U.S. Economy: The Game of Political Smoke & Mirrors Continues
On February 5, 2016 President Obama addressed the nation to announce national unemployment “dipped to 4.9 percent in January” noting “151,000” jobs were created during the month. Obama used this opportunity not only to quell public anxieties over rumors of a looming recession in 2016, but also scolded GOP presidential candidates for stoking the flames. However, given job rates tend to increase around the holiday season – hence the term seasonal employment – and failing to address other market indicators in his speech – such as the DOW, weakening dollar, and renewed investment in gold – what is really going on with the U.S. economy? Regrettably answering this question is elusive due to the apparent mass of contradicting market data points. If America’s economy is relatively healthy, thanks in part to fiscal and monetary policies, why did the FOMC issue a press release on January 27, 2016 citing “economic growth slowed last year” and “additional decline in underutilization of labor resources” as well as other factors resulted in the Committee deciding “to maintain the target range for the federal funds rate at ¼ to ½ percent”? Reading between the lines a bit here, the FOMC agreed to postpone or slow the pace of attempting to normalize monetary policy for fears the U.S. economy is too feeble and might react adversely to a 25 basis point bump in the federal funds rate (¼ of 1%) in the next couple of months. For those monitoring global market activities during the last few weeks it should come as no surprise that many investors are running for cover.
China and Japan took measures to weaken respective currencies in favor of increasing domestic productivity, with apparent total disregard of impacts to trading nations. Iran jumped into the bloated crude oil market forcing downward pressure on prices, sending global market indices into a whirlwind. Simultaneously European countries struggle to identify a viable balance between national security and fiscal responsibility when weighed against moral compassion in addressing the mass influx of refugees that is threatening to upend the entire region. And with all this international turmoil the United States continues to suffer substantial trade imbalances with its top 5 trading partners – China, Japan, Mexico, Canada, and Germany – in spite of a national debt exploding past the $19 trillion mark.
On February 3, 2016 Market Watch reported “the 10-year U.S. Treasury yield hit a one-year low…a sign the market believes that interest rates will remain lower for longer”. Anthony Valeri, LPL Financial investment strategist, was quoted as saying “the bond market is pricing in a lot of bad news…falling inflation expectation and worries about slower economic growth world-wide”. Emphasizing this viewpoint is the fact “the dollar nursed hefty losses against the yen and euro” after the Fed “tempered expectations on the pace of future U.S. interest rate increases”. As a result, on February 5, 2016 FOREX quoted USD/JPY exchange rate settled at $116.80 (down from $120.85 on 01/31/16) and EUR/USD exchange rate closed the day at EUR 1.11 (up from EUR 1.089 on 01/31/16).
[graphiq id=”48FkutVaL9r” title=”LBMA Gold Price in USD (AM)” width=”600″ height=”515″ url=”https://w.graphiq.com/w/48FkutVaL9r” link=”http://time-series.findthedata.com/l/3475/LBMA-Gold-Price-in-USD-AM” link_text=”LBMA Gold Price in USD (AM) | FindTheData”]
If the aforementioned failed to scare you, this week gold reversed its deteriorating course with renewed investor interest pushing the USD/oz from approximately $1,117 to about $1,173. And for anyone watching the housing market and expecting the quasi-Fed induced bubble to explode you might reconsider because the Fed is unable, unwilling, or simply confused about pushing the pace of normalizing monetary policy. One can only assume historically low mortgage interest rates will persist into the foreseeable future. Given all of these confusing metrics trying to measure true ROI (return on investment) for all investments just got more complicated. Granted while some people might find this rhetoric equivalent to waiving a “dooms-day” flag, I assure you it is not.
To the contrary, the sole purpose here is to question President Obama’s assertion that “the United States of America right now has the strongest, most durable economy in the world” citing the 0.1% dip in the national unemployment rate as justification. From my perspective Obama’s message has more to do with giving aid to Democrats during the 2016 presidential election cycle. In closing I suggest taking calculated measures when evaluating ROI relative to domestic and global risks, because 2016 is gearing up to be a rough ride for many investors.