Elazar Advisors is confused once again. We are at "full employment." That means everybody who is available to work, for all intents and purposes, is working. And you want more than that? But demographics is working against us, shrinking the labor force. Monetary policy can change demographic trends? We're stuck. Our only alternative is to short the S&P 500 (NYSEARCA:SPY).
Since we are about to prove jobs data are meaningless, we might as well prove to you Fed rate news and opinions are meaningless as well and throw the entire system on its head.
We're going to start with an amazing chart. (Elazar, it better be amazing if you're setting me up.)
This is the percent of the population in the employment numbers.
What jumps out at you about this chart?
Fewer and fewer people are in that unemployment number.
It is easier and easier to be at full employment, while at the same time, it is easier and easier to be slowing economically, as fewer and fewer people are working.
Interactive Economic Report - Press Here
So, we ask you a few questions:
Full employment is a strong economic sign or a weak economic sign?
A weak nonfarm payrolls number is a strong or weak economic sign?
A) Weak nonfarm payrolls means fewer people are employed.
B) Weak nonfarm payrolls says we are maxed to capacity because the participation rate is shrinking. There are no more people to work, and they keep declining.
We think "B," and we'll tell you why.
Participation Rate Matches the Demographic, Which has Been a Multi-decade Headwind
The chart above shows births each year in the US. Births peaked in 1957. We think 50-year-olds are the peak earners and spenders, and they still work. They did not retire.
In 2007, that group peaked, and since then, they've been decreasing as a percent of the population. They've been coming OUT of the work force.
The participation rate peaked in 1997, when you had record numbers of 60-year-olds beginning their ascent in the population. (You see the low in births in 1935-1937.)
We have been in a long period of demographic economic drag.
And you hope to get the jobs number higher? How? And that is good?
Jobs Becomes the Official Long-Term Elazar "Deck Chairs" Rating
Shuffling jobs data numbers are like shuffling deck chairs on one famous ship.
So all the weak jobs or strong jobs, in context, don't matter much in the long run. Why? Because the participation rate is going down because of demographics, so as much as you push and push, it's not going to budge a century-long people phenomenon, is it?
Uh oh, Elazar is about to go off / diatribe that jobs numbers don't mean anything: I don't care how many physicists, MDs, PHDs, brainiacs, Harvard, Astronauts, formulas, discussion, Wall Street Reports, Analysts, etc. etc....
Nothing is going to move the demographic trends. If so, full employment is going to remain as people come out of the workforce, and that is not a good economic outcome. It will slow the economy despite appearing to be a celebrated number. (Yeah, we reached full employment.)
(Your turn. Look at the participation chart and you tell me, what can the Fed do about participation rate? Nothing, right? So why are jobs so important?)
Uh oh, Elazar is about to go off on the entire concept that Fed rates are also not important:
And another thing. (Uh oh)
Everybody is so focused on rates. Do you know how many times they changed their mind this year alone. At least 10 times.
That's not it.
The Federal Reserve balances is the monetary tool that will move markets that the Fed is going to change before anything. They said it.
Here's what the Fed said: "In that document (principles and plans for normalization), the Committee indicated that during normalization it intends to continue to set a range for the federal funds rate and to use its policy tools to keep the funds rate in the target range."
"Normalization" means lowering the Fed reserve balances that they took up post 2008 to save the planet. They have to bring it down from ABnormal.
They are back and forth on rates, but as they say in the quote above, they will lower these reserves (normalize) before rates go up.
They said thereafter, "When economic conditions and the economic outlook warrant a less accommodative monetary policy, the Committee will raise its target range for the federal funds rate."
So, before "the outlook warrant[s] a less accommodative... policy," they will normalize.
That is in the present. They will lower reserves before they even think about raising rates. That drop in reserve balances will pull liquidity from the system and hit markets.
Fed Minutes Show We Are in the Period to Lower Reserves
In the minutes on Wednesday, the Fed said, "Most participants expected to see continued progress toward the Committee's 2 percent inflation objective."
Fed Governor Jerome Powell said we will hit the 2% in the next twelve months. We are there.
Quick review. Are we at the full employment mandate? Yes.
Are we approaching the 2% inflation mandate? Yes.
So we're in the period the Fed deemed they can lower reserves as a part of their normalization? Huh? Huh? Yes.
Question? Which is important, rates or $4 trillion in reserves due to come down taken from banks?
They both are! Correct.
Question? Which will happen first?
So, which is more important, rates or reserves?
We are way beyond commonsense thinking now. The entire world is fixated on what the Fed is saying about rates and jobs. But what they do with reserves, that's the real issue.
We think they are coming down regardless of whether rates go up or not. Those reserves ticked down last week.
The FOMC Minutes Show the Fed is Miffed Short Term
We read through the minutes. We read through all the back and forth "many said," "most said," "some said."
Their opinions makes nice headlines, but that's what they said.
It's like a company that constantly misses Street numbers. This economy is missing Fed numbers, and they don't understand why.
We think we know. Demographics and the participation rate.
But in the Long Term, We Think the Fed Nailed It
(Elazar, you just gave the Fed praise... was that a typo?)
To that, the Fed did say this in those minutes, "While recognizing that the longer-run neutral rate was highly uncertain, many judged that it would likely remain low relative to historical standards, held down by factors such as slow productivity growth and demographic trends."
Let's Elazarize that: "Demographic trends will drive productivity trends and the world will be in constantly slowing or decline until Elazar's birth chart bottoms first in 2018, then in 2023. Until then we are going to be looking for many indicators to justify our "jobs mandate" despite that major 100 year demographic trend that we really can't do anything about no matter how many QEs we throw at it."
Conclusion: We're about to prove that ALL of Wall Street is looking at the wrong things!!
Rates don't matter.
Fed rates are not the main thing, Federal reserves are. As we've shown, they almost perfectly track market returns. We will add below this report the change in Fed reserve balances versus market moves so you can see for yourself.
Jobs numbers don't matter.
If they are weak, it's good because we are at full employment already? No, it's weak because participation is low? No, that's the same thing? It's up is good because the economy is getting stronger or it's further pushing an already tight labor market tighter to jump inflation?
A weak or strong jobs number is not clear what it actually means. The participation rate is what the Fed can't do anything about.
They can't call it a "participation mandate," because they'd never look victorious. They have to call it a "jobs mandate." (Woohoo, we did it!).
We rate the S&P 500 a short because the Fed likely drops their reserves, which hits markets. The economy will likely continue to shrink because of the participation rate led by demographics, which no amount of QE can do anything about.
Please be safe out there. (Phew, that was a workout, hope you enjoyed!)
As promised. Please see how changes in Fed reserves tracked the stock market. Rates are a magician's hand, but this is the rabbit.
If you want Elazar's analysis on Seeking Alpha, scroll to the top of the article and hit "Follow." Elazar also writes real-time pieces as news is reported. If you want to be among the first updated check the box for "Real-time alerts on this author" under "Follow."
Please let us know what you think in comments. We enjoy and learn so much from everyone who participates.
Disclaimer: All investments have many risks and can lose principal in the short and long term. This article is for information purposes only. By reading this you agree, understand and accept that you take upon yourself all responsibility for all of your investment decisions and to do your own work and hold Chaim Siegel, Elazar Advisors, LLC, bestideas, their related parties, and its authors harmless. #in, $spy, $qqq, $iwm, $vxx, $ycs, $fxe, $EUO, $YCS, $uup, #elazaradvisorsllc, ^GSPC, INDEXSP:.INX, QQQ, IWM, DIA, VXX.
Disclosure: I/we have no positions in any stocks mentioned, but may initiate a short position in ES FUTURES over the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.