Jobs of Stand-up Comedians Swallowed by Polar Vortex?
It seems almost certain that once it has been revised three or four times, last week's payrolls report will begin to look less bad than it looked upon its release. As we have previously argued, this report is pretty much useless (especially on the day it's released). It tells us basically absolutely nothing about the economy, least of all about likely future economic developments. Even if the report were perfectly accurate, it would still depict a lagging indicator, and as such has the usefulness of white noise.
Not surprisingly, it is an indicator the Federal Reserve pays a lot of attention to. Of course, since central planning doesn't work anyway, it probably makes no difference what data its members ponder. Neither their forecasting prowess nor the quality of their meddling could possibly be improved much. Bureaucracies are not comprised of businessmen after all.
Anyway, we found it amusing that a lot of ink was spilled on explaining away the big miss of consensus expectations. To this we would note that said consensus is apparently arrived at by economists plotting a bar chart of the recent trend and then applying a ruler to it. In other words, economists are not really needed to arrive at a consensus expectation: a cheap printer and a ruler will do just as well. Total investment, approximately $30. It costs a lot more to train a professional economist. Just saying. We may have discovered a case of malinvestment here (in fact, we are quite sure that's what it is, and it is probably true for a lot of education these days).
The main explanation was that we were served with a kind of retrospective bad weather report: expectations for payrolls missed so badly because it got very cold (due to global warming). To some extent it is probably true (examples of this weather-related theory can be seen here, here, here and here). One problem with that widely accepted explanation is that it really only explains the decline in construction employment. Why was jobs growth in the health care, accountant and performing arts businesses crushed? Is bad weather the bane of bean counters and stand-up comedians as well?
It should also be of mild concern to observers of economic matters that virtually all mainstream economists agree that this jobs report was not indicative of anything untoward happening. Arch-Keynesian Mark Zandi advises "not to pay any attention to the jobs report". We do agree with him that the numbers were out of line with other data describing economic activity and it is of course true that the numbers will eventually be revised. What we think he and many others are wrong about is their belief that measures of "economic activity" contain any valuable information at all, or that their recent improvement says anything about what is actually happening on a structural level.
It sounds lately as though many economists envisage a "return to business as usual" after a near doubling of the money supply in a little over five years and a more than doubling of the federal debt over the same span. That strikes us as wishful thinking. Note that even the superficially healthy level of corporate profits cannot really be taken as meaningful. Many companies have likely taken a number of decisions shortly after the beginning of the bust in 2008 that improved their fundamental situation. However, since then, the above mentioned combination of monetary pumping and deficit spending in conjunction with administered interest rates stuck at zero are certain to have falsified economic calculation. To what extent, we cannot say, we can only say that it would be a logical outcome, just as it was logical to come to this assessment during the previous boom, for similar reasons. A falsification of economic calculation among other things leads to people confusing capital consumption with profits. Having said all that, economic data in their totality still indicate that the onset of the next officially recognized recession is probably not imminent. One caveat to this is that the beginning of downturns is often swift, which is one of the reasons why the turning points are usually missed. In any case, employment has a history of lagging both downturns and recoveries, so in that sense the weak payrolls report is probably indeed an outlier and doesn't mean much.
A Few Markets Are Paying Attention
What the jobs report is always useful for is to serve as an explanation of financial market moves. This is mainly due to the conviction that the central bank pays attention to the employment data, and hence strong reports are associated with a potentially tighter monetary policy stance and vice versa. The gold market and the government debt market both had a fairly strong short term reaction to the report. Gold resumed the recovery that has essentially been in train since the beginning of the year, while yields on t-notes and bonds fell sharply.
Spot gold achieved its highest close since early December on Friday. A very short term downtrend line was already overcome in early January, but significant lateral resistance awaits.
Of course we don't think it makes much sense to buy gold because of one weak payrolls report. It makes somewhat more sense to buy it for different reasons (both of a technical and fundamental nature), while remaining aware of the fact that it may not yet have seen its lows. However, given the fact that there is a near universal bearish consensus among those who never saw the bull market coming, one can at least be reasonably sure that if the lows are not in yet, they are probably not too far away. Also, there has recently been a decent build-up in the gross speculative short position in gold futures, which makes the market vulnerable to bouts of short covering when unexpected data are received.
We found the move in t-note yields quite interesting from a technical perspective, as various momentum indicators have recently diverged strongly from yields:
Price/momentum divergences in the t-note yield prior to Friday's break.
This reminds us a bit of the old adage that markets often move before the fundamentals supporting the move become glaringly obvious. T-note yields likewise have little business declining just because a payrolls report likely to prove to be an outlier is released. However, technical conditions in both gold and treasuries suggest that a bigger move may be in the offing. If so, then this headline posted by Bloomberg on Monday morning is somewhat incongruous: “Asian Stocks Rise as U.S. Payrolls Ease Stimulus Concerns”. Of course we agree in principle that various stock market bubbles are supported by monetary pumping, and it is therefore an important variable. What makes no sense about such headlines is that the same news outlets continually remind us that "gold is falling on tapering concerns". If gold and stocks are both moved by these concerns, then why have these markets diverged so much in 2013? Obviously stocks are at the very least also driven by the idea that 'things are getting back to normal' (in the sense of a situation that resembles the pre-crisis era rather than the post-crisis one).
The upshot is that over the medium term, these markets are likely to continue to diverge, and we conclude therefore that if gold and treasuries are indeed beginning to rally, it will foreshadow stocks going the other way. And this is why the above mentioned technical divergences visible in the t-note yield chart are of interest.
Charts by: BarCharts, StockCharts