With job loses far worse that the guesstimates and new orders to US factories the worst in five months, this seemed to confirm that any economic recovery is weak. Equities immediately continued yesterday's plunge, and the dollar first gained on the euro, and then turned weaker as the stocks found a bottom and then began to rally. Currently the stock market is trying to shrug off the bad news and work into positive territory.
The reported unemployment rate went to 9.8%, although when under employment, and those who have stopped looking for work are added, the real unemployment rate is estimated to be 17%. In a memo from Goldman Sachs, they estimate that the economy need to create 250,000 jobs per month to get the unemployment rate back to 5%. The best year for job growth was 2006, with 232,000 monthly job growth, while the average job growth from 1989 until now was an average of only 91,000 per month. It looks like our unemployment is going to be with us, and likewise low interest rates for quite a while.
The Goldman memo also discussed the possibility of a double dip recession and had these comments:
"With that, what are the chances of seeing a double dip recession at some point along the way? Back in 1937 (when the economy was in the process of recovery from the great Depression), Congress and President Roosevelt decided the thing to do was to balance the budget, which had gotten terribly out of whack as the government ran large deficits and pumped money into the system just as it’s doing now. So, they raised taxes and created another recession which basically lasted until war production ramped up in the early 1940’s.
Now, the Obama administration is intent on making the economically suicidal move to raise the top tax rate by 10% as it lets the Bush era tax cuts expire. Popular myth is that those who pay the highest tax rate are Wall Street fat cats but the reality is that 75% of them are the small business owners, the ones who are responsible for the large majority of new jobs that are actually created in the country. Taxing them will lead to fewer jobs being created (as they will have less to invest) and of course, less consumer spending."
In previous periods of acute economic uncertainty, investment in US Treasuries was the ultimate safe haven for both central bankers and wealthy individuals. If this trend continues, then the dollar will find support in difficult times, but what if investors are wary the 13% dollar devaluation since March and fear the devaluation will only continue? Will theses nervous investors look elsewhere, and if so where?
These are some of the issues confronting the market as it flies around in a broad range.
The reversal day from the 23rd of September remains in place. We had taken a long, hopeful that the high would be retested, but were stopped out in this morning's volatility. With the unsettled markets, the G7 meeting in Istanbul and discussions about a response to Iran, it is best to stay on the side lines and watch developing events.