Today the monthly non-farm payroll report was issued, 18 days behind schedule. Only 148,000 new jobs were created, lowering the unemployment rate by 0.04%, which rounds up to lowering it from 7.3% to 7.2%. The consensus forecast was 180,000. The news media was gloomy about this and bond prices went up. However, I think the long term trends for employment are still bullish. Gavyn Davies wrote in the FT today where he cited the SF Federal Reserve study that I had cited last week. He mentioned that there is a definite trend of an improving labor market. He cited the Kansas City Fed’s chart showing the rate of change in the labor market has been consistently improving since 2010 and actually looks better than 1990’s boom times. Investors need independent financial advice to evaluate what will happen to the economy.
The Fed’s main reason for keeping rates so low and doing Quantitative Easing is to help unemployed people find a job. Rates don’t need to be low to bail out homeowners because their problem has been solved, in many cases, by debt forgiveness, foreclosure or refinancing into lower rates. Using low interest rates to create a “wealth affect” to create jobs doesn’t work. This creates severe distortions that result in yield starved insurance companies raising insurance rates and banks are forced to charge exorbitant fees because yields are too low. Meanwhile speculators are buying risky assets on margin, which is like winding up a lot of tension in a spring that can be released suddenly in a Flash Crash. For example, if someone borrows margin money at 1% and buys a mortgage REIT yielding 11% they will have a windfall yield. When rates rise the REIT's will crash, destroying the leveraged owner.
What really matters are skilled workers, both to employers seeking to produce goods and for society’s ability to consume goods. By contrast, the hard core unemployed unskilled, uneducated workers have minimal impact on the economy. Thus as the economy grows I see a modest bidding war or tightening for the skilled labor market. I also see more frustration by multinational companies trying to hire skilled people in underdeveloped countries. As work duties grow in complexity then the simplest minded workers won’t fit in and so their willingness to work cheaply is irrelevant to corporate goals and profit margins. What will be relevant is that some skilled baby boomers approaching retirement age may take early retirement (thanks to rising stock prices), reducing the number of skilled workers and thus raising wages. This will hurt corporate profits, hurt inflation statistics and raise interest rates, all of which will dampen stock prices.
Investors should use independent financial advice to decide if the hidden risk of declining corporate profit margins will damage their assets.
Investors should seek independent financial advice.