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After an "impressive" May jobs report, the Dow Jones Industrial Average (INDEXDJX:.DJI) ended its third consecutive week on a down-note, losing 56.12 points (-0.31%) on Friday while the S&P 500 (INDEXSP:.INX) also fell for the third consecutive week, dropping 3.01 points (0.14%) on the day.
On the week, the Dow lost 161 points or 0.9% to 17,849.46 while the S&P 500 fell 15 points or 0.7% to 2092.83. For the year, the Dow has gained a mere 26 points, far less than 1%, while the S&P 500 has climbed by 33 points or only 1.6%.
The NASDAQ Composite (INDEXNASDAQ:.IXIC) has done much better, ending the week basically flat at 5068.46; it is now up about 7% on the year as social media, biotech and tech stocks continue to rise.
But the week's biggest story isn't on the big indexes…
Traders Think the Fed May (Finally) Do the Right Thing
No, the big story this week was the big jump on bond yields both in the U.S. and Europe. The yield on the benchmark 10-year Treasury spiked up by 30.5 basis points to 2.402%, its biggest jump since May 2013.
The 10-year German bund yield jumped to 0.84%, up 26 basis points in a month and nearly 80 basis points in two months, when it hit the ridiculous level of 0.5% around the time the ECB started its QE program.
While some believe interest rate volatility is being exacerbated by low liquidity in bond markets, the truth is that yield levels have been artificially suppressed by central banks for years and are ripe for sharp increases of the type we saw this week.
U.S. Treasuries tend to closely track German yields, and one of the reasons for the sharp rise in U.S. yields last week was the spike in German yields. But the other reason was concern that the Fed, despite hemming and hawing about raising rates, will do the right thing and finally move off the zero mark in September.
Don't Believe a Word of It: Unemployment Is Still Bad
Those concerns were solidified on Friday after the Commerce Department reported that the economy added a higher than expected 280,000 nonfarm payroll jobs in May (the forecast was 226,000).
Even more significant was that a 0.3% rise in hourly wages and a 2.3% year-over-year gain in wages, better than the 2% annual pace of recent years and the strongest gain since August 2013.
While the official unemployment rate increased to 5.5%, this was due to the fact that more people entered the work force. U6, which included underemployed and discouraged workers, remained at 10.8%, and we should not forget that were the same number of people in the labor force today as in January 2009 when President Obama took office, the official unemployment rate would be above 11%, not 5.5%.
Nonetheless, this better-than-expected report signaled to the market that the Fed is running out of excuses to delay raising interest rates. Of course, a Fed that understood how a real-world economy works rather than the theoretical economy on which they base policy would have started raising interest rates at least a year ago. But investors must accept the world as it is, not as they would wish it to be, and this report likely solidified a September lift-off date for U.S. interest rates.
A Bank Run Starts in Greece
Expectations of a September interest rate hike were reflected in a rise in the dollar on Friday. The euro, which had traded as high as $1.12 earlier in the week, settled back to $1.11 on Friday while the yen, which has finally broken through the $1.22 resistance level, closed at $1.25.
The euro has been volatile as European officials continue to negotiate with the lunatics running the Greek government, which has now run out of money while witnessing a massive run on its banks.
Regardless of whether Europe lets Greece off the hook for now, Greece remains a bankrupt country in a bankrupt continent in a bankrupt world. Germany probably wants to continue to keep paying Greece's bills in order to keep the European Union together and keep reaping the benefits of trading with weaker countries inside a single currency, but the lack of viability of the union is increasingly apparent to anyone with a functioning cerebellum.
Racing Toward a "Spoiled" Future
Outside the world of economics, the world of geopolitics continues to deteriorate. Russia is now spending 34% of its GDP on its military and shows no signs of doing anything other than intensifying its invasion of the Ukraine. China's aggression in the South China Sea is also advancing as it builds a 21st century Silk Road across Asia, Africa and the Middle East.
And the Middle East continues to witness a raging Sunni-Shi'a war as the Obama administration continues to negotiate a nuclear agreement with an Iranian government that repeatedly and publicly states that it has no intention of abiding by its terms.
One has to wonder what Mr. Obama knows that the rest of the world doesn't; my bet is that he knows absolutely nothing and is leading America and the world into the biggest foreign policy blunder of the last century. As Winston Churchill famously told Neville Chamberlain after he returned from signing the Munich Pact with Hitler: "You were given the choice between war and dishonor. You chose dishonor and you will have war."
America is peopled with spoiled citizens who expect entitlements without responsibility, spoiled investors who expect high returns without risk, and spoiled politicians who expect to be re-elected without delivering responsible policies.
As we begin the 2016 election season, America faces a choice between a productive future and crisis. We are likely to choose an unproductive future and are guaranteed crisis unless we change our ways very quickly.
About the Author
Prominent money manager. Has built top-ranked credit and hedge funds, managed billions for institutional and high-net-worth clients. 29-year career.
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One of the best short and not-so sweet wrap ups of where the world now stands.
We have been headed down that hill since Johnson's great society which expected nothing of the people receiving it and rewarded them for breeding.
My research shows that all busts are preceded by a euphoric mindset of players in the market. As there is no euphoric mindset to date, is it your proffer that: this time it is different ? i.e. that the market, this time, will come apart on technical datum ? It is also my proffer that this market saddened by the Obama tactics and the Clinton Corruption is in fear for the coming rape of those who have wealth ….
The first thing that the US needs to do is finish off the ISIS, as it was the US which was so adamant in removing Saddam Hussein. The blood and suffering of all the innocents at the hands of the ISIS is the fault of those who removed Saddam. So get back in there and finish off these lunatics.
It seems all that was considered positive and good is being redefined as bad. And what was once clearly bad and destructive now suddenly categorized as good. This goes for our government, our laws, the economy, our moral fiber, and the world. Based on this trend, I doubt if there are good things ahead.
I have an IQ that's reportedly in the high 140's. In addition, I've been around for over 80 years. What does all that mean? It means that, unlike many, I live in the real world not some theoretical Nirvana. As an entrepeneur I have created, in my lifetime, 5 separate and different business enterprises. All turned out to be successful and were eventually sold at a profit. There are two words that describe our problem(s) very clearly. They are Human Nature. Defy Human Nature and you do so at your own peril. Those currently in control have been educated Beyond all ability to reason hence our problem(s).
See previous comment. In addition, make no mistake, those elected to serve are ultimately interested in serving nobody but themselves. That's why term limits are routinely rejected. The electorate are dumber than an infinite number of boxes of rocks. As a result they get what they richly deserve. Unfortunately those of us with more than air between our ears get victimized along with the the morons who created this "disaster".
Chamberlain's decision let England delay the inevitable. For that he has been vilified for decades. GW takes us into a war premptively that upends the Middle East power structure into a chaos that will likely take decades to correct itself. For that OBAMA is chastised.
Lewitt has been harping for six years about the coming crash. He will eventually be proven correct because Obama was handed a big bag of stink. But for six years and counting the bottom has not fallen out. That is six years of less misery than if we had taken the actions Lewitt has proposed.
To paraphrase Churchill, you can have a disasterous economy starting today or you can wait 6, 7, 8, 9, 10 years or more. Your choice. Hmmm… I might be dead by the time it happens, so let's delay as long as we can, Churchill. What say ye?
And which bank fiddled the books that Greece could join the union? The USA is partly to blame.
from France
Seems right on the money, american investors have gotten very greedy with very little preconcusions
I have one correction. You write: "German bund yield jumped to 0.84%, up 26 basis points in a month and nearly 80 basis points in two months, when it hit the ridiculous level of 0.5%". The last figure should have been 0.05%. That's the only way that you can add 80 basis points to come up with a nearly 80 basis point jump to 0.84%. I'm sure it seemed so ridiculous that it was hard to believe and get correct. I always read your analysis and love it.
You can't just make up stories.
"Russia … shows no signs of doing anything other than intensifying its invasion of the Ukraine."
WHAT invasion of Ukraine?
Are you saying regular Russian troops have crossed the border en masse and are conducting a military operation in Ukraine? Yes or no?
If the answer is no, then spare us the talk of "invasions." It's hard to conduct an invasion without troops.
If yes … How many divisions are there? Which divisions? Where did they cross the border? When? How have they gone undetected? Where are they currently positioned? How is it that the Russian army can't defeat the bumbling and unmotivated Ukrainian army?
These would be easy questions to answer had any ACTUAL invasion occurred. But since the invasion is the stuff of fantasy, you can't possibly answer them.
Your neocon song and dance is just so much propaganda … and repeating a lie … no matter how many times you tell it … doesn't make it so.
It's been days now. No answer.
I'd think you'd want to clarify or defend your position. But I guess that'd be pretty hard to do, wouldn't it, given that your position is indefensible?
Interesting contrast between Levitt & Shah Galani on reasons for 'INTEREST VOLATILITY' – LEVITT says cause is due to artificial suppression of rates by Central Banks – GALANI says cause is lack of liquidity in Bond Markets!
So if we were going to 'SHORT EUROPE' – which cause can help us better with 'TIMING' for 'The Biggest Short'?