Last Friday the Non Farm Payroll (NFP) monthly data release was met with an “Everything Is Awesome” interpretation across the media. Just 2 headline statistics produced this euphoria. The “unemployment rate” fell to 5.5% and the “jobs created” headline was up 295k for the month.
These headlines fitted neatly in to the Federal Reserve narrative that their policies have finally worked, the economy is strong and interest rates can soon rise. So bond markets collapsed to price in higher rates and as this would make the US the only country in the world set on a path of rising interest rates, the dollar soared.
What did not quite fit in with this narrative was that assets that should benefit from this new confirmation of “growth”, equities and commodities, also fell significantly. It is very rare for all asset classes to fall at the same time so some investigation should be worthwhile. However, the media had already moved on.
Just over a month ago I described this rush to judgment phenomena as very dangerous for investors and warned “Beware Media Hype Days”.
Markets and economies are complex systems. I understand the appeal of simplistic judgments but at best they are likely to be an oversimplification, and at worst they could be completely misleading. The chairman and CEO of Gallup clearly leans to the latter point of view as regards the official unemployment rate. He recently said plainly, “The official unemployment rate, which cruelly overlooks the suffering of the long-term and often permanently unemployed as well as the depressingly underemployed, amounts to a Big Lie.”
This perspective seem to resonate with most of the thoughtful analysis I have read since.
This polarization of opinion has become very critical for the eventual outcome for the US and world economy, and therefore the markets too. If the headlines are all you need to know then all is well, no reason to worry. However, that is just 2 statistics out of many for just one month’s data.
The chart heading this article shows a different perspective with over 14 years of data. The key working age population of 25 to 55 year olds employs 4 million fewer than it did 8 years ago. It also shows that over the same period the total amount of mortgage debt has fallen, and furthermore that overall oil consumption is lower. Hardly signs of an overheating economy. The only massively rising phenomena in the chart is federal debt that has managed to create the appearance of growth, as federal debt gets spent into GDP statistics.
The problem with the “everything is awesome” interpretation is that if it is wrong, then by generating even higher interest rates and a higher dollar, it would be generating a negative feedback loop by tightening policy further on an already weak economy with CPI already printing negative numbers.
Perhaps, that is why commodities have renewed their downtrend and equities have begun to struggle following the NFP. In that case it may be far too early to give up on Treasury bonds.