It Will Help You Save The Bacon if You Smell a Rat in the Jobs Report

When you average December’s blowout jobs number, which few foresaw, with November’s weak number, which nobody foresaw, what do you get?

Nothing.

That’s right, nothing. The average of the two months isn’t materially different than the average gain of the past year, or the past 7 years for that matter. This was much ado about nothing.

But as the Wall Street Journal put it,

Strong U.S. Job and Wage Growth Provides Assurance on Economy

Employers added 312,000 jobs last month and 2.64 million in 2018, the best year since 2015

Wow! They sure were excited. It was a perfect excuse for them to be bullish, when I would have thought that more jobs would keep the Fed on a tightening path, which is bearish.

Fed Chairman Jerome Powell disabused us of that notion later in the day. In a panel discussion with his predecessors, Jerome went all soft hearted on us and announced that Fed balance sheet “normalization” (a euphemism for tightening) wouldn’t be on autopilot after all. Now that’s not the same as saying they would print, but the market took it as a gift, which it most assuredly isn’t.

Here’s why it isn’t, and what you should do about it.

Powell did not say that they would return to QE. He said they might slow the pace of bloodletting. To that I would say that whether the pain is taken in big chops, or small cuts, it’s still pain. Slow the pace would only prolong and the bear market, now in its first big hibernation.

But I’ve beaten that horse in prior reports and will keep reminding you until something material changes. Meanwhile this post is about jobs, jobs, jobs! And in this case, I smell a seasonally adjusted rat. If you smell it too, that will help you to avoid the attendant unpleasantness.

The Monthly Jobs Report Is Art and Games, Not Science

The BLS is like the great French impressionist artists of the early 20th century. They painted, not reality, but an impression of it. The 312,000 jobs gain was like that, a seasonally adjusted (SA), fictional statistical impression of reality.

In fact, it will get painted over a few times, 7 to be exact, before the final work is complete in 2024, for this month’s number. Next month we’ll get both the regular month after revision, plus the annual benchmarking of the number to real data. They do that to the current numbers every year for the next 5 years, fitting the SA curve to what happens in the future, so that it correctly lines up with the present.

This month, the first SA print was a huge beat in the game of Beat the Number. The Number is the average of a survey of Wall Street economists, who, whether on average, or individually are never right about anything important. Their consensus guestimate was a gain of 176,000 for December. Apparently they got that by taking November’s announced gain and adding 20k because their paint by numbers kits told them too.

Now let’s backtrack to the Journal’s subhead about the 2.64 million jobs added in 2018. That’s an average of 220,000 per month. Now let’s average November’s announced SA gain of 155,000 and December’s 312,000 SA. That comes to 233.500, which is pretty darn close to the average of 220,000. In an economy with 154 million workers, 13,500 doesn’t even amount to a rounding error.

So was there really such a big jump in December? Or was this just more statistical impressionism?

When We Look At the Facts, We See Reality

As usual, we’ll look at the actual, not seasonally adjusted data (NSA). I do love Impressionism, but when it comes to analysis, I prefer Realism. Did you know that Picasso was a Realist in his early years as a painter? He was very good, but he realized that he could make a lot more money and become much more famous with his Avant Garde modernism, mostly pulling the viewers’ legs, I think. It’s like that with economists. They make up all this wild and crazy stuff because it makes them famous and they have more fun pulling our legs.

But that doesn’t work with us. We recognize the importance of staying firmly grounded in realism when it comes to money and investments.

We can get a handle on whether the real number is getting hotter, colder, or is just about the same by comparing rates of change. We do that by looking at the monthly change and comparing it with the same month over the prior 10 years. And then we look at the annual growth rate for the month and compare that to recent months to see if it is accelerating, decelerating, or about the same.

But most important, we look at a chart. That way we can see with our own eyes what, if anything has changed over time, and is changing right now. We don’t need some Wall Street impressionist artist to tell us what’s happening. We can see it for ourselves.

So here’s the reality.

There were 151.2 million jobs in December. There were 151.2 million jobs in November. That’s right. The same big number in both months, rounded to the nearest 100,000. The BLS waved its magic seasonal adjustment wand and said, abracadabra! Make my December number bigger! And boom it came out 312,000 bigger. Isn’t that amazing!

But the raw, actual, unmassaged number declined by 54,000, which as you saw, isn’t even a rounding error. Even that number probably isn’t right. They only survey a tiny fraction of all the employers in the country. Then they extrapolate, interpolate and percolate even the NSA number, but it’s a lot closer to reality than the SA number.

So now we have this stock market fireworks show based on… nothing! It is because traders misunderstood the implications of Powell’s softening. They’ve again put their recently liquidated cash back into stocks, and levered up on top of that to drive this rally. I’ll go back to harping on that in subsequent posts but let’s dig a little deeper into the jobs data.

The reported 312,000 gain was really a loss of 54,000. Now there normally are slightly fewer jobs in December. A drop of 54,000 is a good deal better than the December 10 year average of a drop of 286,000. But it was only the third best reading of the past five Decembers. December 2014 and December 2015 were both better. They were almost flat. On balance, there doesn’t seem to be much justification for the BLS puffing the SA number as much as they did.

When you look at the chart, what meets the eye is just how little things have changed over time. What do you see? Railroad tracks running in a barely undulating trend. December is the red line just below the connected peaks of November shown by the gold line. The medium blue line in the center is the 12 month moving average. They are all progressing along a trend that has barely budged since 2011!

 

Finally, the annual growth rate at the bottom of the chart shows gentle acceleration this year. But this is nothing new either. The same thing happened in 2013 and 2014, and the current annual growth rate of 1.8% is smack dab in the middle of the range of the past 7 years.

The US Economy Is Too Big To Tweak, But The Markets Aren’t Too Big To Strangle

7 years of various Fed policies, and both a tax increase early in the period, and a huge tax cut in the middle, and not thing has changed in the trend of jobs growth. The growth rate is 1.8% now, the same as in August, the same as in February 2017, the same as in August 2016, May 2014, January 2014, January 2012. And it has been within a couple of tenths of a percentage point in every other month in between.

The US economy is a monster. It’s orders of magnitude bigger than the monetary and fiscal policies designed to tweak it. It goes its own way. In the long run, if the Fed chokes down on liquidity long enough, the economy will succumb. $50 billion a month in drains is enough to matter over a long enough time. But the US economy won’t respond anywhere near as quickly as the financial markets which are directly driven by liquidity.

Wall Street will make up all kinds of excuses about why the market is or is not following the trend of the economy. And they will all be wrong. Because the markets don’t follow the economy. They must, over time, go with the flow of liquidity.

The Fed slowing the rate at which it withdraws money from the system won’t change that. Less money is less money. It won’t have an impact in a straight line. It never has, and it never will.

But unless the Fed literally adds money to the system regularly to inflate the financial markets, the markets will deflate over time. That’s because the US government will add $1.2 trillion a year in new supply of securities to the system. With total money now nearly static as the Fed sucks money out of the system, the prices of existing securities must decline.

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Here’s What You Need To Keep Doing

Therefore, those of us thinking about preserving our capital for the long haul need to stay the course and just keep buying and rolling 13 week US Treasury Bills as money continues to tighten. Because they are still doing this.

 

Traders can trade what the markets give. And we have trading gurus here at Money Map Press who will help you do just that!

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Sincerely,

Lee Adler

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