Wednesday, January 8, 2014

A stronger ADP report is not cause for concern

The ADP report on private sector job gains for December was decently stronger than expected (+238K vs. +200K). That appears to confirm what other indicators have been suggesting, namely that the economy strengthened somewhat on the margin over the course of the last several months. Of course, this time of the year seasonal adjustment factors play a strong role (layoffs typically surge around year end), so it's hard to get too excited. The way I read the above chart, which compares the ADP estimate to the BLS employment report, job growth today is about the same as it has been for the past few years, and similar to what it was during 2004-2006.

The market was initially concerned that this upside surprise would translate into a faster-than-expected tapering of QE, and that in turn would be bad news for future growth. I would say that the Fed would be quite justified if it thought that QE should be tapered at a faster pace, and that this wouldn't be bad news for the economy at all. There is little or no evidence that QE has stimulated growth, so an absence of QE shouldn't depress growth. As I've said many times in the past, the real purpose of QE was to provide risk-free assets—T-bill equivalents—to a world that was desperate to deleverage and de-risk.

So the real issue surrounding the tapering of QE is not whether the economy is a bit stronger than expected, but whether the world's demand for risk-free assets is declining, and whether the world is becoming less risk-averse on the margin. I suspect that risk aversion is on the decline, in the same way that confidence is slowly returning, so that would suggest that a faster pace of tapering is fully warranted and not something to worry about.

If there is anything to worry about, it would be a more rapid return of confidence and a more rapid decline in risk aversion. If the FOMC members lie awake at night worrying about anything, the subject of their concerns is likely to be the return of confidence. More confidence would mean banks would be more inclined to lower their lending standards and the world would be more inclined to borrow money rather than to deleverage. Excess reserves are so huge that banks have effectively no constraints whatsoever on their ability to lend, so an increase in lending could at a some point result in a significant increase in the supply of money relative to the world's demand for money. That's equivalent to an increase in the velocity of M2, and that means that the existing stock of money could support a significant increase in nominal GDP: more growth and/or more inflation.

The decline in gold prices over the past year is one symptom of a return of confidence. Similarly, the decline in credit spreads, which are now beginning to approach levels that are consistent with healthy economic growth, is symptomatic of a return of confidence. Swap spreads have been very low for a long time, and have thus correctly predicted healthier financial markets and improving economic fundamentals.


Benjamin Cole said...

Sheesh, I am not concerned at all--I think the economy could easily generate 300k jobs per month, and still have lots of slack, and no inflation.

Is QE only adding to bank reserves, at this point?

Well, maybe, maybe not. Depositors could also be packing away savings, and there is lots to suggest that is true. So while reserves have ballooned concurrent to QE, it may be plenty of QE money is making its way into the stock and property markets and actual consumption.

Since QE3---open-ened, results dependent QE---
the S&P 500 is up more than 25 percent, real estate markets are good, and the private sector is generating 200k jobs per month, and maybe that figure is rising. The federal deficit has shrunk nicely.

I hope QE doesn't work like this for a long, long time.

The experience in Japan was that the central bank, ever worried about inflation, pulled out of QE too soon. The 2001-6 use of QE coincided with Japan's longest postwar expansion, and almost their only expansion since 1992.

Rather the Fed err on the upside for a change, but that is not likely to happen.

The Fed remains an institution suspicious of prosperity and deeply fixated on inflationary phantoms.

And now they have added bubble ghosts to the mix.

theyenguy said...

The real issue in the US Federal Reserve Tapering is that it is tacit affirmation that the world central banks’s monetary policies and economic policies of investment choice and credit stimulus have crossed the crossed the rubicon of sound monetary policy and have made “money good” investments bad.

This is the case as An epic reversal in fiat wealth commenced January 2, 2013. Jesus Christ acting in dispensation, that is the administration of all things economic and political, a concept presented by the Apostle Paul in Ephesians 1:10, had begun to PIVOT the world from the paradigm and age of liberalism, into that of authoritarianism, on the death of fiat money, on October 23, 2013, as investors deleveraged out of Credit, AGG, and Currencies, DBV, CEW, on fears that the world central banks’ monetary policies of investment choice and credit stimulus, have crossed the rubicon of sound monetary policy, and have made “money good” investments, such as the Defensive Stocks, DEF, and the Emerging Markets, EEM, bad. And then, He then fully PIVOTED, the world from the paradigm and age of liberalism, into that of authoritarianism, on the death of fiat wealth, that is World Stocks, VT, on January 2, 2013.

Yes, it’s the Defensive Stocks, DEF, that is defensive large cap value stocks, together with Growth Outside the US, DTN, Electric Utilities, XLU, Global Telecom, IST, Energy Partnerships, AMJ, Consumer Staples, KXI, Small Cap Consumer Consumer Discretionary, PSCC, and the Emerging Markets, EEM, which are turning lower first, as is seen in the ongoing Yahoo Finance chart of DEF, DTN, XLU, IST, AMJ, KXI, PSCC, and EEM. The Risk-Off ETN, OFF, has been trading higher since the first of the year, communicating that risk appetite has turned to risk aversion. And the rise in credit spreads, seen in the chart of LQD:BLV, trading lower since the first of the year, communicates the beginning of the loss of faith and the beginning of the failure of economic growth. Gold, GLD, trading higher since the beginning of the year communicates a demand for safe assets.

The reality is that the economy is about to enter a deflationary bust, as the crack up boom in fiat wealth growth presents extreme systemic risk. The business cycle is now complete, and is now moving into Kondratieff Winter, as the Benchmark Interest Rate, $TNX, entered an Elliott Wave 3 Up on October 23, 2013; these are the most sweeping of all waves, they produce the greatest affect of all the waves; in this case, the destruction of economic prosperity, and introduce economic destructionism, as highlighted in Christopher Quigley’s Financial Sense article Kondratieff Waves and the Greater Depression of 2013-2020, and in David Knox Baxter Safehaven article Prepare for the Global Long Wave extinction event.

Creditism, corporatism and globalism were the dynamos of liberalism’s economic activity, whose purpose and focus was for investment return.

Economic growth metrics, such as job creation, ADP Employment, increasing GDP, are hokum and exogenous to liberalism’s purpose of providing investment return for the investor based upon one’s risk profile.

Five years of liberalism’s money manager capitalism is going to produce authoritarianism’s Minsky moment very soon.

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