A Spot of Unenjoyment

Submitted by Pater Tenebrarum  –  The Acting Man Blog

No Lipstick Can be Thrown on this Pig

The markets have been hit with yet another negative economic surprise today, this time concerning the indicator that is thought to have the full attention of the representatives of Anglo-Saxon central banking socialism huddling in the Eccles building. The professional soothsayer class has once again failed to foresee this development, but we hereby predict that won’t keep it from continuing to apprise us of the results of its entrails readings.


Oh well, at least we will continue to get to make fun of the economic theory challenged “science is prediction” class of econometrists.

PayrollsUS payroll gains sag – and once again, the always sunny expectations of the professional soothsayer class have been disappointed – click to enlarge.

As one observer commented on this latest economic data debacle: “There’s no way to throw lipstick on this pig” (we’re actually not so sure about that – someone will surely try?):

“U.S. employers slammed the brakes on hiring over the last two months and wages fell in September, raising new doubts the economy is strong enough for the Federal Reserve to raise interest rates by the end of this year. Payrolls outside of farming rose by 142,000 last month and August figures were revised sharply lower to show only 136,000 jobs added that month, the Labor Department said on Friday.

That marked the smallest two-month gain in employment in over a year and could fuel fears that the China-led global economic slowdown is sapping America’s strength.

“You can’t throw lipstick on this pig of a report,” said Brian Jacobsen, a portfolio strategist at Wells Fargo Funds Management in Menomonee Falls, Wisconsin.

(emphasis added)

Anyway, one mustn’t forget, employment is a lagging economic indicator – as a rule, it is therefore one of the last one’s to exhibit weakness when the economy turns from expansion to contraction. In other words, one could suspect here that payrolls have so to speak become a confirming indicator that tells us that an “official” economic contraction is imminent.

However, it should also be pointed out that two months of weak data do not yet represent a trend. In the course of the post 2008 recovery, weak as it has been, there have been several instances of leading, coincident and lagging indicators weakening, but ultimately recession was avoided.

How was it avoided? By means of money printing and the diversion of scarce resources it sets into motion. All sorts of economic activities seemingly become profitable and sensible when additional money enters the economy and interest rates are suppressed, and these activities are then recorded as “growth” in aggregate statistics. In reality, most of them ultimately consume capital. This brings us to the next point.

Is the Rate Hike Fantasy Dead?

As Mish has recently pointed out, 3 month t-bill yields have approached zero and have actually briefly turned negative on several occasions of late. Moreover, the yield curve is in the process of flattening, mainly due to the long end seeing larger declines in yield than the middle of the curve and parts of the short end. These are not indications of a strengthening economy.

IRX3-month t-bill yields – back in July and August, the market was still convinced that a Fed rate hike was imminent. It isn’t anymore – click to enlarge.

Given the proclivities of the Yellen-led Fed to date, we think it is pretty certain at this point that there won’t be a rate hike announcement on occasion of the October FOMC meeting either. What happens in December is presumably going to depend on how CPI and payrolls behave between now an then.

However: zero interest rates are unlikely to be enough to keep assorted bubble activities in the economy and the financial markets going. As we have previously mentioned, we believe these would require acceleratingmonetary inflation at this point, and that can only be provided by QE, or by commercial banks expanding credit at a faster pace then they have recently done.


Economic data continue to weaken and that probably suffices to induce yet another rate hike postponement. One of the questions is whether financial markets will finally begin to perceive bad news as actually bad, instead of simply speculating on more central bank intervention to save the day whenever weak data are released.

In this context we happen to believe that valuations are too stretched to be sustained without further active monetary debasement. US money supply growth remains brisk at over 8% annualized (TMS-2), but this compares with far higher change rates in 2009-2011. Recent economic weakness by itself already tells us that bubble activities are increasingly under threat.

Charts by: St. Louis Federal Reserve Research, StockCharts.