Expect Weak Jobs & Housing to End Taper Talk

Aug
29

By Charles Biderman

 

I expect the Bureau of Labor Statistics on September 6 will claim that much less than 100,000 new jobs were created in August; maybe as few as 25,000. And if the Fed is telling the truth that whether or not to taper is dependent on economic data, then a weak job market on top of slowing real estate says to me there will be no tapering anytime soon.

 

What is more, if the economy is as weak as I think it is and the stock market heads down, I would not be shocked if the Fed announced a moratorium on tapering through at least the end of 2014.

 

The facts behind my opinions are that the early June spike in mortgage rates which resulted from the start of Taper Talk in mid May has popped the mini housing bubble and therefore, overall US economic growth. And I expect that economic weakness to show up in the BLS August jobs report.

 

Specifically, the reason I think the August jobs number will be particularly weak is that the BLS sends out its surveys to 140,000 employers – including most government entities and big companies – the week that includes the 12th day of the month, which this year was a Monday. And by the week that began August 12, the slump in wages and salaries was four weeks old. In other words, it took six weeks from the beginning of June for the spike in mortgage rates to slow economic growth by the middle of July.

 

Remember, I have been saying over the past month, including last week’s video and when I was on with Rick Santelli early August that upcoming real estate data will suck. That’s because the early June spike in mortgage rates ended the two year long bull run in single family housing. Now my view that housing is in trouble seems to be fast becoming conventional wisdom.

 

So, currently wage and salary growth has been slowed by the mortgage rate hike. That is why I expect the BLS to announce a surprisingly small new jobs number. We had estimated less then 25,000 new jobs in July, and the BLS survey said 162,000 new jobs. But now four weeks into the slump, next week’s jobs number is likely to be puny. If wage and salary growth continues in the 1% or so range after inflation, and real estate becomes a year over year negative the Fed will not taper if indeed tapering is based upon what is really happening in the economy.

 

So, what happens to the markets if there is no taper? My answer to that question is if the market continues to expect that sometime soon the Fed will start to reduce the amount of drug money it gives to investors, interest rates will stay up and stock prices and real estate will sell off.

 

However, if the economy and markets do weaken, I would not be surprised if the Fed a total about face and declares a moratorium on Taper Talk. Right now most of you cannot image the that Fed does an about face at its September meeting and announces a year long moratorium on tapering. I can. Particularly if the markets drop 10% between now and the next Fed meeting.

 

The simple truth is that the global markets are dependent upon the drug, free money, to keep levitating. Without that free money stock prices will drop and interest rates will rise. And yes, a moratorium on any easing could probably reverse any downturn and spike upward both stock and bond prices.

 

The bottom line for me is that many investors firmly believe that the only reason stock prices are this high is that the US economy has to be in a sustainable recovery. What happens to the psyche of those investors if conventional wisdom becomes that the US economy is not getting better?

 

Who knows? What I do know is that these are interesting times.

 

 

15 Responses to Expect Weak Jobs & Housing to End Taper Talk

  1. Pam on August 29, 2013 at 4:33 am

    Isn’t your closing remark an old Confucian curse? May you live in interesting times. I often jokingly say,”oh well, things will get better when we baby boomers die off”, but it may be more prophetic than I intended it to be. The future still looks fraught with risks in my humble opinion.

  2. katie on August 29, 2013 at 5:05 am

    Yes, that’s exactly why the stock markets “levitated” today, not just because of the “dead cat bounce” but investors are smug that taper is off in Sept because with a war looming ahead and the home sales dropped a whopping 1.3%, ” Led by drops in most of the U.S., sales contracts on homes fell 1.3% in July, a second month of declines”.

    Hence the perversity of the market going up because of bad news. The more bad news, the more that tapering in Sept will be called off, and the likelier that equities will recover and go back up and up and up. There is no connection between main street and the stock markets whatsoever. The Fed rules.

    Expect that equities will continue to levitate back up tomorrow and Friday in anticipation of the taper being called off.

  3. JoelDee/Berlin on August 29, 2013 at 7:59 am

    Mr. Biderman,
    I missed your commentary these last few days. Hope you are well rested.

  4. black dog on August 29, 2013 at 6:44 pm

    Without that free money stock prices will drop and interest rates will rise.

    take a peek at bond charts. Long bond does BETTER when no QE (10 yr yield went up over 100 bps following formal announcement of QE2). I think much of current sell off is front running taper. I expect yields to drop following taper announcement next month as economy slows coupled with DC fighting over budget(or continuing resolution)/ debt ceiling.

  5. William on September 1, 2013 at 1:05 am

    All this “Taper Talk” is to hide that the FED doesn’t control interest rates, both short term & long term. It was meant to paper over the fact that “Mr. market” has pushed rates higher.

  6. Mike S. on September 2, 2013 at 9:32 am

    This Fed induced weird bull market is getting really long in the tooth. There have been maybe three rallies longer than 60 months in the last hundred years and that was based on a strong underlying economy. So the Fed is going to increase it’s balance sheet, thru a taper moratorium thru 2014, to 6 trillion? Bernanke is out in 4 month – not even attending Jackson Hole – they are scared and they know that time may be almost up for the reserve currency. How do you then service the national debt after losing the dollar’s privileged status? There is no choice but to stop the money printing by the end of the year, blame the mess on Bernanke, as POTUS takes idealogical control of the Fed thru five new voting members waiting in the wings in the hopes of stopping the money printing mania.

    • Ed_B on September 5, 2013 at 5:43 am

      You could very well be right, Mike. On the other hand, I keep having this nagging thought that there is a Grand Plan afoot that will end this mess once and for all. This could be done by transferring ALL government debt to the Fed and then… ending the Fed. Poof! Gone! No more Fed and no more debt. Not that our creditors would fall for this slight of hand move, of course, but consider the simpletons in DC these days. This WOULD appeal to them greatly… at least as much as creating a $16T platinum coin, one of the silliest financial ideas ever.

      If a more conventional path is followed, the US very well could lose its World Reserve Currency status via G20 action that creates a new world trade currency that is specifically set up not to permit any one nation to run wild with their currency printing presses. This would greatly appeal to the creditor nations who are getting pretty tired of being paid for their goods in a steadily shrinking currency. While this is spoken of quite a bit, what is not much mentioned is the result of losing WRC status. Economists differ on this point but many agree that it would mean a reduced demand for US dollars for trade settlement and that with falling demand comes reduced value. Again, economists differ on what the impact would be on US citizens but the general consensus seems to be somewhere in the 30-40% range. This means that if we lose WRC status, US dollars would fall to about 2/3 of their current value and everything we buy would rise by 1/3 in price… virtually over-night. This would be a financial death-blow to millions of Americans who are just barely making ends meet now.

      This is not a far-fetched thought. This could happen and perhaps sooner rather than later. I am especially worried about the time between early-2014 and mid-2015. A lot of things will be happening during this time period that could add up to a financial “perfect storm”. Stand by to batten down the hatches, just in case!

  7. katie on September 4, 2013 at 2:23 am

    Well, I was wrong about friday’s down markets, didn’t expect that Obama would cause a sell off once he started talking about another “surgical strike” in Syria. Again today, once Boehner started talking about the common bipartisan need for regime change in Syria, the markets immediately responded by going down, no matter how much money the Fed keeps on printing and giving out at zero interest to its “friends”.

    A black swan event could come in a week from today once Congress approves a tactical strike in Syria and some countries like China dump millions of shares of US stocks to show their immediate displeasure.

    Though it is said that markets rebound after a new war begins, this particular incursion appears to have some heavier costs when Russia now has moved 2 warships off the coast of Syria.

    • Ed_B on September 5, 2013 at 6:00 am

      I find the term “surgical strike” an interesting turn of phrase. It specifically connotes a limited and precise application of military force for a limited time. At the same time, going “under the knife” and having surgery is definitely a risky act that is most often justified by avoiding something much worse than the typical problems associated with surgery itself. Still, surgery is not a risk-free act and neither is striking another country with military force. It IS an act of war. There are so many possible outcomes for this that they are impossible to determine. The risk / reward ratio seems HIGHLY unlikely to be in our favor, however.

      What would happen, for instance, if Cuba were to say, “We find that US drone strikes in the Middle East are an act of terrorism and that we have decided to lob some missiles into the US mainland in response to and as punishment for this lawless behavior”. Would the US be satisfied that this was a limited response on their part? No. We would devastate Cuba via a massive counter-attack and call it fully justified. Is Syria really so different about such things. Probably not.

      I am not too concerned about the Russian warships sent to the eastern Med. Likely, they are there as observers, watching and recording electronic signals they can pick up from our ships and satellites as well as any missile launches. They can learn a lot from such activities. Being outnumbered by at least 5 to 2 is not in their favor in terms of initiating hostilities.

      I fully expect Putin to put a LOT of pressure on the Europeans regarding a possible US attack on Syria, demanding that they try to talk Washington out of this or see higher gas prices and / or reduced gas volume if they do not. Europe needs Russian gas and they need it badly. Putin is too experienced to overlook this screw to be turned.

  8. Robert on September 5, 2013 at 3:15 am

    You write: “And by the week that began August 12, the slump in wages and salaries was four weeks old.” Isn’t that stale data? Shouldn’t you be using the data immediately following the week that includes the 12th of the month, vs. the 4 wks prior?

    Thank you for sharing.

  9. Ed_B on September 5, 2013 at 6:19 am

    QE, better known as “money printing”, is one of those tar babies that is best left untouched. Yes, it can put off economic problems for a while but not forever. A day of reckoning WILL come and typically, a delayed problem only becomes bigger and more difficult to solve once people stop delaying it and actually try to solve it. This is basically having a smaller amount of pain today so that we can have a MUCH larger pain in the future.

    At some point, this will become clear, even to the politicians. That is when the finger-pointing and back-peddling turns truly rabid… and with all of them busily pointing fingers, no one is actually solving the problem… again. Not that any of them has the slightest idea of how to fix our current financial dilemma, of course, because that will require true leadership and a lot of very hard work.

    But some of us out here in America know exactly how to solve these problems. We know because we are not corrupted by massive amounts of graft and corruption offered to our “leaders” by lobbyists and others of low repute. Anyway, I digress. The answer to our problems is that we simply have more government than we can afford. Government is running wild, spending more and more money to achieve less and less desirable results and the profligacy of this spending is staggering. Like the creatures in the movies “Alien” and “Aliens”, the government is literally consuming the nation that gave it birth. Vast amounts of capital are being spent on things that are not productive and that do not much matter to most of our people. Over-reach in any and all ways is now the norm, not because it is necessary but because those running the government can do it. What we need, and quite desperately, is a much smaller government that spends a lot less money.

    In my opinion, this should be about 10% of our GDP and not the current 25% or even the more traditional 18%. Some advance the idea that we need to return to the 18% of GDP spent on government level but I reject that idea as it is what has brought us to the verge of complete financial ruin.

    Doing this will be devilishly difficult but if it is not done, the current unsustainable system WILL collapse of its own weight and that will be MUCH worse than cutting a lot of the fat from this bloated bureaucracy.

  10. John A on September 5, 2013 at 7:53 pm

    Lee Adler, who tracks withhold tax receipts just like you, seems to completely disagree with your conclusion:

    LINK

    “That leaves a gain of 5% year over year, which is huge. Some of that is probably due to increased commission income and other variable income, but it’s still a mind boggling number which suggests a much greater year over year gain in payrolls than the implied consensus estimate of +1.7%. It means that the consensus guesstimate of a gain of 177,000 jobs in August is probably too low.”

    • cbiderman on September 10, 2013 at 12:06 pm

      We derive our wage and salary estimates from daily withheld income and employment taxes. We regularly verify our estimates with an official Washington economist who also tracks withholding. We checked late last week, and he agrees that our estimates are similar to his.

  11. richard rinderman on December 30, 2013 at 5:46 pm

    Are you planning to do any additional blogs or have you stopped?

    • cbiderman on December 30, 2013 at 9:25 pm

      I plan of doing blogs when I have something to say.

      I have added a year end blog that will go live tonight.

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Charles BidermanCharles Biderman is the Chairman of TrimTabs Investment Research and Portfolio Manager of the TrimTabs Float Shrink ETF (TTFS)

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