We are in the period when financial markets are depending on measurements of human actions to proscribe probabilities for profitable investment. On Friday, the jobs report reflected the measurement of labor statistical data in order to achieve some forward-looking view on the health of the U.S. economy. The jobs data was a mixed result as nonfarm payrolls in the private sector were weaker than consensus but the important average hourly earnings (AHE) increased at a robust 0.4%, which SHOULD give the hawks on the FOMC a push to raise rates. But of course one month’s robust data is certainly not a trend. Chair Yellen has been laying the ground work for the data running hotter for longer so 0.4% is a positive but there is room for further gains in wage increases. Besides, if the wage gains are coming out of corporate profits all the better from the perspective of a career labor economist.
Some analysts were questioning the strength of the unemployment report because of the continued low participation rate. The argument about the strength of the labor participation has been the determinant of analysts’ discussion over the success of the Obama administration’s economic policies. Critics use the historically low participation rate as a MEASURE of the outcome of poor economic policy. Obama proponents argue that the low participation rate is due to the demographic effect of the retirement of the Baby Boomers. Fed Vice Chairman Stanley Fischer expounded on this in a speech on Friday. He said, “If labor force participation was to remain flat, job gains in the range of 125,000 to 175,000 would likely be needed to prevent unemployment from creeping up. However, if labor force participation was to decline, as might be expected given demographic trends, the neutral rate of payroll gains would be lower. If we assumed a downward trend in participation of about 0.3% point per year, in line with estimates of the likely drag from demographics, job gains in the range of 65,000 to 115,000 would likely be sufficient to maintain full employment.” (If Fischer believed this why has he not voted to raise rates at the last few meetings?)
I offer a challenge to those who believe that the participation rate is weak because of the retiring Baby Boomers. When I read the Bureau of Labor Statistics (BLS) data on civilian labor force participation rate by age, gender, race and ethnicity, what is STARTLING is that in 1994 12.4% of the 65 and older group were in the labor force while today it is approaching 20%. The amount of people working past “retirement” age has increased dramatically and throws the entire edifice of the weak participation rate due to demographics into question. In the same data what is troubling is that the 25 to 54 group has seen its group participation drop from 83.4% to 80.9%. The demographic trends are sending mixed signals about the overall health of the economy.
The FED officials OUGHT to be questioning whether its use of financial repression tactics to steady the economy has resulted in older employees being forced to work longer, thus failing to make way for younger members to replace knowledgeable, skilled workers with health care costs being lessened by medicare. While all things can be measured the analysis of the aggregated data is always open to question. Political basis can certainly result in faulty analysis.
The jobs data seems to easily more measurable than the election outcomes of the U.S. Presidential and Congressional battles being decided on Tuesday. The recent failure of pollsters to predict the 2014 Congressional results, the Brexit outcome and several other global contests certainly makes the recent polling data suspect. One thing is certain among people polled. The American people want this election over as it has been seen as a contest between Donald the Deplorable and Hillary the Despicable. Markets are set up to believe that a Trump victory would result in a 10% drop in the SPOOS as it would mirror a Brexit-like effect. I have no problem with that view. Hillary Clinton is seen by financial markets as a more certain hand and somebody the markets have a working knowledge of her policy ability. The recent drop in global equities will experience a relief rally with a Clinton victory but I would caution that other outcomes may result in a larger impact:
If Hillary wins and the Democrats were to win both Houses, the SPOOS will be sold, bonds will be sold, metals will rally and the dollar will experience a significant DROP. However, according to the data this is the most unlikely as the Republicans are expected to retain the HOUSE, especially as the presidential polls tighten.
If Trump were to win, I assume that the republicans would also retain both HOUSES and this would be the most confusing for the markets. First, equities will sell off because of Trump being in control but the duration of the selloff would have to be carefully watched similar to the Brexit vote. Markets may think that a Republican sweep would mean a rollback in regulations, a new twist on the ACA, revamping the tax code, and a negative tied into the Trump name would be global trade. But if Trump were to win, the DOLLAR may be sold, bonds will be sold and GOLD will probably rally a bit, but probably not sustain a large initial rally. (it may trade contrary to the equity markets.)
The greatest probable outcome it appears will be for a Clinton victory but the size of the Clinton popular vote will determine the outcome of the Senate while the House will remain Republican. This outcome will probably be most friendly to an equity market rally but I think the dollar and bond market will struggle to find a rally. A Clinton victory will set the stage for a messy period of factional politics in Washington as the FBI investigation will keep the cloud of uncertainty hovering over the Capitol. That’s hardly bullish for global sentiment about the DOLLAR and U.S. assets. The greatest asset of the U.S. dollar is the growing uncertainty of global politics as after the U.S. elections the focus moves to the Italian referendum on December 4, the FOMC meeting later in the month and then onto the concern about French and German domestic politics. In a blog post from October 10, I warned about the coming increase in volatility and we are just beginning to experience its effects. More to follow.
***An important data point to watch. In the November 3 Financial Times, there was an article about coming problems in ABS auto loans written by Joe Rennison. “Repo Men See Dark Side of car Sales Boom,” is a reflection on the underlying weakness in the recent robust data. The continued low interest rate environment has resulted in low lending standards on auto loans. The article interviews a REPO MAN, who said, “A year ago most of the cars that Mr. Neglia repossessed were from fraudulent schemes–people renting cars under a fake name and not returning them, for example. Today, he sees a larger number of individuals simply unable to repay on their loans.”
The increased amount of REPOS adversely effects the auto loan market that has grown to $1.1 trillion from $750 billion during the last five years. Many of the loans were to made to less creditworthy borrowers whose loans were packaged into asset-back securities (ABS). The pressure on pensions and insurance firms to chase yield has created a pool of willing lenders for questionable loans. The adverse feedback loop for the auto loans is that the more repossessions the lower the value of the used car market as increased supply puts downward prices on auto prices. Increased auto repos in the time of FULL EMPLOYMENT is something we need to monitor for this data set is representative of serious negative divergence. Now onto the election and its market impact.