So said several people this morning about the jobs report. Hmm, well maybe not worst of all worlds is more appropriate?
The NFP number has hit under the estimate so many times that I was kind of thinking it might blip up this month but alas, no. The 4.6% unemployment rate was, forgetting whether or not it was accurate, a it doesn't get any better than this type of number and now it is getting a little worse.
If this does in fact mean the Fed is done or will pause, OK, maybe that does mean the market will lift a little (but that might be tough to do from here) but if the trend is changing, it would be tough to make a positive fundamental case for equities. Equities can rally without fundamental support but I think the picture gets a tad gloomier in the next few weeks.
It also seems like the less demand for dollars story could be gaining traction. Henry Paulson is thought to know how to deal with the Chinese better than his predecessor. While that is not for me to judge, Mr. Paulson has said China needs to be more flexible with its currency. That means less demand from China for US dollars. There have also been a bunch of smaller countries that have reduced dollar exposure too (Norway, Italy and several small ones in the Middle East).
If the dollar weakens it will take higher rates to attract foreign buyers of our bonds to fund our various deficits.
This is a scenario that could play out, we can't know for sure but there is visibility and it is not far-fetched. It is important to explore this because this is will hurt your portfolio not Ed Yardeni's assertions that the economy is on fire. Ed being right would be a great thing but I'm not sure the everything's coming roses scenario merits the same study.
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5 comments:
Roger,
This whole thing with Paulsen and the Chinese looks like a rerun of James Baker, Treasury Sec under Reagan, and the West Germans fighting over interest rates, the mark, etc. Throw in that Greenspan had just taken over in Aug., 1987 and we have Helicopter Ben.
Interesting times indeed.
I'm no economist. But it's easy to see that:
1. Fed can not keep raising rates because consumers can not stand the pain.
2. We need the inflation to grow our way out of the deficit(s).
Personally, I'd rather be wrong on the inflationary side, than on the deflationary side.
jmho
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while I agree that defaltion is worse, that one seems like a long way off, no?
Roger,
"That means less demand from China for US dollars. There have also been a bunch of smaller countries that have reduced dollar exposure too (Norway, Italy and several small ones in the Middle East)."
Can you translate into how less demand and less exposure is accomplished? Do you mean less interest in buying our bonds/debt?
My systemic sense is that you are close to where a tipping point could happen. As you explain, I think, the macro economic argument is that demand may have little to do with inflation. It's supply. Just imagine all the freak'n dollars in Iraq and these are dollars that will find their way to troughs that stay off shores. Is there a parallel to Vietnam? Govt stroked the mkt by priming the pump but we got to the point that we couldn't grow our way out of it? When there is too much of anything, it looses its value. Shucks, I like the clarity and simplicity of your postulated scenario. What would Dr Y, the economist not the puppet of Kudlow et al, say to this rub in the ointment. Real or not real?
the smaller countries could just sell dollars with no lasting impact on the market.
China has bought a lot of dollars in the last few years maintaining the peg. It seems like they will work a little less to maintain the peg. This means they buy fewer dollars in the future, IMO
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