October 6, 2017
Weekly Market Comment
“Do something you really like, and hopefully it pays the rent. As far as I’m concerned, that’s success.” – Tom Petty (1950-2017)
The official jobs estimate for September showed a contraction of 33,000, the first in seven years, but when stripped of the hurricane-related problems, the underlying labour market remains quite strong. It’s more reason for the Fed to hike rates again later this year, especially with the robust stock market giving them cover.
What’s probably giving the Fed pause more than anything is the lack of inflation, with core PCE (the Fed’s favourite measure) sitting at about 1.3% vs. the 2% guided rate they would like to see. But the Fed also believes a sub-4% unemployment rate (now at 4.2%, see chart below) is not sustainable without triggering inflation. Why? Because with willing workers already gainfully employed, employers have to offer fancier wages to entice a worker to quit and switch firms. Wage inflation is normally the single largest driver of overall inflation.
Below is a look at various official U.S. unemployment rates going back to 1990. The grey vertical bars are periods of recession. The real harbinger of a pending recession is a reversal upwards of the unemployment rate, which clearly has not happened yet. Again, as Yellen is suggesting, we might see historic low points get even lower this time around (caveat: Fed predictions have been known to be wrong from time to time!).
Canada’s unemployment rate hit a one-year low of 6.2% as new jobs were created for the 10th month in a row.
Another factor driving stocks higher is the hope that taxes will get cut materially in America. This theme continued to play out this week but, as Republican Senator chairman of the tax-writing Finance Committee Orrin Hatch warned, “it’s uphill, there’s no doubt about that.” Perhaps the most realistic quote came from Republican Bob Corker who complained “I’m disheartened right now,” when commenting about the decision to keep many of the existing tax deductions that lobbyists don’t want to lose. “All I see is a bunch of sugar being thrown on the table, but no one wants to eat even one leaf of spinach yet.”
According to RBC, there are a few geo-political issues that could disrupt the supply of oil from a few different places. Kurdistan is pushing for independence but neither the Iraqi government nor Americans want to change the status quo at this time. Not that anyone is much surprised by their desire to split from Bagdad. Also, more pressure on Venezuela’s Maduro by the Americans might be coming in the form of sanctions. That will hurt PDVSA’s ability to keep production up and make government debt payments at the same time. And then there is the Iranian nuclear deal that America now is signaling it will walk away. If they do, it may lead to some sanctions being put back on, making foreign investment into Iraq and exports from Iran more scarce.
Spanish stocks shed as much as 9% after the northeastern region of Catalonia held a vote to separate from the motherland. Spanish authorities tried blocking the vote as did the constitutional court, resulting in a lot of ugly baton violence by riot police on unarmed men and women. Critics of Spanish authorities say it was democracy being denied while authorities claimed the votes were not “authorized”. Some 90% of voters who did cast their votes did so in favour of leaving Spain. The EU is in a tough spot because their major priority is to keep the union alive. And the Spanish constitution is pretty clearly against any splinters:
“The constitution is based on the indissoluble unity of the Spanish nation, the common and indivisible homeland of all Spaniards; it recognizes and guarantees the right to self-government of the nationalities and regions of which it is composed and the solidarity among them all.”
But let’s be historically honest. Constitutions are all man-made constructs that are known to be subject to changes, as are any other rules, laws, ethical norms, freedoms, human rights, etc. What is completely sacred and normal to one person in one era is absolutely not to another.
As the brilliant book “Sapiens: A History of Mankind” clearly illustrates, these constructs have forever and will ever shift and morph to varying degrees. Man’s ability to myth-make and believe in those myths is what sets us apart from every other creature on earth. This quality makes us both better equipped and organized to co-exist with one another while at the same time it makes us imperfect and fallible and sometimes forces us to fight it out (be it politically and/or violently) to reach some sort of a settlement.
We hope Spain finds peace. The same goes for the victims of hurricanes or the country music fans and families affected by the inexplicable shooting in Las Vegas.
And Tom Petty.
Musings Beyond The Markets
Some excerpts from Sapiens:
“History is something that very few people have been doing while everyone else was ploughing fields and carrying water buckets.”
“money is the most universal and most efficient system of mutual trust ever devised.”
“One of history’s few iron laws is that luxuries tend to become necessities and to spawn new obligations.”
“Culture tends to argue that it forbids only that which is unnatural. But from a biological perspective, nothing is unnatural. Whatever is possible is by definition also natural. A truly unnatural behaviour, one that goes against the laws of nature, simply cannot exist, so it would need no prohibition.”
“In 2012 about 56 million people died throughout the world; 620,000 of them died due to human violence (war killed 120,000 people, and crime killed another 500,000). In contrast, 800,000 committed suicide, and 1.5 million died of diabetes.23 Sugar is now more dangerous than gunpowder.”
“How do you cause people to believe in an imagined order such as Christianity, democracy or capitalism? First, you never admit that the order is imagined.”
“You could never convince a monkey to give you a banana by promising him limitless bananas after death in monkey heaven.”
“We study history not to know the future but to widen our horizons, to understand that our present situation is neither natural nor inevitable, and that we consequently have many more possibilities before us than we imagine.”
Word of the Week
curmudgeon (n.) – a bad-tempered or surly person. “It’s a little too early to play curmudgeon and complain that the kids today don’t have the patience to read long web pages.”