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Suddenly, it feels like 2000 all over again. A few weeks ago we noted that Dow 36,000 author James Glassman was on TV reheating his rather-battered theory as the Dow neared 12,000. Then this week we notice that his co-author Kevin Hassett is on Bloomberg reassuring the worried American public that all the bears are wrong and there won’t be any US recession.
He and the other optimists may be correct. But if they are, it won’t be for the reasons that they’re using to support their Panglossian worldviews.
Many pundits are pointing to strong corporate profits growth. But as we discussed recently, these numbers are misleading – profit growth is clearly in a slowing trend (see: Why US corporate profits aren’t as strong as they look, for more details). The other argument – favoured by Hassett and plenty of others – is that employment is too strong for a slowdown. The only problem is that employment is almost meaningless when it comes to spotting recessions…
Employment and unemployment data are lagging indicators for the economy. That’s because they reflect employment decisions that were often taken some time ago and because people generally base their decisions on the type of conditions they’ve been experiencing. So all that healthy labour numbers tell us is that things have been going well – and we already know that.
In fact, the unemployment rate is so lagging that it generally reaches its low for the cycle just before the economy tips into recession. When you think about it, that makes perfect sense. The cycle tends to go from boom to bust very fast – much faster than people expect. There’s no time for a gradual reduction in the workforce as things deteriorate. Instead, there are sudden, mass layoffs.
There are a handful of employment indicators that are arguably more coincident – in other words, they tell us what’s going on at the moment. It’s just that they tend to be the more detailed ones that people don’t watch so closely. In the US, clues can sometimes be got from the temporary employment numbers. When people want to hire but they’re feeling uncertain, they’ll tend to take on temp staff for a while and make them permanent if things turn out okay.
Unfortunately, all of the US payroll numbers seem highly unreliable at present. Last month, we saw huge revisions to the preceding two months. Just before that, we saw one enormous revision for the whole year-to-date. It’s a waste of time trying to read anything into them. While the markets – and in particularly bonds – are still going crazy each time the monthly headline number comes out, they might as well be betting on the roll of a dice.
Perhaps more useful is the year-on-year change in initial claims for unemployment insurance. This has a decent – if not perfect – track record of signalling major turning points in the economy. Unfortunately, this series is also distorted at the moment, by the comparison with the fallout from Hurricane Katrina last year. But bearing that in mind, it seems to be ticking up – which is a negative signal for growth.
Meanwhile, for another case of markets seeing meaning where there is none, consider what happened to the dollar this week. Traders have been getting extremely excited about some comments from Zhao Xiaochuan, governor of the Chinese central bank, in which he supposedly said that China is now planning to diversify its foreign exchange reserves away from dollars.
Except that it seems he didn’t. According to Reuters, he told one of their journalists that: “All central banks are trying to diversify… We have had a very clear diversification plan for several years.” It’s not quite the same thing – he’s not suggesting that China intends to do any more than it already is.
What’s more, thinking about this rationally, if China did have a new plan for dealing with this fairly sensitive issue, it’s unlikely they’d chose to announce in an off-the-cuff comment to a journalist. Still, you can never accuse the average forex trader of being too rational; inevitably, the dollar dropped sharply against several other currencies on a piece of misquoted scuttlebutt. It makes you wonder what would happen if there was some real news.
More pertinent perhaps was a comment by Fan Gang, director of the National Economic Research Institute and a member of the monetary policy committee. “The real problem the world faces today is an overvalued dollar, not just against the renminbi but against all major currencies. The main responsibility for this imbalance lies with a US Treasury which is printing too much money.”
But he also stated that a sharp revaluation in the renminbi would be catastrophic for the global economy. The implication seems pretty plain: the renminbi will continue to rise, but at a measured pace – there will be no major shocks if China can avoid it. That’s not particularly helpful for the large and frustrated pack of dollar bears in the market – but still, it’s good to hear another central banker put the boot into the Fed’s inflationary policies.
Turning to the stock markets…
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The FTSE 100 closed in the red on Friday, falling 23 points to close at 6,208. A weak mining sector led stocks lower, with Antofagasta and Vedanta Resources the day’s biggest fallers. For a full market report, see: London market close
Elsewhere in Europe, the Frankfurt DAX-30 closed flat at 6,357. Both Adidas and Deutsche Telekom extended their losses on weak quarterly results.
Across the Atlantic, stocks closed higher. The Dow Jones Industrial Average was 5 points higher, at 12,108. The tech-heavy Nasdaq was 13 points higher, at 2,389. The S&P 500 was 2 points higher, at 1,380.
In Asia, the Nikkei closed lower again, slipping 89 points to end the session at 16,022.
Crude oil last traded at $59.72, whilst Brent spot was at $57.65.
Spot gold hit an intra-day high of $632.40 this morning, not far from a two month high of $646 reached last week.
And in London this morning, shares in engineering firm Amec soared by as much as 9.8% following reports in yesterday’s Sunday Telegraph that the company had been the subject of a takeover approach from a private equity firm.
And our two recommended articles for today…
What will Democrat gains mean for markets?
– Last week’s mid-term elections significantly changed the US political landscape, but what will the Democrat’s new-found power mean for markets? For Jeremy Batstone of Charles Stanley’s suggestions as to which stocks will thrive – and which will suffer – see: What will Democrat gains mean for markets?
Can the US consumer live without home equity extraction?
– American consumers have been behaving like children, clamouring for newer cars and bigger houses and extracting equity from their homes in order to pay for them, says Richard Benson. But how will they react when the home equity cookie jar is empty? To find out what the impact on house prices, retail and employment will be, read: Can the US consumer live without home equity extraction?