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Jobs Debate Hits Boiling Point Ahead of Fed Meeting

Friday, September 04, 2015
Money and Markets
You can also access this issue on our website.
Jobs Debate Hits Boiling Point Ahead of Fed Meeting This Month
Market Roundup
Dow -272.38 to 16,102.38
S&P -29.91 to 1,921.2
NASDAQ -49.58 to 4,683.92
10-YR Yield -0.04 2.128%
Gold -$3 to $1,121.50
Oil -$0.70 to $46.05

By Mike Larson

When it comes to the debate about America’s economy and Federal Reserve policy, it’s all about jobs, jobs, jobs. And this morning’s Labor Department report had a little bit for everyone.

On the one hand, it showed the U.S. added only 173,000 jobs in August. That missed the average Bloomberg estimate of 217,000. Manufacturing and mining were two notable weak spots, with factory payrolls alone falling by 17,000 – the most since July 2013.

But the readings for June and July were revised up by a combined 44,000 jobs. Domestically focused industries like health care (+41,000), financial activities (+19,000) and food service (+26,000) all showed decent gains.

Plus, the unemployment rate sank to 5.1% from 5.2%. That was the lowest since April 2008. Average hourly earnings also rose a better-than-expected 0.3%.

What are the implications of these figures? That’s where things get interesting.

The jobs numbers could be the go-ahead sign for the Fed to raise rates.

I believe these numbers look strong enough (on the surface) to prompt the Fed to hike rates in two weeks. Policymakers have been putting it off forever – unwisely in my opinion, as they should’ve raised earlier this year. They have no excuses anymore, especially because both wage growth and unemployment appear to have met their pre-conditions for a hike.

But ironically enough, the Fed may end up tightening right into the start of an economic downturn. Jobs figures are a lagging indicator, for one thing, and other, more forward-looking indicators have been weakening.

At the same time, the global economy is in lousy shape and getting worse by the day. The breakdowns in several financial markets (emerging markets, high-risk bonds, carry trades, etc.) are pointing toward a much rockier global environment. Even the International Monetary Fund (IMF) warned this week that economic “risks are tilted to the downside, and a simultaneous realization of some of these risks would imply a much weaker outlook.”

Those are all reasons to be concerned about where markets are headed next. So is the fact that we’re getting more evidence all the time that central bankers are losing control of investor confidence and capital markets.

“Those are all reasons to be concerned about where markets are headed next.”

Just look at how European Central Bank head Mario Draghi was only able to goose asset prices artificially for a few hours yesterday … before they gave up the ghost. That’s very similar to the failed rally we got a few weeks ago from the release of dovish Fed meeting minutes, and the failed rallies we’ve had all summer in China, despite aggressive easing from the central bank there.

Bottom line: I’ve been urging you all summer to get more defensive, and to pare down your holdings of stocks, junk bonds and other higher-risk investments. I recommended a lot of that selling BEFORE stocks started to crack sharply in August, and nothing I’ve seen since then has me encouraged about an imminent turnaround. So make sure you take those defensive steps.

Or if you’re more aggressive, consider using things like inverse ETFs and put options to rack up potential profits from slumping markets.

(Editor’s note: That’s what Mike has been doing for several weeks now in his Interest Rate Speculator service. Here’s where you can find more information.)

Now it’s your turn: What do you think of the latest labor market data? Is the jobs market improving, or not, based on your personal experience? Do you think the problems in sectors like mining and manufacturing foretell greater trouble for the economy? Or can the service sector power us ahead?

Finally, what does the latest batch of data mean for Fed policy and capital markets? Here’s where you can share your thoughts online at the Money and Markets website.

Our Readers Speak

Heading into the three-day weekend, I’m glad you took some time to weigh in on Fed policy, stock markets and the latest political wrangling over the Iranian nuclear deal.

Reader tommr said the Fed is on the wrong track with policy, and has been for some time. His take: “How is an overwhelming policy of zero interest rates and QE supposed to boost prices? How can financial repression cause the majority of people to consume? They can’t. If consumers have no money because of these policies, they cannot spend!”

Reader Wayne H. also took issue with the Fed’s policy of artificially supporting asset prices. His comments: “It’s obvious, and has been for a while, that world banks have lost control. They’ve been propping up markets, making leaders look good, and giving the populace a false sense of security for seven years.

“The Fed has become a political entity, and forsaken their mission. But the gig is up, the piper will be paid, and guess who gets the bill? Inflation, unemployment, and poverty will be our stead for many years to come.”

But Reader Roy T. said you shouldn’t get too bearish when the Fed and other central banks are still in play. He added: “‘Don’t fight the Fed’ has worked in every crisis in the history of the stock market. Like it or not, they have the power to help the market along. The market will do what it always does — get into extreme and bounce back to equilibrium.

“Businesses will continue to create jobs, provide services and products, and make decent profits. People will eat, sleep, and multiply. Nothing has changed. Buy good companies now. It is the bottom or near the bottom for most of them.”

Meanwhile, Reader Jim offered this take on who’s at fault for instability and terrorism in the Middle East: “Everybody likes to accuse Iran of bad behavior, but the real exporter of Islamic extremism is now and always has been the Saudi royal family. It would be a perfect example of The Law of Unintended Consequences if that extremism returned to destroy them.”

And Reader Victor said: “The Iranian leadership is crazy, but there are still millions of sane people there who need to live their lives. It is impossible to keep Iran from developing nukes. Everyone knows that the more you try to deny someone something, the harder they try to get it — especially when national pride is involved.

“The focus of the negotiations should be to use the money they receive for common sense business purposes. Make it more attractive for them to buy Boeings than arms and to stay within their borders. This is tremendously difficult but has to be done.”

Thanks for sharing. It appears the Iranian deal is heading for final approval, regardless of our opinions on it and barring any last-minute surprises. So I’m sure American companies will try to muscle into the country and make whatever money they can.

When it comes to the Fed and its counterparts overseas, I believe we reached an inflection point a few months ago – and we are in a totally different paradigm now. More and more QE-style announcements – like yesterday’s Mario Draghi gambit – are failing to spur lasting rallies.

Stated another way, they aren’t goosing asset prices for several months, like in the old days. They’re barely goosing them for more than a few hours or even minutes. So please don’t get stuck using a strategy that worked for the last six-and-a-half years, but that likely won’t in the next couple of them!

Didn’t get a chance to weigh in yet? Then you’re in luck. You have a three-day weekend that you can use to fire up the keyboard, and post online at the Money and Markets website.

Other Developments of the Day

BulletChina tried to put the currency genie back in the bottle, with People’s Bank of China deputy governor Yi Gang stating that the yuan will “be more or less stable around the equilibrium level” and that “the Chinese economy’s fundamentals are fine.”

The comments at a G20 summit in Ankara, Turkey are meant to calm the markets. But oftentimes when a central banker or politician comes out and tells you not to panic, the best choice is to head for the exits!

BulletEurope’s migrant crisis is getting worse by the day, with thousands of Middle Eastern and African refugees trying to get to the Continent by any means possible. But more rickety, overloaded boats are sinking, killing hundreds in the process. Meanwhile, migrants taking an overland route are getting held up in Eastern European nations like Hungary, which is taking a harder line on immigration than core European nations Germany and France.

BulletPut Richmond Fed President Jeffrey Lacker firmly in the “higher interest rates” camp. He said in a Virginia speech today that the Fed needs to stop focusing so much on every financial market gyration, and focus on the real economy. In his view, it has improved enough that it’s time to move off of zero percent “sooner rather than later.”

BulletPatriots quarterback Tom Brady won his court battle against the NFL yesterday, with judge Richard M. Berman vacating the QB’s four-game suspension. It’s just the latest defeat for NFL Commissioner Roger Goodell, calling into question whether the football league needs to revise its player discipline procedures. It should be noted the NFL plans to appeal the ruling, but won’t try to keep Brady off the field while that process plays out.

Do you think China’s “Remain calm” comments are a reason for worry? What about Fed policy … is Lacker on target? And is there anything Europe can do to help displaced migrants from the Middle East and Africa — without overwhelming its domestic economy and social support systems? Share your thoughts over at the website if you get a minute.

Until next time,

Mike Larson

Mike Larson
Mike Larson graduated from Boston University with a B.S. degree in Journalism and a B.A. degree in English in 1998, and went to work for There, he learned the mortgage and interest rates markets inside and out. Mike then joined Weiss Research in 2001. He is the editor of Safe Money Report. He is often quoted by the Washington Post, Reuters, Dow Jones Newswires, Orlando Sentinel, Palm Beach Post and Sun-Sentinel, and he has appeared on CNN, Bloomberg Television and CNBC.
The investment strategy and opinions expressed in this article are those of the author's and do not necessarily reflect those of any other editor at Weiss Research or the company as a whole.

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