Notes From Underground: The Unemployment Number is Wall Street’s Version of Picasso’s `The Dream’

It was the best that Wall Street could dream of: It was a huge headline nonfarm payroll number with a large number of workers jumping into the labor market, which kept the unemployment rate at 4.1% and wage growth at a very tepid pace. Average hourly earnings were 0.1%, which is nirvana for the wealth managers: solid economic growth with stagnant wages. This may certainly be a one-off month as NFP could return to its average or wages begin to rise by at least 0.3% every month. Rick Santelli and Ed Lazear made the case that the increase in the labor participation rate was a great outcome as long time unemployed are gaining confidence in the genuine strength of the economy. The return of the long-term unemployed will show the real amount of slack in the economy, reflecting even more downward pressure on wages. If the slack is greater than the FOMC has previously believed, then the FED may well slow its rate increases. People returning to the labor force is a positive but it may be another kink in the Fed’s models.

One set of data does not a trend make but with the tax cuts beginning to impact growth the FED will need to be vigilant in its measuring the labor participation rate. Yes, Lael Brainard and other “doves” have parroted the Jerome Powell line of “headwinds to tailwinds” but the wage picture is the critical element. The election of Donald Trump was very much a factor about the huge disparity between Middle America and those at the top of the economic ladder. Any effort by the FED to scupper the wage gains of the middle-class can raise the specter of even greater political backlash.

The media continues to point to the rise of economic growth in Europe but the last few elections have given rise to louder voices of populism. If the world’s economy is so robust why have the voices of discontent continued to grow in the countries with the most robust economic growth? It took Germany six months to craft a ruling coalition and all eyes turn to Italy to see how last week’s election finalizes a coalition government. The parties on the right garnered almost 65% of the popular vote so any attempt to disenfranchise the largest number of voters by creating a left/center coalition can bring political turmoil. When does a dream become a nightmare?

***The weekend brought three way discussions between Europe, Japan and the U.S. over how America’s allies will get relief from the bite of the taxes on imported steel and aluminum. EU trade commissioner Cecilia Malmstrom raised the issue to the U.S. trade rep Robert Lighthizer. Malmstrom towed the line when she said, “As a close security and trade partner of the U.S.the EU must be excluded from the announced measures.” The rhetoric from the tri-party meeting reflects the silliness of the security justifications of the Trump tariffs. The issue of national security in the tariffs on steel and aluminum is a classic red herring.

As President Trump tweeted in response to the EU’s trade rep: “The EU, wonderful countries who treat the U.S. very badly on trade are complaining about the tariffs on steel and aluminum. If they drop their horrific barriers and tariffs on U.S. products going in, we will likewise drop ours. Big deficit. If not, we tax cars, etc. Fair!” Here it is as clear as possible: It is all about a perceived fairness in trade and not a bit about national security. Will we get a trade war or will Trump act to push the dollar lower as a lever to raise U.S. exports?

The recent trade data has shown a robust increase in the U.S. trade deficit. It has been many moons since the trade numbers have moved markets, but the direction of the Trump White House reflects a new narrative. The Trump trade issues will certainly make the FED‘s job more difficult as interest rate rises will at some point push U.S. SHORT-TERM REAL YIELDS POSITIVE ACTING TO SUPPORT THE DOLLAR. I don’t know when but will watch the FED‘s coming battle with the White House.

***Returning to Italy. Last week’s London Telegraph had an extremely thoughtful piece from Ambrose Evans-Pritchard titled, “Whoever Governs Italy Will Destroy the Euro From Within.” The piece is splendid in examining the issues confronting the established Italian elite but I want to point out what where Evans-Pritchard picks up on the point I made last week: Italy is not Greece. In response to Marco Provera, head of the Pirelli tire claim, if Italian intransigence becomes too great “Italy could soon find itself under a draconian bail-out regime along Greek lines.” AEP pulls no punches in responding to Provera: “That is where he is wrong. If the EU policy elites try to crush the Italian Spring as they crushed the Greek Spring, they will blow up the European Project.”

From my perspective the bottom line is that the markets are underestimating the importance of the current Italian political situation. Italy’s massive debt load is a sword of Damocles hanging over the entire global financial system. Evans-Pritchard offers up various scenarios as to how the Italian debt situation is resolved. Those will be topics for months to come but the issue is to be aware of the difficulty confronting the EU and the complacency of the markets. Ah,to only sleep the sleep of Picasso’s “Dream” (not at Notes From Underground).

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5 Responses to “Notes From Underground: The Unemployment Number is Wall Street’s Version of Picasso’s `The Dream’”

  1. Econosums Says:

    The Euro is a fixed exchange rate system. In the 90’s, everybody knew these things always blow up. Somehow there is a miasma of illusion around the EU and Euro, and this inevitable economic adjustment is out of mind. The Euro is too cheap a currency for Germany and too expensive for southern and eastern Europe. Germany has a huge internal trade surplus with Europe. So they profited from it and are the masters now, but they helped bankrupt the south. Either they bail em out (impossible. Germany has tons of debt too) or the Italians, Greeks and Spaniards each default by switching their liabilities to traditional depreciated currencies or just stop paying. The Greeks and others would have already split, but Germany has been subsidizing enough of the electorate (the pensioners who vote) to keep the charade going. Italian industry and balance sheet benefit if they do what they always have done. Go back to the Lira and depreciate the debt. TS Deutschland.

    • yra harris Says:

      Econosums–absolutely–we will delve deeper into this as many articles appearing in the EU press in an effort to prevent the appointment of jens Weidmann as the next ECB President.The Target 2 accounts are a rising problem for the European financial system but the financial community pretends otherwise.Draghi has done the bidding of the european elite by trying to create a synthetic euro bond

  2. Stefan Jovanovich Says:

    Why would the Italians leave the Euro when they are in the position of Goldman Sachs, Wells Fargo and every other “sound” bank during the now-long-forgotten crisis of 2008/9? The Greeks were Lehman Brothers, and the ECB has learned its lesson. They have no choice but to become the buyer of first resort for all European sovereign debt.

    Trump has the wit to understand that these are the rules of the game; he also knows that he can squeeze every one of its European and Asian allies into buying more F-35s (they hardly need soybeans) as long as the net balances of all commerce between the nations still require the U.S. to spend more dollars than it collects from exports, investment income and capital investments. The “trade war” is ending, not beginning. The U.S. will sell weapons to the world just as Britain sold battleships in the era of dreadnoughts; and the “crises” will be settled, even as nations’ capacity for lethality expands exponentially.

    Sumner writes somewhere in his History of American Currency that questions of debt and currency cannot be separated. As long as the Euroland state bank does not have to deal with a negative FX balance, it can sustain whatever amount of sovereign debt is needed to make the internal books balance. The rules for Japan, China and India are not fundamentally different.

    When Yra writes about the Italians “depreciating the debt”, he is, I assume, describing how the U.S. rolled over its WW II debts and had its tax collections rise fast enough to allow everyone to think that matters were back in balance, even as the price of a quart of milk in greenbacks rode up the money/credit supply escalator. The debt continued to be redeemed at par; the lenders were just paid back in legal tender that was increasingly remote from even the memory of being redeemable on demand for specie.

  3. Chicken Says:

    My understanding is Europe maintains a sizable trade surplus?

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