Funny thing is that the minutes were in April, but in first week of May, there was the disappointing jobs report and then there were the rising unemployment claims throughout May, yet everyone treated the news as current and started a sell off in almost anything. Which are the more recent news?
Strong jobs growth is really quite a myth. The U3 feel good data of course shows unemployment rate a 5%. But if you look at the U6 data, unemployment is still mired at around the 10% region (see chart):
Source: ST Loius Fed
Look closer on the chart and you will see that the U6 data is much higher now than prior to the Global Financial Crisis. Is that good jobs growth? The US has been losing high paying manufacturing jobs and in its replacement it has part-time and low paying jobs such as retailers, bartenders and waiters/waitresses.What's going to drive the consumption economy?
What about the people who work two jobs simply because one is not enough to sustain the family. More jobs do not necessarily mean more people working. If the jobs growth is so spectacular, why are 47 million Americans on food stamps and nearly 100 million people of employable age remains unemployed?
Second point, the US economy. Despite the trillion dollars pumped into the economy, the GDP growth remains sub-par compared to the bull cycle in the 1990s. Is that considered as strong economy growth? The problem is that things are so bad that even centrals banks are lowering their own forecast, very much like the S&P00 earnings forecast, lowered so that the earnings could be an easy beat.
If the US economy is strong why are so many of the economic indicators pointing towards slowing global trade (Baltic Index), manufacturing and services (PMIs), goods movement within the US (Freight Index) and the the high inventories to sales? Look at the numbers of companies filing for Chapter 11, the retailers who are announcing massive closure of malls and layoffs.
Despite the indicators the Fed believes that 0.5% growth in Q1 2016 is a sign of a strong economy.
Well, it looks like the Fed never waste an opportunity to talk up the dollar.
So what will be the ramifications?
1) Should interest rates hike we could see the US Government debt exploding due to the higher interest in borrowings. So the deficit could widen and the debts will keep piling. Will this make the dollar stronger?
2) Corporate America which have borrowed US$2.5T in the past few years for dividends and share buybacks now faced the prospect of higher interest which will squeeze their margins all in the midst of major declines in earnings. Expect more Chapter 11 to be filed.
Recent ruling on US$15 per hour wage and overtime will cause employers to cut down the workforce. So expect to see more layoffs and spike in unemployment claims.
3) This could put a dent in housing sales as the mortgage rate rises, thus impacting the housing market.
4) A strong dollar could see pressure mounting in China. Will it trigger a Yuan devaluation, very much like what happened early in the year,causing a immediate crash of global stock markets worldwide? We could see a repeat of that moment because the Chinese do not want to see a strong Yuan (which is pegged to the dollar). Japan and EU would cheer because it will improve their exports. So if China makes its move to devalue the Yuan, you can see another currency war ahead.
I think a series of poor unemployment and economic data in the coming weeks/months will stay the Fed's hand in raising interest rates. The debt burden is just too high and global trade is slowing down after the burst of of positive data, driven by China's US$1T stimulus. China has already signaled it will rein in its debts and put a brake on loans.
I still believe that the global economy will see a major setback in the coming months and that hedging in gold and silver remains a viable insurance against this backdrop. I continue to be bullish on miners.
You are encouraged to do your own research as our risk profile differs.
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