Notes From Underground

Tomorrow comes the most important data point for the markets as the BLS releases the monthly unemployment report. Yesterday, the market was abused by the ADP employment info, which was much weaker than expected and lead to a selloff in all asset classes. A quick gaze upon the closing CQG quote board lent credence to the line from Apocalypse Now: “I love the smell of deflation in the morning.” Of course, I jest as I substitute DEFLATION for NAPALM but the use of either causes major destruction. The ADP data was able to cause so much angst because it followed very weak housing and manufacturing numbers released during the previous week. The CONSENSUS for Friday’s UNEMPLOYMENT REPORT is for: NONFARM PAYROLLS of 155,000; the jobless rate to hold at 9.0%; and average hourly earnings to show a gain of 0.2%.

Again, the emphasis will be on private sector jobs created as it seems that state and local governments will continue to be a drag on job growth. Also important will be manufacturing jobs to see if the weakened DOLLAR is beginning to have an impact of U.S. exports and whether American firms are moving some production back to the U.S. because of the higher costs of imports. If the NFP comes in at CONSENSUS I think the EQUITIES will rally because of the damage done by the ADP report Wednesday. Even a number of 100,000 with a steady unemployment rate should see the S&Ps try to rally as tepid growth will keep the FED in the easing game.

The recent economic weakness is providing Chairman Bernanke with the cover to maintain an “EXTENDED PERIOD” for the FED and to keep the inflation hawks detaloned. Mr. Bernanke is what is known as a 1937er in that he marks that year as the FED and U.S. Treasury combining to make a grave error by reining in fiscal spending while removing liquidity from the financial system. Those twin errors have been attributed as bringing about a severe recession that prolonged the pains of the “GREAT DEPRESSION.”

In a speech at Milton Friedman’s 90th birthday celebration, Bernanke told the father of monetarism: “YOU’RE RIGHT. WE [THE FED], DID IT. WE’RE VERY SORRY. BUT, THANKS TO YOU, WE WON’T DO IT AGAIN.” Friedman and Schwartz in their landmark work, “THE MONETARY HISTORY OF THE U.S.,” came to place a great deal of blame on the economic actions of 1937 as prolonging the severity of the depression. Make no mistake about it, BEN BERNANKE is a ’37er. The significance of this is that if the CONGRESS were to really enact some fiscal austerity while the economy is showing signs of weakening, Chairman Bernanke will do everything in the FED‘s power to prevent a repeat of that dreadful year in U.S. monetary history.

The markets may sense DEFLATION as the economy slows but the FED will pull out all stops to prevent a renewed downturn. The BONDS and NOTES have been warning of a second leg down as they have defied the opinions of some of the best fundamental analysts in the world, which is why I always advise using technicals as the tool to tell traders when they are right. Readers of NOTES FROM UNDERGROUND have not been short the U.S. DEBT markets even though I have stated that the 2-year TREASURY is the most overvalued asset in the universe. In the time period of a TREASURY RALLY, the 2/10 curve has flattened by 25 basis points as the financial markets were sensing the renewed economic weakness. If job growth begins to weaken badly, then the pressure of a very fragile HOUSING MARKET will become even more troublesome and push the FED to even more aggressive action.

It is Bernanke’s promise to Friedman that keeps the DOLLAR weak and the support for the GOLD. It seems that we are coming to some type of change in the weak DOLLAR risk-off algo. It is Thursday night and the EURO is up on the week while the U.S. EQUITIES are down. If it continues, the markets will be warning us that a sea change is developing. Remember that the news from EUROPE continues to be troubling and as of Thursday night the haven status is not in play. Yes, Greece, Portugal, Ireland, Spain and Italy are still a concern but we will always have 1937.

A quick hitter: Japan is back in the news as Prime Minister Kan survived a no-confidence vote in the DIET. I will look deeper into the implications of what appear to be some political shenanigans played by some Japanese politicos but the result was that it had very little market impact. The effort to unseat PM KAN at a time of great economic and psychological stress post-earthquake and tsunami was best summed up bu Kazushige Okuno of Norinchukin Trust: “If this disorder continues, Japan is going to lose credibility …. It’s a little sad.” As more news becomes available on the no-confidence vote, I will write about it, if and only if, it has market implications. Otherwise, the U.S. economic data and the EURO DEBT crisis will continue to be the primary focus.

Tags: "Great Depression", ADP, Apocalypse Now, bonds, CQG, deflation, Dollar, Equities, Euro, Europe, extended period, Fed, Gold, housing market, Japan, Milton Friedman, nonfarm payrolls, notes, PM Kan, S&P, Treasury rally, U.S. debt, unemployment

This entry was posted on June 2, 2011 at 8:14 pm and is filed under Currency, Debt Market, unemployment, United States. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.