Friday we received the non-farm payrolls release, and once again, market`s reaction was very weak, contrasting to the past experience where we would frequently have monthly trends started or ended by the directions indicated by the numbers. This was the case, for instance, during the 2007-2008 crash where the slow reversal in Q4-Q1 employment numbers decisively reversed the previous uptrend that had been in place for many years in the risk market. Now, however, markets appear to be convinced that employment does not matter because the Fed will intervene so strongly in the case of multiple weak releases that risk assets will be on an uptrend perhaps indefinitely. This mentality is not a new phenomenon, but has been reinforced strongly by the Fed`s latest actions.
An addition of about 103,000 to the payrolls which brought the unemployment rate to 9.4%, was received positively by the bond market where prices risen again, while stocks and currencies have not reacted by much. Gold, similarly, was mostly unchanged. Our understanding is that the U.S. market is going to go higher, and employment numbers have little to no relevance, provided that another major shock does not damage stability.
Meanwhile, lawmakers are continuing their bickering over U.S. debt which the government demands to be raised by March 31st, or in the worst case April 16th. The ceiling is right now at $14.29 trillion, and to raise it congressmen from both the Democratic and the Republican Parties are pressing the government to present a long-term plan for budget cuts reaching up to trillions of dollars, in a bid to preserve their seats at the next election, and probably, in consequence of a little bit of commonsense and a feeling of responsibility too.
Could the Congress refuse to raise the debt limit? We do not believe that there is even a remote possibility that the debt cap will not be raised, since, as Geithner himself remarks in his comments to the Congress, failure to act would have consequences that would easily dwarf in their impact the experience of 2008 after the Lehman default. It is not hard to see that, if the default of Lehman Brothers could trigger a global financial crisis, the default of the U.S. government would trigger the armageddon for the financial world. But speaking now, and talking tough will cost nothing to the U.S. or to the representatives. And as such, the vocal opposition that we observe right now should not be taken to imply anything more than posturing to the electorate, since after all, if the U.S. went bankrupt, the lynch mobs that would crowd Washington would not be too kind on Senator Conrad, Congressmen Erskine Bowles, or Alan Simpson, who now head the movement to discipline the administration.
But in spite of the charade - and not withstanding the possibility that the Obama administration will make some cosmetic changes here and there to appease the Congress and to find a compromise - the fact that this debate is now being had, and various possibilities and scenarios are being discussed is proof enough that the mentality of the boom days has been left behind firmly by the people and their representatives in preference for a much more austere and sensible outlook on finances, consumption and economic life. The same reasons that compel the government and the Congress to curb down on borrowing are depressing comsumption in the U.S. and investment and it is extremely unlikely that by allowing people to borrow more the Fed or any other branch of the economic leadership can reverse the trend towards thrift. Perhaps the Fed is preventing a sharper contraction through its actions and interventions; it is certainly a plausible proposition. But it is unclear that by doing so it is not protracting the elimination of the weak (in the corporate world), the survival of the stronger and healthier, and the properity of the smarter, the more competitive actors in the country. We know that the U.S. owes its strength and success to its merciless approach to competition between the powerful and the rich.I it is not clear that the Fed is not destroying this pillar of the American system by its actions, however limited its impact may be in terms of reviving the economy in anything longer than the immediate future.
Taken in this context, the NFP release is a small component of a much larger puzzle which is being dominated by factors that have little relationship to economics. We believe, in consequence, that what happens in politics has greater relevance to economic trends, and the duration of the bubble, than any mildly positive or negative economic data for the enxt few years.
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