Being a life-long CUBS fan it is with a sense of irony to note that the nonfarm payroll number almost equaled Friday’s attendance at Wrigley Field. I will venture to guess though that the cheers from the FOMC were louder than all of the voices cheering the CUBS onto victory. Janet Yellen and her insider clique on the FOMC cheered as the softness in the JOBS data provided the rationale for the FOMC not to raise interest rate before the BREXIT vote. Everyone in the financial world knows that the FED is “data dependent” … at least when it fits their needs. Yes, the unemployment rate dropped to 4.7% from 5.0% but this substantial fall calls into question the credibility of the Fed models. The drop in the rate was due to participants leaving the job force, and, more importantly, those departing the labor market are not at the retirement age level but more in the middle of the age timeline, which makes investors challenge the idea of the economy gaining strength.
Many of the nonfarm payroll reports for the past few years have noted how the over 55-year-old employees have benefited the most from the recent bout of job growth. Importantly, the previous two jobs data reports were revised downward and for our purposes the tepid increase in average hourly earnings was another sign that Art Cashin and the no more rate hikes for 2016 gained ascendance. The post unemployment trade saw interest yields drop and the U.S. dollar decline by almost 2%. The GOLD rallied as those betting on a June rate hike were disappointed and had to cover short positions or repurchase previous exited longs. There is no question that Chair Yellen was dancing in the streets and cheering on the soft data. The FOMC doesn’t want to raise rates in the period of great political uncertainty around the world. The Chinese were also pleased for the YUAN while stronger against the dollar was softer against the euro and the YEN as the yuan basket barely moved. The world is torn asunder when a labor economist CHEERS A SOFT UNEMPLOYMENT NUMBER.
***An interesting data point that the market digested: The Financial Times ran an article titled, “Negative-yield debt breaks $10 tn Level For The First Time.” In a chart from Pension Partners it shows that Swiss bond yields are negative through 20 years. Japan sovereign debt is negative through 10 years. German paper is negative through nine years. Even French sovereign debt is negative through SEVEN years. It is not the massive amount yielding less than ZERO that should disturb all market participants, but, more importantly, the TYPES OF RISK THAT PENSION FUNDS, INSURANCE COMPANIES and all types of private investors are having to pursue in order to compensate for the lacked of yield on high-grade sovereign debt. THE BOND BUBBLE IS SETTING UP INVESTORS FOR A RISK PROFILE THAT WILL CAUSE GREAT LOSSES. The central banks have made all investors Keynesians for we have to respect one of John Meynard’s great dictums: Markets can remain irrational for longer than you can remain solvent. Trade with fervor but invest with fear.
***A major concern as we approach BREXIT. In Wednesday’s FT the lead front page article should raise concerns in Britain about the EU and free trade. The story, titled, “Europe and U.S. In Battle to Keep Trade Pact on Track,” raises the issue about the recent hardening of anti-TTIP positions within France and Germany by influential groups opposed to several of the covenants agreed to in the treaty. Yes, both Donald Trump and Hillary Clinton have raised objections to the TTIP but that is deemed to be electioneering noise. As the article notes, “France is the most vocal TTIP sceptic, largely because of fears that the deal could harm its farming sector and lessen the value of geographical indications that protect French wines, cheeses and meats.” The French and Germans are raising concerns over ISDS covenants in the TTIP. The ISDS is the issue of investor-state dispute settlement.I t was “originally envisaged as a way to protect investors from arbitrary state abuse.”
The environmentalists in Germany are very worried that investors will sue foreign governments in courts and claim that government legislation is capricious and harms investors. Many have claimed that Britain would severely suffer being outside the EU trade zone but with all the conflict within the EU over the TTIP and the roadblocks being built to hamper the treaty’s implementation, we are left to wonder if Britain, with its strong history of the rule of law, would fare better outside the clutches of the Brussels bureaucracy. Brexit has to keep us all very cautious as the European elite is doing all it can to cause voters to not support Brexit. Our motto for JUNE: Trade with fervor, invest with fear. And don’t listen to the cheers of 38,000 when one voice can drown out all the others.