Jobs Report Worst in Five Years

And now… today’s Pfennig for your thoughts…

Good day, and a marvelous Monday to you!

Well, well, well. My dad always told me that eventually, the chickens come home to roost, Chuck. He should’ve known that all too well, as he was brought up on a farm with a city block long chicken house! And to me, the chickens all came home to roost on Friday. 

May jobs creation showed just 38,000 jobs created for the month, with 224,000 jobs added to the surveys by the BLS. Which means that once again, May being just like April, that the surveys indicated negative job growth, but for the wonder and magic of the BLS they made sure they weren’t! Gold got on a rocket and went to the moon, along with the euro, and the commodity currencies. It was a sight to see, even if I saw it with blurred vision.

The recent ISM Manufacturing Indexes have been telling us that the labor component of the report was softening, so there was indication that the chickens were ready to come home to roost, but we needed to see it, the markets needed to see it, and most of all Janet Yellen needed to see it with her own eyes.

Now, I have to wonder… She told us that the rate decision was going to be data dependent. And I hear rumors that Fed member Lael Brainard has Yellen’s ear, and Brainard is a dove. But what will that do to all the rate hike rhetoric that Yellen sent her fellow fed members out to talk about in May? Will it put egg all over their collective faces? Will the markets take it as the boy who cried wolf, one too many times, and never pay attention to them again? Oh, so many questions I have shooting into my mind about what this might do to the credibility of the Fed going forward.

Oh, and fed member Fischer is a hawk, and he has Yellen’s other ear, so it’s like the old cartoon with the devil on one shoulder of a man, and an angel on the other shoulder of a man, and he’s confused as to who’s words he must follow. Or, even the old Stealers Wheel song sung by Gerry Rafferty, Stuck in the middle with you. I’ll leave singing the lyrics up to you, now that I’ve put that song in your head for the day! Oh! And let me be clear, I’m not calling the fed members devils or angels, I’m just saying that it reminds of that old cartoon…

So, that was Friday. Gold has held its $33 gain from Friday in the early morning trading, but the currencies are giving some of their gains back, with the Brazilian real one of the very few that are still pumping positive gains vs. the dollar.  The euro has given back one-quarter cent after Germany printed a negative Factory Orders report. The print was expected to be negative, but not the -2.0% figure that it posted. The Aussie dollar (A$) is drifting ahead of the Reserve Bank of Australia (RBA) meeting tonight. Would the RBA opt to cut rates at back-to-back meetings? That’s the question that’s on traders’ minds today, as they cautiously trade the A$, ahead of the meeting.

The New Zealand dollar/kiwi is selling off in sympathy with the A$, but also because traders did the V-8 head slap and realized the Reserve Bank of New Zealand (RBNZ) will be meeting this week, and I’m sorry to say that it is widely expected that the RBNZ will cut rates this week. UGH! Everybody wants inflation, and I’m afraid that one day, not too far into the future, these Central Banks that wanted inflation, will rue the day they wished for inflation. But then, that’s just me, and my opinion, I could be wrong. I just think Central Bankers are making a HUGE mistake believing that inflation is dead.

Last week I spent our Thursday Pfennig talking a lot about China, and the renminbi. Then I read some more stuff that’s going on there, that I hadn’t heard about on the TV news, or read about in my local paper. Did you know that the U.S. announced a 522% duty tax on cold-rolled steel from China a week ago? And a 450% duty tax on corrosion-resistant steel from China? Well they did!  Oh, my, my, my. What have we here? A trade war with China? It certainly appears that this is what’s on its way, folks. I don’t think we want to get into a trade war with China, when they hold so much of our debt, do you?

Now for those of you who are new to this currency investing stuff, let me take you back in time, in Bill and Ted’s time machine that was a telephone booth, to the early 2000’s, and the new President at that time, George W. Bush, had just placed a tariff tax on Japanese steel. And began a trade war with Japan. I remember it like it was yesterday, for I seized that info and threw it out for my readers telling them that this should begin a long weak trend for the dollar, as currency markets do not like trade wars, and the country that starts it.

And what happened not long after that announcement of the tariff tax on Japanese Steel? The dollar entered a long weak trend that began in 2002, and pretty much ended in 2011. Now, I don’t know if China is going to retaliate or not. My guess is they will and when they do, it won’t be a Pollyanna, retaliation. And that could really get the dollar back to its underlying weak trend.

For the record, at the moment Chinese officials have said, “we are extremely dissatisfied with this irrational move by the U.S. which could harm cooperation between the two countries, and that, China will take all the necessary steps to strive for fair treatment and to protect the companies’ rights.” Add to all this saber-rattling between the two countries to the problems associated with China’s claiming to have rights to a group of  islands in the South China sea. And we’ve got ourselves a real pickle here to sort through.  Again though, why would you be picking a fight with the country that  owns a very large portion of your debt?

You see, I think that besides having enough gold to back their renminbi in some sort in the future, China has been accumulating large portions of gold each year, to offset their losses in the debt they hold should they unload large pieces of it. I know, I know, that sounds like conspiracy, but it isn’t. It’s opinion, and I could be wrong on this, but think about it, and get back to me if you think I’m barking up the wrong tree here.

The important thing for currency investors is that we could see near-term history repeat itself with regards to the reaction of traders to the dollar, after the U.S. announces tariff taxes on imports. And for long-term history, recall that the Smoot-Hawley tariff that added taxes on over 20,000 imported goods to the U.S. came right before the Great Depression, and I’m a firm believer that it had a lot to do with setting the U.S. on the path of the Great Depression.

Well, the information I had last week, regarding the Janet Yellen speech being the last one before the quiet period ahead of the June 14-15 Fed Meeting was incorrect, and she’s expected to speak again today, in Philadelphia, and now she has the May jobs report in her back pocket, but I do believe that she will walk a fine line between rate cut or no rate cut. She can’t risk ruining what the Fed members all went out in force the past three weeks to tell the markets about the coming rate hike, with dovish talk, and she can’t risk putting the markets into a tailspin with hawkish talk. Stuck in the middle with you. See how it works there?

Another thing that Lael Brainard has reminded Yellen about recently is that the “leave vote” in the U.K. is gaining momentum and if the people of the U.K. vote to leave the European Union (EU) that the affects could spill over to the U.S. and therefore Yellen should wait to see the outcome of the referendum that’s later this month.

The price of oil seems to be stuck in the mud as it trades in the $49 handle, but doesn’t attempt to breach $50. And just like I always tell you about assets that push the envelope up to a level repeatedly, but never breaching it, that the traders soon lose interest in that asset, and give up the ghost on that asset, and move on to some other asset. So, the price of oil had better breach $50 soon, or we could see a pullback. And with the price of oil stuck in the mud, the petrol currency traders have already moved on, and have begun to take away chunks of flesh from the petrol currencies, led by the Russian ruble, and followed by the Norwegian krone, and Canadian dollar/loonie.

Last week, I sent Chris a note that he used in the Friday Pfennig about the car loans problems that are beginning to become something we should be wary about. And a dear reader sent a note and asked me to go into more depth as to who will get hurt and how with the pending subprime auto loans. Sure! It just so happens that I was reading some more about this just this past weekend!

Basically, these subprime auto loans are done with special auto loan companies that charge HUGE interest rates on the loans. We’re talking anywhere from 18% to 30%… So, when a subprime borrower can’t make their payments, the cars are repossessed and sold at auctions, where they sell for less than the car’s sale price. The sales proceeds minus the lender’s repossession costs are credited to the borrower, and the lender then sues the borrower over the remaining balance. And reports show that most of these lawsuits favor the lender, and then the subprime borrower now has a huge bill, with no car! So, in the end it’s the borrower that gets hurt the most, and goes into debt. Which means that eventually they will be on some sort of social benefit at a cost to taxpayers. I hope this helped with that question.

So, getting back to the Jobs Jamboree from Friday. With only 38,000 jobs added (according to the BLS) it was the worst month of hiring in five years here in the U.S. and while the Unemployment Rate dropped from 5% to 4.7% it was no call to celebrate because what it meant was that half a million Americans gave up their search for work, and were no longer counted as unemployed. Yes, that’s one of those “funny things that we do here in the U.S.” Once a person gives up searching for a job, they are no longer counted as unemployed by the U.S. Wait, What? Yes, stranger than fiction, folks. I would think that someone giving up looking for a job would be the MOST Unemployed a person could get!

The three things I always tell you to look at in the Jobs report. The Avg. Hourly Earnings, The Avg. Hours Worked, and the Labor Participation Percentage, had some things to tell us on Friday. First the Avg. Hourly Earnings were bang on expectations with a 0.2% rise and an annual increase of 2.5%, so nothing of note here. The Avg. Hours Worked were marked down to 34.4 from 34.5, and again nothing to note here. The Labor Participation % was 62.9%, up 2-tenths to the highest level it has been in over a year now. So, while the jobs report was awful, and a half-million people gave up looking for work, this % rose. So, I guess you could get some drum pounding from this rise if you wanted to.

I mentioned the BREXIT vote in the U.K. earlier, and the latest poll showed the “leave vote” in the lead now. I told you a couple of weeks ago, that there would be so many of these polls ahead of the referendum and that the pound sterling would gyrate with these polls, and that’s exactly what we’ve seen in the past week, which started last week with the a poll showing the “don’t leave vote” in the lead, and the pound rallied, and as the week went on, new polls showed the “leave vote” catching up, and the pound rallied stalled, and then onto the weekend with the “leave vote” taking the lead, the pound is getting sold this morning. I see that PM Cameron has really been beating the drum for the “don’t leave vote” and like I said early in this process, I don’t see the U.K. leaving the European Union, but stranger things have happened, right?

The U.S. Data Cupboard doesn’t have much for us today, except the labor data that the Fed really looks at, the Fed’s Labor Market Conditions Index (LMCI) You may recall me reporting last month that this Index had shown four consecutive months of negative numbers. Will the May report make it five? I would think so. And then finally we can put to bed the June rate hike talks, and begin to doubt the July meeting’s chances of a rate hike.

Well, gold was up $33 at the close on Friday, and silver was up 33-cents. A nice day for gold and silver. But – and you knew there would be a “but” here – gold’s nice day could have been even better if the price manipulators had stayed on the sidelines. At one point on Friday, gold was up to $1,247, and the volume was incredible with 217,000 contracts being traded, who knows where the shiny metal could have gone from there, but wasn’t allowed to, and so we had to settle for a $33 gain, which isn’t anything to complain about, just not as satisfying as a $50 or even better gain sounds.

Before we head to the Big Finish today, I wanted to talk about something.Did you hear that Blue Cross Blue Shield of Texas filed for a rate increase of almost 60%? Why, you may ask? Well, it is due to revenue losses estimated at more than $1 billion over the last two years under the Affordable Healthcare Act. It has another name, but lets’ just call it the AHA. You and I both know that Insurance companies are sticklers when it comes to calculations about future things. They employ a truckload of actuaries that KNOW WHAT THEY ARE DOING! So, that brings about a fair question, were they given the wrong expense numbers from the government to begin with? I shake my head in disgust over this whole boondoggle.

Well, negative rates have really taken hold around the world. And get this – for the first time EVER Over $10 trillion in government bonds have been issued with negative yields. I found this on Zerohedge.com  and you can read it all here, or here’s your snippet:

The world passed a historic milestone in the past week when according to Fitch negative-yielding government debt rose above $10 trillion for the first time, which as the FT adds envelops an increasingly large part of the financial markets ‘after being fueled by central bank stimulus and a voracious investor appetite for sovereign paper.’ It also means that almost a third of all global government debt now has a negative yield. The amount of sovereign debt trading with a sub-zero yield climbed 5% in May from a month earlier to $10.4 trillion, pushed higher – or lower in yield as the case may be – by rising bond prices in Italy, Japan, Germany and France.

The ascent of the negative yield, which first affected only the shortest maturing notes from highly rated sovereigns, has encompassed seven-year German Bunds and 10-year Japanese government bonds as both the European Central Bank and Bank of Japan have cut benchmark interest rates and launched bond-buying programs.

Chuck again. But, investors keep buying these negative yield bonds, right? Are you kidding me? Who on earth would buy this stuff? Well, here’s something to think about, in the near term which means right now, the capital gains in the bonds are making up for the negative yields, but when rates turn, what will happen to the capital gains then? That’s right, they will be gone, and the holder of the bond will then have to pay to own that bond for the remainder of the term of the bond. Oh boy! Where do I sign up for some of that? NOT!

That’s it for today. I hope you have a marvelous Monday! Be good to yourself!

Regards,

Chuck Butler
for The Daily Pfennig

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