Following today’s Labor Department release of unemployment data, Wall Street
bulls, much like for Godot, will have to wait a little longer for actual evidence
of the highly anticipated and widely forecasted economic recovery. The naked
truth is that the economy shed another 30,000 jobs in June following a revised
70,000 losses in May, four times greater than what had been originally reported
and trumpeted by the bulls as evidence that labor market had turned positive.
The beleaguered manufacturing sector lost another 56,000 jobs (so much for
the “benefits” of a weak dollar,) average hourly earnings rose a
meager.2 percent, and the “official” (i.e. still understated) unemployment
rate increased to 6.4%.
Yet despite this abrupt collision with reality, stock market bulls once again
ignored the data and bought stocks anyway. Convinced that all of the bad economic
numbers are backward looking, the bulls maintain that the best indicator is
the market itself, which is a leading indicator, and its recent strength is
anticipating future growth. It seems that for the bulls, their attitude with
respect to the market and the strong recovery is “if we buy it, it will
come.” It seems to me that the recent rise in the stock market is better
viewed as a contrary indicator, reflective of too much investor optimism for
a rebound in earnings and the economy despite overwhelming evidence to the
Other negative indicators ignored by the bulls include the sharp increase
in long term interest rates, with 10 year treasury yields rising from just
over 3% to over 3.6% in just three weeks, and oil prices holding above $30
dollars per barrel. But what is potentially the most problematic news of the
week happened in Japan, as JGB prices plunged, sending interest rates to their
highest level of the year, while the Nikkei continued its stellar advance,
rising over 10% in less than a month.
If the 13 year bear market in Japanese stocks is finally coming to an end
(which is far more likely than an end to the 3 year old bear market in U.S.
stocks), capital flows out of U.S. dollar assets will intensify, as Japanese
savers, large holders of U.S, debt, repatriate flight capital to participate
in the new bull market. Such a shift could not be occurring at a worse time
for the U.S. With an enormous current account deficit to finance, and with
the federal and state governments attempting to finance record budget deficits
in an otherwise overly indebted, savings short domestic economy, the U.S. desperately
needs access to all the foreign capital it can get.
In fact, Global investors who are substantially over-exposed to the U.S. and
under-invested in Japan, may rethink their allocations. For the U.S., the result
of such flows would be much higher interest rates, consumer prices, and unemployment.,
sharply lower stock and real estate prices, and a severe recession. Unless,
of course, as I have been forecasting, the Fed attempts to further monetize
our way out of this mess, which would alternatively result in an even worse
scenario unfolding, hyper-inflation.