Just when it seemed like the Fed had its guns loaded and was ready to raise interest rates again at its June meeting, the jobs market jammed the action with the shocking news that, not only had the economy added just 38,000 jobs in May, but that the March and April jobs were overstated by 59,000.
This brought average job growth over the last three months down to a pathetic average of 116,000, confirming my view that the economy is stuck in the mud under the growing weight of too much debt and regulation.
It's idiocy to expect that the Fed can dig us out of the hole. They'll only dig it deeper...
Get Used to Infinite Zero
The Fed now has the perfect excuse to keep destroying the world with low interest rates that suppress economic growth by showing people that the global economy is too weak to withstand a mere 25-basis point rate hike.
The problem for the Fed is that, as Gluskin Sheff & Associates economist David Rosenberg keeps pointing out, the jobs market is not as healthy as the headline unemployment rate suggests.
In fact, the Fed has never raised rates with the jobs market as weak as it is. While the unemployment rate dropped to 4.7%, this was only because hundreds of thousands of people dropped out of the market.
The economy suffers from a structural rather than a cyclical employment problem, which means that there is a mismatch between available jobs and the skills required to fill them. As a result, there are more than 94 million people who have left the jobs market, the highest level since the 1970s.
Higher Rates Only Get You So Far, Anyway
While higher rates are needed for other reasons, they will not help a jobs market facing serious headwinds that can only be solved by jobs training and other non-monetary policy initiatives.
By the end of trading on Friday, the Fed futures market dropped the odds of a June rate hike to 3.8%, down from 21% a day earlier. But even at 21%, it is apparent that markets have little faith in the Fed's willingness to normalize rates and pull the economy out of its funk.
The odds of a July rate increase also feel to 30% from 49% before the jobs report. The Fed's track record of finding every excuse in the book to avoid raising rates is starting to affect market psychology.
The VIX Shows Markets Are Totally Complacent
The problem with that is that the market may be poorly positioned when Janet Yellen and her confederacy of dunces finally wake up from their stupor and realize that they have created the conditions for another financial crisis.
By then, of course, it will be too late, but try telling that to the financial media (with a few exceptions, like CNBC's Rick Santelli) or Wall Street strategists spinning bullish tales so investors will buy their worthless products.
I would say that markets are at peak complacency, except that they never seem to disappoint in getting even more complacent even as conditions get worse.
The Chicago Board of Options Exchange Volatility Index - the VIX, which is the "fear gauge" of options volatility - is back near its 2016 lows and is showing that markets have not a care in the world. This is ironic considering that many of the largest and most famous hedge funds are suffering their second (or third) consecutive year of losses and that the market is littered with broken stocks.
Nonetheless, stock market indices are still trading near all-time highs, suggesting that it will take a real knock on the side of the head to shake investors from their delusions of stability.
Markets were down only modestly last week. The Dow Jones Industrial Average lost 66 points to 17,807.06 and is up 2.19% for the year. The S&P 500 was flat on the week at 2099.13 and is up 2.7% year-to-date. The Nasdaq Composite Index added 9 points to close at 4942.52 and is down -1.3% for the year.
The markets have basically gone nowhere for two years, since it became clear that Fed would end QE and start thinking about raising interest rates.
Credit markets appear stable for the moment with the average yield and spread on the Barclays High Yield Bond Index hovering near their lows for the year of 7.34% and 569 basis points, respectively. These levels, needless to say, are totally inadequate to compensate investors for the risks of investing in junk bonds in the current economic environment. Yields and spreads on the Barclays Investment Grade Bond Index are stingy at 3.04% and 142 basis points as well, producing real (i.e. inflation-adjusted returns) that are barely above zero - if you believe the government's phony inflation figures - and well below zero if you live on planet Earth.
Now, Here's the Alternative
As I keep saying, the Fed has destroyed bonds as an investment, in the process inflicting serious damage on pension funds, insurance companies and individual investors.
Investors appear to be buying into the "TINA theory." TINA stands for "THERE IS NO ALTERNATIVE" to investing in stocks.
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I have news for TINA adherents - there is an alternative to investing in a stock market that is trading at nearly 20 times earnings...
The alternative is DNLM - DO NOT LOSE MONEY!
In addition to a weak economy, America is heading toward a period of severe political instability. Investors should be prepared for rising volatility and a more difficult environment in which to make money in the months and years ahead.
Every investor has an alternative available - get the protective moves and high-profit recommendations in Michael's Sure Money twice each week. He's bringing his readers n ew ways to make money in markets that are totally divorced from reality. Click here to subscribe, and you'll get Michael's "Toxic Stock" Playbook, full of ways to profit from the poisonous, debt-ridden companies littering the S&P 500 right now.
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.