, was
the Challenger's Job-Cut Report released on Thursday. It showed the September
layoff count jumped from 41,186 in August to 58,877. The total number of layoffs
year-to-date is 493,431, which is already higher than all of last year and
is on a trajectory to be the greatest number of layoffs since 2009.
The tenuous state of our economy has led to an unskilled and unproductive
labor force. According to the Bureau of Labor Statistics (BLS) an employed
person constitutes anyone who worked for pay during the survey week. Therefore,
if you provided one Uber ride around the block the BLS considers you employed
with the same economic relevance as a full-time brain surgeon. In fact, our
part-time low-paying job market is the reason productivity growth has averaged
a meager 0.45% annually during the past four years.
So Where Does This Lead the Fed?
The real issue is despite Yellen's recent nod to a slowing global economy,
the FOMC still remains obsessed with the relatively low unemployment rate.
This is because of the wrong-minded belief that too many workers will suddenly
hyper-inflate our deflating worldwide economy.
While Yellen and Company busily tinker with their Phillips Curve models--in
a fatuous attempt to determine how many Americans they should allow to find
work--they are missing the crumbling economic fundamentals all around them.
The flattening yield curve, plummeting commodity prices, and weakening U.S.
and international economic data; all illustrate that the asset bubbles created
by central banks have started to pop.
Despite today's disappointing jobs report, the Federal Reserve continues
threatening to commence a rate hiking cycle in the misguided fear of inflation
emanating from a meaningless U-3 unemployment rate. What Keynesian central
bankers fail to understand is Inflation only becomes manifest when the market
loses faith in a fiat currency's purchasing power, not from more people
becoming productive. Nevertheless, the Fed's models stipulate that a
low unemployment rate breeds intractable inflation and the liftoff from ZIRP
is set for the end of 2015. That is unless the U-3 unemployment rate turns
around and starts heading north.
However, this go around the Fed will be raising rates into a yield curve that
is already flat in historic terms and becoming narrower, and credit spreads
that are already blowing out. Ms. Yellen will be hiking rates into falling
long-term Treasury yields, falling Core PCE inflation data, slowing global
GDP growth, and tumbling equity and junk bond prices. The only good news here
is the Fed is moving towards a free-market interbank lending rate; and in the
long term this is great for markets and the economy. But in the short term
it will resume the cathartic deflation of asset prices and debt that was short
circuited back in 2008.
Over 100 of the S&P 1500 stocks have fallen more than 50% and 600 are
down more than 25% from the high. The S&P 500 dropped nearly 8% in Q3 and
is down two consecutive quarters. The Dow Jones Industrial finished down three
quarters in a row. Meanwhile, the manufacturing numbers in the US are in freefall
and the Atlanta Fed forecasts growth of just 1.8% during Q3. And the IMF is
set to lower its overall forecast of global growth again next week from its
already anemic 3.3%.
On top of the slowing global growth and hawkish-sounding Fed, we find stock
market valuations that are still the second highest in its history. For these
reasons I believe the S&P 500 is going to trade down to the low 1,600 area
in the next few months before possibly stabilizing. But exactly how low we
end up going at least partially depends on how long the Fed blusters about
normalizing interest rates. However, with the gravitational forces of deflation
getting stronger, the FOMC will not be able to get far off the zero-bound range.
Hence, the next big prediction of mine is that the Fed will soon change to
an easing monetary policy stance and cause weak-dollar investments to rebound,
as the USD falls back towards 80 on the DXY. Pento Portfolio Strategies
has held 40-50% cash since the end of 2014 in anticipation of this current
bear market and recommends holding only those investments that will profit
from a turn in Fed policy away from a hawkish position. While more ZIRP and
QE may not rescue the overall market or economy, it should at least supply
a bid for the beleaguered precious metals sector.
