All eyes were on the October jobs report this week - to see whether it would increase the odds of a Fed rate hike in December - but they should have been on the dollar.
The U.S. Dollar Index (DXY) ended the week at 99.17, up sharply from its mid-October low of 94 as the Japanese Yen and Euro pierced key levels of 122 and $1.08, respectively. The Yen ended the week at 123.13 and the Euro at 1.074 based on expectations that the Fed will move in December - and the realization that the ECB and Bank of Japan have no choice but to increase easing measures as their economies continue to circle the drain.
A stronger dollar will make it very difficult for the price of oil and other commodities to rise and much more likely they will test new lows. A stronger dollar will also pressure the earnings of S&P 500 companies in the fourth quarter and 2016.
It will also increase the pressure on emerging markets that are already struggling to service the trillions of dollars of debt that they borrowed in recent years. If you keep an eye on the dollar, you will have a pretty good idea of what is going to happen to the global economy and global markets. And if the dollar keeps rising, as I expect it to, the news won't be good.
A December Rate Hike is Far from Guaranteed
The October jobs report wasn't as good as it looked despite what the cheerleaders on Wall Street and in the financial media claimed. But it still convinced markets that a rate hike is coming in December. That may be the case for the moment, but if stock markets drop sharply between now and then, it would not be beyond the cowardice of our clueless Fed to back off once again.
The Institute for Supply Management's Index, which surveys more than 300 manufacturing firms, is hovering right above 50 (the most recent reading was 50.1) and is trending downward. The Fed has never hiked when this number has been at 50 or below. So stay tuned and don't take a rate hike for granted.
For the moment, however, the 271,000 headline jobs added in October was enough to convince markets that the Fed will finally move off the snide (for the first time in nearly a decade) and raise rates by 25 basis points.
Two-year Treasury yields moved up sharply last week to 0.89%, a sign that investors have raised their expectations of a rate hike significantly. With respect to the dollar, it's the direction and not the magnitude of the move that matters. The Fed is not going to embark on an aggressive tightening program and will no doubt couple any hike with language designed to soothe markets that it is basically done. But the first hike in nearly a decade would signal the end of the epic easing cycle and a sea-change in global monetary policy.
The 271,000 headline jobs reported in October included 165,000 jobs that were added in by statistical adjustments that may or not truly reflect the health of the jobs market. Further, the average jobs gain for the last three months is a much lower 187,000 - which is also far lower than the 2014 average of 260,000, when the Fed should have started raising rates.
There are still 94.5 million people out of the work force, and the labor participation rate of 62.4% is at a 38-year low - problems that monetary policy can't solve. In fact, low interest rates are making these problems worse by suppressing demand and lending. But try telling that to the geniuses in the Eccles Building or Congress or the White House. All you will get back is blank stares.
Politics Spill into The Economy Like Oil into The Sea
We need not despair, however. While policymakers are waging a losing war on the economy, and are too afraid to man up and fight a real war against ISIS, or radical Islam, or Vladimir Putin, theUnited States is waging a war that it believes will save the world. It is a war on climate change. Last week saw two announcements that make it clear that the Obama administration and its allies have finally found an enemy they believe is worth fighting.
First, President Obama finally killed the Keystone pipeline after seven years of discrediting a job-creating, pro-growth and environmentally safe project. That was no surprise.
Not to be outdone, Democratic New York Attorney General, Eric Schneiderman, joined in the climate change jihad by declaring war on Exxon Mobil. On October 5, The New York Times(to which the news was probably leaked by Mr. Schneiderman) disclosed that the New York Attorney General had "begun a sweeping investigation of Exxon Mobil to determine whether the company had lied to the public about the risks of climate change or to investors about how these risks might hurt the oil business."
According to people with knowledge of the investigation (likely Mr. Schneiderman or his employees), the Attorney General issued subpoenas demanding extensive financial records, emails and other documents related to "the company's activities dating back to the late 1970s."
Mr. Schneiderman is following in the tradition of other political hacks like the disgraced Eliot Spitzer who sat in his seat before him and abused the public trust by politicizing the Attorney General's office. Exxon Mobil should tell Mr. Schneiderman to shove his subpoena where the sun doesn't shine.
This "investigation" is part of an agenda pushed by the Obama administration to outlaw carbon as an energy source. This has resulted in the bankruptcy of virtually every major coal company in the United States and created companies like Tesla Motors, Inc., whose stock is grossly overvalued, as it generates a significant amount of its meager earnings from selling carbon credits. This agenda also places enormous burdens on the U.S. auto industry to meet expensive environmental regulations.
Rather than rush to tax and criminalize business conduct that has been widely accepted for years, the appropriate response to climate change is to determine, in a scientifically objective way, exactly what is going on and then work with business to address it.
I hold no water for Exxon Mobil, believe me. But I hold a great deal of water for limited government and for preventing abuses of power by public officials like Mr. Schneiderman. New York has already been rendered an unattractive place to do business by its high taxes and heavy regulation. Politically-driven investigations like this will lead even more companies to leave the Empire State for saner places to do business. Mr. Schneiderman isn't protecting the people of New York, he is hurting them...
Finally, Valeant Pharmaceuticals continued to trade down this week, losing another 13% to end the week at $81.77. Investors were focused last week on the fate of CEO Michael Pearson, who had $100 million of Valeant stock-backed loans called by Goldman Sachs - forcingthe sale of 1.3 million shares of his stock.
Valeant shareholder Bill Ackman's comments, raising doubts about his backing of Mr. Pearson, also shook the stock. Add in a couple of new subpoenas regarding the company's drug pricing,from various parts of the government, and it isn't hard to see why the stock has continued its descent from its August high of $263.81. This story will continue to unfold for a long time but there is no light at the end of the tunnel.
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.