- Earlier today we released the most important Non-Farm Payroll report ever, at least according to the media
- A WSJ article stated that this report could “seal the deal” on rate hikes
- Interest rates have been at zero for 7 years as the Fed contemplated lift-off
- It all boiled down to one jobs report?
- If the Fed were going to raise interest rates in 2 weeks, how can it count on its accuracy or the fact that numbers will change next month?
- Let’s get into the numbers:
- The number we got was 173,000 – well below the consensus forecast
- One of the weaker components was private payrolls, which only grew by 140,000 vs and expected 211,000
- The headline number is the unemployment drop to 5.1% – the lowest in the Obama presidency
- Once again, the devil is in the details
- The unemployment rate is falling because of the mass exodus from the labor force
- Another 261,000 Americans left the labor force this month
- The participation rate held steady at 62.6%
- The lowest rate since 1977
- I think it’s heading lower
- The total number of persons not in the labor force rose to a new record: 94,031,000
- Also this month another 158,000 Americans find themselves involuntarily employed part-time
- That’s what’s responsible for the “improvement” in the labor numbers
- Janet Yellen specifically wanted to an increase in labor force participation and more full-time jobs before contemplating raising rates
- Those numbers have gone in the wrong direction
- Why is nobody pointing this out?
- This is the 9th month in a row that year-over-year factory orders have declined
- The only other time that has happened is during recession
- Every time we’ve seen a sharp decline in the market accompanied by an increase in the volatility index, the Fed has responded with Quantitative Easing
- More and more people now do not believe the Fed will raise rates in September
- If the Fed raises interest rates and the market keeps falling and the economy rolls over, the Fed loses a lot of credibility
- This is affecting global markets
- The Dow is now in correction
- I pointed out in my last video blog that: a) the Fed has never raised interest rates from zero and b)normally the Fed raises interest rates into an accelerating economy
- This time the Fed is raising interest rates when the economy is weakening
- This time a rate hike will prick a much larger bubble
- Even if the Fed raised rates to a quarter of a percent, that is still cheap money
- The markets are forward-looking and they are not going to like what they see
- The dollar strengthened on anticipation that the Fed will raise rates
- America cannot afford higher interest rates on the debt we have now
- One of the things most people overlook is the huge stockpile of U.Ss treasuries that are held abroad
- Why do the emerging markets have so may dollars?
- In the aftermath of the 1997 Asian economic crisis, they bought dollars as a reserve to defend their currency if it started to fall
- That is happening
- So now, foreign governments are going to start drawing on their reserves, selling treasuries to shore up their currencies
- The vast majority of the accumulation happened after QE1, when we had a currency war
- The media has labeled this sell-off “Quantitative Tightening”
- China has already started to gradually sell treasuries
- The Fed has promised not to roll over maturing treasuries and to shrink the $4.5 trillion balance sheet to about a trillion
- That’s $3.5 trillion of Quantitative Tightening
- Interest rates would have to rise dramatically to attract real buyers to U.S. treasuries
- No one can afford higher rates, though
- The Fed is not about to embark on rate-tightening now
- How long is this game of chicken going to go on?
- The market will continue to fall until the Fed admits it cannot raise rates
- The inventory to sales ratio continues to climb, but declining manufacturing jobs is an indication that the sales are not there
- Talk of rate hikes will go away and the reality of another round of quantitative easing is going to rear its ugly head
- Again if the Fed raises rates slightly, it will cause the Fed to lose even more credibility
- If we had a viable recovery the Fed would have raised rates years ago
- The time is coming when it will be obvious that we checked into an economic policy roach motel, and we can never check out
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