The Employment report was released by the BLS today showing only 75,000 new jobs created, less than the 100,000 a month needed to keep up with population growth. Thus, on a relative population-adjusted basis, employment shrank by 25,000 jobs. Based on employment to population percentages before the GFC of 2008, the hidden unemployed are roughly 1.0% to 1.5% of the workforce, thus the unemployment rate is close to 5% instead of the official 3.6%.
Many workers are labeled by the BLS as employed even though they have a speculative, high risk self-employment occupation with almost no income or they may have a waiter’s “job” with a $2.50 an hour minimum wage.
The inverted yield curve of bond yields implies a recession is coming in December this year. A downtrend in employment implies the cycle has topped out. The excessively long cycle is so old it seems unlikely to continue.
Bond yields plummeted sharply the past six trading days with the 2 year Treasury Note yield as low as 1.776% today at the low of the day; it was 2.99% at the one year high in 11-9-18. The marketplace is saying that they are taking back half of the Fed’s 2015 to 2018 rate increases.
The trade dispute with China, in theory, could help those U.S. workers who have the lowest amount of job skills, except in reality those lost jobs that went to China will simply migrate to other EM countries like Vietnam or Ethiopia and thus there won’t be a net employment gain for U.S. workers. The fundamental problem of the era is that blue-collar jobs migrate to low-wage EM countries, leaving our U.S. blue collar workers underemployed. Not everyone is capable of going to college and becoming an engineer or a salesperson when they lose a manufacturing job. Some who lost jobs will become discouraged and refrain from job seeking and become the hidden unemployed. If traditional blue-collar jobs are lost by Developed countries by factories moving to EM countries then deflationary symptoms will appear, thus the Invisible Hand of the marketplace will make bond yields drop to bizarrely low levels.
The deflationary symptoms legitimately result in very low bond yields which then cause investors to incorrectly react in anger and seek out higher “yields” in bogus types of “yield” such as writing put options that are disguised by Wall Street as an exotic high yield investment like “reverse convertible bonds”. In Korea there is a huge demand for a form of this called “auto-callable” securities which basically are put options where the premium from writing a put option makes the naive investor think he’s getting yield, but it is not yield, it is a form of (insufficient) compensation for taking on speculative risk; by contrast, an investment grade bond is supposed to have minimal risk so a bond’s yield is truly yield. See this FT article about “auto-callable” securities.
The global financial markets are trapped in a feedback loop where low bond yields encourage reckless use of speculative trades like writing put options or buying junk bonds, etc. This, in turn, makes it more feasible for stock speculators to take on excessive risk, thus creating a stock bubble. Hungry investors get careless with their cash and send it to Venture Capitalists who fund goofy experimental tech companies that lose money and who run up huge tabs for ads on Google, Facebook, etc., thus stimulating some areas of the economy even while the Venture Capital investor loses money.
Naïve stock investors think Fed rate cuts will boost stocks. They won’t; when the economy heads into recession rate cuts are not a strong enough medicine to rescue the economy or stocks, especially if stocks are ridiculously overpriced, as there now are. During the huge rate cuts of 2007-08 stocks kept crashing down 55%; the cure for the crash was that eventually prices got too low and had to go up, plus in March, 2009 Congress changed the accounting profession’s rules for banks allowing them to avoid marking failed loans to market and thus banks were permitted to make misleading statements about their failed assets.
Investors need independent financial advice about the risks of misunderstanding the employment report.