Jobs Weaken Big Time / Fed Cut Likely
A: Oh boy. On Friday, the BLS issued an absolutely AWFUL jobs report that brought us the first negative jobs # in 4 years, and also restated jobs data downard for the months of June & July! Just an awful report no matter how you cut it. Some may ask why stocks fell because that all but locked in a fed cut very soon; the reason is the stock market ALREADY priced in rate cuts and the news of the already weakening economy now means a recession is a very real possibility. Stocks had to adjust. Lots to discuss here to get all those interested in the macro side of things up to date. Sorry for the delay while I was away since Friday.
First the very disappointing jobs data. According to CNN Money:
The number of Americans with jobs fell in August for the first time in four years, according to Friday's government employment report, raising fears that weakness in the economy has spread beyond the housing and financial sectors that have roiled markets in recent weeks.Job losses were mostly fealt in construction, manufacturing, and government services while health care and education showed the most strength. We STILL are yet to feel the full effect of job losses resulting from residential construction + credit mess and associated lenders/brokerages/financial services who are in big trouble. I worry there is more pain to come. However, because NOT ONLY AUG was bad but June & July were revised downwards as well tells me that we are already dealing with a weaking economy! That means the fed is now BEHIND THE CURVE and all but locks in a rate cut at their upcoming meeting. The question is whether it will be 1/4 or 1/2. Lets go back a bit for a moment.The Labor Department report showed was a net loss of 4,000 jobs in the month, down from the 68,000 increase in July, which was also revised lower. Economists surveyed by Briefing.com had forecast an increase of 110,000. The household survey actually showed an even larger drop in the number of Americans saying they had jobs - a drop of 316,000.
For the longest time, I have been stating that the two biggest threats to housing were:
1. Tighter Lending Standards
2. Job Losses
...in the following posts:
DEC 28th, 2006 ---> Housing Data In: Not Too Shabby But...
JAN 2nd, 2007 ---> Predictions Post
JAN 25th, 2007 ---> Existing Home Sales & Foreclosures
MARCH 1st, 2007 ---> Why Lower Rates Might Not Be Good
Then, on AUGUST 17th, about 3 weeks AFTER the credit squeeze came to a head, I had to alter my two biggest threats (in my post titled, "Time To Talk Global / Consumer / Jobs") as tighter lending standards and the credit crunch came true. So, in the post I stated that my NEW two biggest threast to housing were:
1. Global Growth Slowdown Amid Credit/Liquidity Crisis
2. Job Losses
Keep in mind that at the time I wrote the above post, jobs data showed some signs of slowing but nothing drastic! Well, that ALL JUST CHANGED ON FRIDAY! I mean, on September 4th, 3 days before that jobs data even came out, I publicly stated to you in the post, "Certainty Helps Stocks / Housing" that:
"I just don't see the fed aggressively acting in 2007 unless the jobs data deteriorates significantly! If they do, my near term prospects on the economy will become very gloomy! That's not to say that I think this credit squeeze is over or that it's full effects have been absorbed yet. Not so. I think we have major issues under the surface that can negatively effect jobs and consumer spending, but the data is not significantly showing that yet."I couldn't have been more clear about that! Now, jobs are being lost not only last month, but for the past three months now! That fits into the statement of "deteriorating significantly" in my book and changes the macro environment and future fed policy.
Now that all the red flags I've been discussing for so long are finally hitting the jobs market, I expect the fed to act, and act rather aggressively until we get to the end of the year! The moral hazard question is a valid one as no one wants a fed with the reputation of bailing out those who make bad bets. But, this jobs report now gives the fed actual evidence of a weakening US economy so that they can make a rate cut without their credibility questioned.
I have to adjust my biggest threats to housing once again as both my original predictions (tighter lending standards/credit crunch + jobs losses) have now come true. The two biggest threats to housing I now see are:
1. Global Growth Slowdown Amid Credit/Liquidity Crisis
2. Insolvency Crisis - Inability to pay back debts; assets no longer exceed liabilities
I'll discuss #2 when I get back to NYC. My biggest fear now is that a slowdown is here in the US economy and even worse, it will SPREAD TO GLOBAL ECONOMIES! Globalalization has been such a major factor in the growth of US corporate profits and ultimately stocks for the past few years. If we remove that equation, we will be entering a period of stock market corrections, more layoffs, negative wealth effect, change in consumer psychology, and big cutbacks in bonuses and salaries. This has NOT happened yet! I often say this when I make these predictions as I did with my past ones.
Let's see how it works out. I want to get this post up without the fine tuning I usually do or adding any image to portray the emotion of the post. So, hopefully you'll be able to read the entire thing without falling asleep. I'll get into this more this week as these are real issues, real problems, and housing is the end result of all this in the macro food chain! Questions I now have are:
1. Any fed move will be behind the curve. How aggressive will they be? I worry it won't do that much other than cushion the carnage to the economy in the years to come! It will NOT help the illiquid credit markets or the damage that is yet to come from this problem.
2. How LIBOR rates may be affected, if at all, for ALL those ARM resets & credit debt holders in 2008 and beyond?
3. When will brokerages/lenders/hedge funds ALL come out with their holdings related to mortgage backed securities? Who's holding what? There is still no liquidity in secondary mortgage markets leading me to believe more pain is to come?
4. Global connection to US subprime mess and illiquid secondary mortgage markets? Will that cause the global slowdown?
5. Consumer? How will spending restrict? How will sentiment/psychology change?
6. Insolvency Crisis? How many bad debts are out there in the hands of consumers, lenders, hedge funds, brokerages, corporations that won't be able to be paid back? With a dried up secondary mortgage market and a very slow commercial paper market (corporate bond market), what will happen when margins are due?
Comments (2)
Noah, everybody seems to be saying that the Fed will definitely cut the rate. It is as if, that magic wand will do its trick. Am I the only who think that the Fed will not cut the rate? You mentioned moral dilemma; does the Fed wants that? If the rates, it will not jump-start borrowing. People are in fear and will not borrow even if rates are restored to their formerly low levels. A rate cut will only prolong the crisis and delay the correction that needs to be done. It will also call a drastic decline of the value of the dollar which is already bleeding badly. Low interest rates and declining dollar = speculators exchanging their dollars and investing abroad where rates are higher. Betting against the dollars will be the next game, once the Fed cut interest rates. Thus, they won't.
Posted by Bobby | September 10, 2007 9:05 PM
The housing concern in regards to buyers having a lower rate is NOT the concern. The housing concern in fed's minds is the trickle effect on consumer spending and the US economy falling into recession. Any rate cut WONT be felt immediately anyway and will take time to funnel through economic system. The main goal of the cut will be too cushion the slowdown that the fed obviusoly feels is coming.
Thats the thing with fed cuts. It is behind the curve AFTER they see data that economy is slowing. The moral hazard debate lsoes steam AFTER the awful jobs data came out and 2 prior months got revised down. Real evidence that economy is slowing. That is what changed the landscape and now the fed is BEHIND the curve as if the economy does slip into recession, if they dont act to cushio the blow, then 2008 will be a long rough year.
Lending rates are working under a different dynamic now with repricing of risk and dried up secondary mortgage markets. Fed cut wont help lending rates that much, may help credit debt a bit, but again, will mostly be targeted to cushion the severity of any future economic slowdown.
Posted by Noah | September 11, 2007 9:06 AM