Email – #300
Dear Reader,
Earlier this week we got an inkling that the economy would be stronger than we all expected: the Federal Reserve’s Beige book showed some indications of growth, then Ben Bernanke acknowledged some evidence of growth in the economy his testimony. But neither we nor the market expected not the type of surprise we saw this morning with an almost too-good to be true jobs report.
Hence, bonds sold off across the yield curve, expectations of rate hikes adjusted for this new perception, accurate or not, and gold sold off. Then, after the initial spike in the futures gave rise to a rise in the cash market, the rally, on low volume, lost its footing and abated. Volumes are just too thin to play with much conviction. And they are likely to get thinner as we move closer to the year end.
The only criticism that bears might get away with throwing at this is that the pick-up was in temporary employment. And although this pickup in temporary jobs could easily be reversed after the holiday season, the reversal is not likely to happen. For months the rate of job losses has been abating consistently. And some see the possibility of actually seeing job gains soon. Remember that the US economy is terribly flexible and adapts very fast to new economic realities. Just as fast as people lose jobs, the same or new industries get on the hiring bandwagon when things improve.
And remember that temporary employment usually precedes full employment pickup. And employment in any case is indeed a trailing indicator, recovering well after the economy recovers. Also, temporary employment is deeply affected by seasonal issues in this time of the year, and last month the report was so grim that we should average the two, like many bright minds suggested last month, rather than jump to precipitous conclusions. Finally, always remember that one data point does not a trend make.
So, what is the significance of all of this economic tea-leaf reading?
A strengthened economy might bring the exit strategy of the Fed sooner than we all expected. Earlier in the week, my preferred Big Ben’s quote from his congressional grilling was: “We not only need an exit strategy for monetary policy, but we also need an exit strategy for fiscal policy.” There you have it. And a monetary guru came out indicating that the Fed doing reverse repos to absorb liquidity did not signal the beginning of an exit strategy. The market sold first and asked questions later.
And the selling went through our very tight stops. I had tightened them to protect profits and avoid the likelihood of a nasty profit-taking reversal as we close the year. Later this month we will be positioning for the beginning of January, taking full advantage of our calendar flexibility, not enjoyed by long-term institutional investors, Wall Street and hedge funds.
We are indeed close to the end of the year and nobody wants to ruin their well-deserved bonus by blowing up a winning position. Also, there has been plenty of Fed criticism about its role in enabling asset bubbles in some other parts of the planet. These criticisms which some Fed governors dismissed by stating that it is not the Fed’s mission to worry about asset bubbles in other countries. This is true: if Hong Kong or China are seeing asset bubbles forming in their local real estate, they could de-peg their currencies from the U.S. Dollar. Alternatively, they could tighten monetary policy.
And there is no CPI inflation to be seen in the U.S. yet. With such a high unemployment and idled capacity there is little to no pricing power. So even if commodity prices rise, these price increases cannot be transferred to end consumers. But we are already seeing some anecdotal increases in the pricing of services (i.e., legal firms are raising fees for next year, already). This are preliminary indications that the Fed reflation policy is starting to take hold.
As I indicated last week, I have a strong line-up of candidates waiting for the right level to be deployed. Let’s be patient and be ready to pull the trigger, as some of them start to line up.
Enjoy and profit,
Horacio Marquez
