Friday, August 2, 2013

Taper Tigers: Payrolls and the Fed

Here's the thing. The jobs numbers released this morning are weak enough to persuade the Fed to keep the pedal to the metal, which the market loves, right? At some point, though, stock prices are going to come down from the liquidity high and realize the Fed has a monetary policy for a reason – and it isn't to inflate asset prices.

Nope, Ben Bernanke and the majority of the Federal Open Market Committee must believe the economy is in danger of dipping back into recession, even deflation. Taper, the new Wall Street buzzword for tighter money, is far off. 

Sooner or later, market participants will give up on the idea that six months hence economic growth will justify higher stock prices today. In other words, they'll see monetary policy as acknowledgment that the times ain't a changin' and that valuations are too optimistic.

The Labor Department reported this morning that nonfarm payrolls grew 162,000 in July, well below the 185,000 consensus estimate. What's more June and May totals were revised lower by 26,000 jobs.

Even more significant, in our view, was the drop in the work week and wages. The government said the work week dropped 0.1 hour and that hourly earnings fell by two cents after rising 10 cents in June. Plugging this into our third-quarter GDP model puts growth near zero absent any productivity gains.

Meanwhile, little noticed in the FOMC's release this week affirming its bond buying program was the observation that inflation (the grease for economic wheels) is well below the Fed's target of 2%, yet another reason for the Fed to stick with its quantitative easing regimen.

There have been some bright spots. One significant data point was the increase in imports in second-quarter GDP accounts released earlier this week. Though higher imports subtract from the GDP calculation, they do indicate stronger consumer demand.

But stock prices are too rich, in our view. According to, total capitalization of U.S. stocks is 113% that of GDP. The market could churn higher on momentum, but it is not undervalued in our view. All the easy money on easy monetary policy has been made, we think.

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