On Monday, I told you about the true customers of the big media outlets – advertisers and other corporate clients. And I told you that the news you read advances the interests of those customers, not yours.
With that insight in mind, let’s dissect the jobs report from earlier this month.
The Wall Street Journal’s take left a lot to be desired, if you knew what to keep an eye out for. And what they did leave out pointed to a clear signal for any investor who wants to keep their capital.
Here’s where mainstream media showed their hand, what the numbers actually tell us, and exactly how you can protect your portfolio from their desires…
The Pot’s About to Boil Over
The Wall Street Journal had a wildly bullish take on last Friday’s July nonfarm payrolls report from the Bureau of Labor Statistics (BLS).
The headlines read:
Jobs Growth Contributes to Uncommonly Strong U.S. Economic Picture
Employers add 209,000 jobs as jobless rate drops to 4.3%, a 16-year low
The report added some of unabashed cheerleading:
“The latest evidence was a Labor Department report Friday that showed U.S. employers added 209,000 jobs to payrolls in July and the unemployment rate fell to 4.3%. With the July increase in hiring, the record stretch of monthly hiring is equivalent to six years and 10 months, almost three years longer than the second-best streak, from 1986 to 1990.
Expansions tend to get tripped up by boiling excesses, like a housing bubble in the 2000s, a tech bubble in the 1990s and inflation in the early 1980s. But this economy appears to have some more room to run as it enters its ninth year.”
Before tearing the numbers apart, I’ll just interject that the second paragraph is important because it’s half right. These factors are related to the ending of expansions.
But expansions don’t just get “tripped up.” They end when the Fed says to the players, “I think you’ve had enough!” and pulls the punchbowl.
The observation that that happens in association with “boiling excesses” like the housing bubble, tech bubble, or consumer price inflation is trenchant.
But the reporter then goes back “on message”, implying that the end is somehow an accident.
It’s not. The central bank ends the party when it tightens credit conditions.
Then the reporter makes sure to drive home the marketing message. “This economy appears to have some more room to run as it enters its ninth year.” In other words, nothing to see here, move along, just keep buying those overhyped, overpriced stocks that we’re hawking!
Another logical fallacy is the implication that we investor frogs are able to recognize the “boiling excesses” while things are heating up.
Maybe the pot is already boiling.
We are not part of Wall Street’s propaganda-driven mainstream media. Wall Street paints those warnings as if they were Cassandras on the mountaintop, shaking their fists at the lightning strikes of the gathering storm. The naysayers are ridiculed and marginalized while Wall Street tells us why, at 200 degrees F, we’re nowhere near the boiling point.
Because, this time it’s different!
That’s right, it’s different. It’s different because we’ve never seen such overt and outrageous central bank sponsorship of financial asset bubbles blown to such unimaginable extremes.
But hey, we’re not boiling yet. So jump right in! The water’s fine. A nice hot tub soak.
The truth is that it’s hot, and the Fed has decided to start cooling things down. The likelihood is that the ECB (and, finally, the Bank of Japan) will follow suit. But the fact that the Fed has turned should be warning enough.
There’s plenty more to watch out for under the surface.
Pay Close Attention to the Man Behind the Curtain
Meanwhile, the media reported the BLS data on Friday that the US economy added 209,000 jobs in July. In an economy with 146 million workers, they pretend to know how many jobs were added in a month down to the number of thousands based on a tiny survey of employers. It’s preposterous to pretend to know this with such a high degree of accuracy, but people act as though it’s a fact.
Here’s a fact. This is a seasonally adjusted number. It’s a fiction, a mathematically artistic impression painted from an arbitrary statistical construct called seasonal adjustment. Seasonal adjustment is an attempt to draw an idealized picture of reality, supposedly to smooth out normal seasonal fluctuations. I’ll have a column later this year about seasonal adjustments. For now what you need to know is that it’s usually a guess, and often not a very good one.
In fact, each guess gets revised twice in the immediately ensuing months. Then it gets revised annually for 5 years based on facts that are collected from payroll tax data.
Thus July’s seasonally adjusted number is a crapshoot. There’s no way of knowing whether it represents reality reasonably closely or not, unless we also check the raw, actual data. So why look at the adjusted data at all if we must also read the actual data? The answer is that we need to know the adjusted data to understand the Wall Street narrative, and to figure out what is true, and what isn’t. False narratives ultimately end in destruction.
One of the elements necessary for divining the facts is current Federal tax data. We have the data on withholding taxes in real time, and we saw that it was very strong in July.
I guessed in my Wall Street Examiner Pro Trader report on this measure that it meant the consensus economic estimate for July jobs was too low…
A Wall Street Journal survey showed a consensus expectation of 162,000…
Briefing.com’s survey result was 189,000. We knew that the estimates were too low…
Most importantly, the tax data told us that the jobs numbers would reinforce the Fed’s intention to begin shrinking the balance sheet, probably in September. After the strong jobs news, the headline writers concurred. The Fed would be encouraged to tighten.
Still, the market has been sanguine.
This points out another truism: Money talks.
The market doesn’t discount the future. When it appears to do that, it’s an accident. Stock prices will roll over once systemic liquidity begins shrinking due to the Fed shrinking its balance sheet, and probably not before.
Now for the nitty gritty on the data.
There’s Always Truth in Numbers
As surveyed, the actual, not seasonally adjusted number of jobs fell by 1.04 million in July. That sounds awful, but we need to view this in the context of what’s normal for July. July is always a big down month. To know whether this July performance was strong or weak, I compare it with the last 10 years’ July performance.
In that light, it was average. It wasn’t quite as good as July 2016, which dropped by only 979,000, but it was slightly better than the 10 year average for July of a decline of 1.1 million. Very slightly.
Behind the excitement of the headlines lay a big, fat nothing-burger. Economists were expecting a below average number.
They were wrong, as usual. The monthly change was about average.
Meanwhile, the annual jobs growth rate came in at a gain of 1.5%. This number has been remarkably consistent since last December 2016, ranging from 1.45% to 1.67%. We should note however, that the growth rate has been trending lower since March 2015 when it hit +2.29%. It had ranged between +1.9% and +2.29% from July 2014 until December 2015.
So there’s been a gradual slowing of growth since then, to say nothing of the fact that so many jobs have been of the low wage variety.
But our purpose here is not to judge the quality of the economic recovery. It’s to look at the facts of the jobs data to determine what it means for us as investors.
We can see from the chart above that nonfarm payrolls have been making steady railroad tracks higher ever since the recovery started in 2010. That was about a year after the stock market bottomed.
In fact, going back 20 years, we can see that stocks lead payrolls. Jobs are a lagging indicator.
Now we can see that all the attention that the media pays this report every month is mislaid. It gives us no advantage in timing the market whatsoever.
Jobs were late in turning down at the top in 2000. They were late in following the 2003 stock market low. They lagged the downturn in 2007. And they were extremely late in following the 2009 stock market rebound.
Why should anyone think that jobs data would be useful in getting us in and out of the market?
This cycle isn’t new. The economy follows the stock market. The stock market follows the Fed. The Fed, of course, follows the economy. The unfortunate part is that the Fed isn’t very good at understanding what’s going on.
Ultimately, central banks finally do recognize and do not like bubbles. They get to the point where they worry about financial instability, much more than employment, consumer prices, or the other things that (by law) they are supposed to be focusing on. They stopped the tech bubble in 2000 and they stopped the housing bubble in 2007. In both cases, they were far too late. That is the essence of the term “behind the curve.” The Fed’s powers of recognition are so poor that being behind the curve is an inevitability.
Today is no different. Far too late in the financial asset bubble party, the Fed has decided to pull the punchbowl. The excesses and misguided investments have reached legendary proportions. They won’t go gracefully into the good night when the dawn of correction comes.
What This Means For Every Investor
In the slowing of the growth rate of nonfarm payrolls, we see a similar (but less pronounced) slowing as occurred when the housing bubble ran out of steam in 2006 and 2007.
The housing bubble directly involved millions of jobs in real estate marketing, construction, and real estate finance. The growth rate in job creation began falling as the housing bubble topped out in 2006.
Fewer financial service jobs were created in this financial engineering bubble than were directly spurred by the housing bubble. The job gains this time are more indirect, occurring mostly in unrelated service industries. The big decline in jobs growth in advance of the drop in stocks in 2007 probably won’t happen this time. Jobs growth probably won’t decelerate as sharply as in 2007 until stock prices fall.
What the current jobs report will do – which the headlines correctly pointed out – will be to keep the Fed on track toward shrinking its balance sheet. When that starts, probably in the next couple of months, money will come out of the financial markets. It will come out slowly at first, then later at a faster pace. We don’t want to wait for that second phase because financial asset prices will already have begun their decline.
The time to begin a prudent program of reduction of exposure to stocks is now.
That could mean regular liquidations of fixed percentages of your portfolio each month, until our indicators send more urgent sell signals, or conversely, give us the green light to go back into the market. Most likely that would come after some degree of correction.
For now, the word is Sell-a little at a time in an orderly way. Sell rallies and don’t buy dips. Build cash now. Beat the rush. You’ve made some money in this market. The next two months will be a good time to bank it!