Rally Is Not Structurally Based

Includes: C, CAT, DE, DIA, JPM, MS, QQQ, SPY
by: Bernard Thomas

Yesterday’s rally in the equity markets and selloff in the fixed income markets were impressive. The DJIA was up more than 2.00% and the S&P 500 was up nearly 3.00%. This was due to stronger-than-expected economic data from China and Australia and better-than-expected manufacturing data via the ISM report. The markets paid little attention to the ADP Payrolls report which indicated a contraction of private sector jobs to the tune of -10,000. What many pundits and investors seemingly fail to grasp is that it comes down to domestic jobs. One CNBC pundit proclaimed this morning that due to profits, corporations have the wherewithal to hire. The wherewithal maybe, but there is little desire and even less need to add workers.

Some have pointed to the renewed strength in the manufacturing sector. Manufacturing makes up less than 10% of the U.S. economy. Even there most blue collar jobs have either been automated or sent overseas. For example: Caterpillar’s CEO said the company could add up to 9,000 jobs in the coming month… worldwide. Chances are that most actual manufacturing jobs will be created close to end users where labor is less expensive and logistics make local production more cost-effective.

Meanwhile politicians debate how much more temporary stimulus may be needed to re-spark the economy. Auto sales came in much softer than a year ago during the “cash for clunkers program.” There is a growing contingent of government officials who would like to implement more temporary incentives to spend and borrow. To think that we the people cannot see temporary stimuli for what they are is insulting. The American people are being treated like medieval peasants who can be placated by throwing us a few baubles or treats.

The American people deserve more credit than that. We know that the economy is going through a structural change, not a cyclical correction (sorry Ms. Romer). We want to see changes to policies which make it easier and more advantageous to start or expand businesses. That is how jobs will be created. That is how the economy will recover. Temporary credits and rebates will yield temporary benefits.

It appears that the political and intellectual elite believe they are living in serfdom. The American people cannot be soothed to behave like trained lackeys to spend and borrow (irresponsibly if necessary) to drive the economy forward. Growth will be slow and the recovery shallow until consumer deleveraging is finished and the glut of homes on the market is absorbed by a growing population and no about of optimistic rhetoric, cash for clunkers or other government programs are going to change that.

Bring on Nonfarm Payrolls.

Disclosure: No positions