Rates improved today as mortgage bonds and Treasuries get a boost from a very disappointing Non-Farm Payroll report released this morning. Bond prices moved up and yields (rates) have moved down as the bond market sees future economic activity contracting (so much for “green shoots” and the “Summer of Recovery”) and inflation pressures easing thus creating more demand for bonds. Our official U-3 unemployment rate is now 9.8%, up two tenths from 9.6% and much higher than the promised 8% unemployment rate promoted by POTUS (President of the United States) while he was selling his trillion dollar “stimulus plan” almost two years ago (what is now feeling like a lifetime ago). The real unemployment rate, calculated using the old fashioned method prior to the Clinton administration cooking the books in the early 90’s, also known as U-6 unemployment, is now approaching 17% and, according to John Williams at “Shadow Government Statistics”, a non-governmental think tank, the real unemployment rate is closer to 22%.
The markets were expecting a much larger jobs creation number based on earlier prognostications that served to pushed up equities, send bond prices down and yields up over the last 3 weeks. It should be noted that the same analysts that didn’t see the “greatest recession” looming in late 2007 are the same pundits that expected more job creation today (why do we still listen to these people). Given that the market was looking for 160k in added jobs and the economy only generated 39K, it is a bit surprising we are not seeing much of an equity market sell off at this point (hold onto your hats … that could be next). The markets are somehow still convinced that the promised recovery is underway despite a contracting jobs outlook, a housing market still declining and the sovereign debt bomb blowing up all over Europe. Adding fuel to the fire of increased economic uncertainty is the specter of allowing the “Bush Era” tax cuts to expire for upper income individuals and entrepreneurial companies. While it may feel good to “stick it to the rich”, it is the upper income demographic that actually employs most of us by investing their capital, taking the risks to actually create wealth and in that process create jobs (radical thinking I know). Without a structural shift away from consumption dependency and a radical change in tax policy that encourages capital in-flows and supports capital formation, it is hard to see how we can get out of this fix. Remember that consumer spending (70% of the economy) is the result of savings and investment and thus it is savings and investment that we as a nation must encourage or there really is no way out of a permanent economic decline. Given that more economic stimulus is politically impossible and won’t work anyway, the Fed gave us QE2, and in that spirit gulped up another $6.8 billion in Treasury debt this morning in a misguided effort to keep the recovery going and rates low. Let’s hope this distortion is successful because quantitative easing (QE2), money creation and currency devaluation is all that’s left for the Federal Reserve and our government. On tap for next week: more Treasury debt to be purchased by the Federal Reserve and the Irish budget vote. Stay tuned for more rate/price volatility people…
In the news today
- U.S. Adds Fewer Jobs Than Forecast, Unemployment up two tics to 9.8%
- ISM Index of Service Industries in U.S. Increased to 55
- U.S. October Factory Orders, Shipments and Inventories up
- Trichet Keeps Up EU Pressure as ECB Buys Bonds to Calm Investors
- Cross Section of Rich Invested With the Fed
Take Away: All things being equal, rates should ease as economic activity continues to stagnate. Remember, all things are never equal and un-anticipated “black swan” events could actually push rates up so lock in your profit as quickly as possible.
Reading Suggestion for Today: Intellectuals and Socialism by Friedrich A. Hayek
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