Bonds clobbered, weird job numbers add to stock uncertainty

Employment and economic news no longer make sense. Traders utterly confused as bond yields increase, putting bond vigilantes in the driver’s seat. Greece punts.

TMX board listing bond trades.
TMX board listing bond trades. (Via Wikipedia)

WASHINGTON, June 5, 2015 – Friday’s stock market trading threatens to degenerate into another free-for-all, similar to Thursday’s rolling disaster. Bond have been brutally beaten this week, continuing into today’s trading, with bond prices sinking as bond yields move up at a rapid clip.

The action in normally boring bonds has stock investors petrified. They read the increase in yields as adding competition to stocks, whose yields tend to become more unattractive as bond yields increase. So what’s an investor to do? Why, dump stocks, of course.

Warning: longish read ahead.

Fear is arising that those legendary but always nameless “bond vigilantes,” heretofore mysteriously dormant, are once again arising like an army of monetary poltergeists to force interest rates and bond yields up whether the Federal Reserve likes it or not.

We saw the opposite kind of action in 2008-2009 as the vigilantes bailed out of bonds en masse, overselling the entire bond market in the process, creating the trade of a lifetime for those investors willing to take a chance on the long side. We may now be witnessing the beginning of an equal but opposite reaction leading to the short side and ultimately to trouble for stocks, whose yields may start to lose their appeal.

Stocks by many measures are overpriced. With bond yields apparently on the march once again as the bond vigilantes arise to force interest rates back on a normal trajectory, once seemingly juicy-looking stock dividends are looking less tempting, leading to over all panic selling bouts.

On days like Thursday when Greece and the ECB play brinksmanship, stocks get kicked even more as bond yields drive still higher in fear of international chaos. When that action backs off, markets tend to go higher again, until the next time.

Compounding the mess Friday, even as Greece and the EU appear to be kicking the can again on resolving their high-stakes quarrel, the U.S. issued an “unexpectedly strong” employment increase, briefly cheering markets; that is, until they realized that increased employment could lead the Fed to raise interest rates sooner rather than later, proving the bond vigilantes correct in their current judgment.

The problem is that lurking behind today’s celebrated job numbers is the grim fact that the main or real unemployment rate, expressed by the Bureau of Labor Statistics’ (BLS’) U-6 number, remains pinned in double digits, indicated a painfully high level of essentially permanent, structural unemployment remains despite all Washington’s happy talk.

A succinct and useful explanation of this phenomenon appeared earlier today on CNBC:

“A number of economists look past the ‘main’ unemployment rate to a different figure the Bureau of Labor Statistics [BLS] calls ‘U-6,’ which it defines as ‘total unemployed, plus all marginally attached workers plus total employed part time for economic reasons, as a percent of all civilian labor force plus all marginally attached workers.

“In other words, the unemployed, the underemployed and the discouraged—a rate that still remains high.

“The U-6 rate was flat in May at 10.8 percent. It was the first time since early 2014 that the rate did not change from one month to the next….

“The U-6 rate has held firm in the double digits since June 2008. It most recently peaked at 17.1 percent in April 2010.”

The following chart, adapted from this week’s BLS stats tells the story.

U-6 vs. U-3 unemployment.
Rarely reported, more realistic U-6 unemployment rate vs. “official” U-3 rate for public consumption. (From CNBC chart derived from current BLS statistics.)

Based on the same numbers—quite different from the government’s preferred and widely reported U-3 employment and unemployment numbers—ZeroHedge observes

“… the biggest malady affecting the US economy today, is still in place: as the chart below shows, the labor force participation rate rose just barely from 62.8% to 62.9%, a range it has been for the past year. Indicatively, the last time the US labor force was here, was in mid-1978.”

Labor Force participation rates.
Labor force participation measurements, via ZeroHedge. The top chart goes down as the bottom goes up, with both at historically negative rates.

Hold that thought…

Over in that international basket case known as Greece, Reuters reports that Greece has once again decided to “delay” making a scheduled loan repayment to the International Monetary Fund (IMF) today as expected.

“Athens bundled a 300-million-euro debt payment due on Friday with others payable later this month as Prime Minister Alexis Tsipras, facing fury among his leftist supporters, pushed for changes to tough terms that the IMF and EU creditors are demanding to release aid to Athens and stave off default.

“Bankers played down the possibility that the delay might lead to the kind of capital controls that Cyprus imposed during a 2013 crisis, closing banks for almost a fortnight and restricting euro payments abroad for much longer.

“‘If it is read as Greece asking for some more time to make the payments while it tries to clinch a deal with lenders, it is unlikely to turn into a problem and bring capital controls,’ one senior banker told Reuters.”

Right. And the Maven will be elected the next Pope. Greek citizens have been staging runs on Greek banks all this week, fearing the worst, and heaven knows how this one will end. Greek citizens rightly fear that they’ll be next on the savings confiscation list, having seen that happen last year to their Mediterranean neighbors over on Malta.

By “confiscation,” we are simply supplying the truthful word for what banking officials call a “depositor buy-in” or “bail-in.” In other words, savers will get their money back some day when their banks are once again solvent. As if. Depositors’ cash has now magically been transformed into virtual shares of their bank, illiquid shares, no less. Who knows when or if they’ll ever be able to “redeem” or sell their shares and get their money back? And in the meantime, where did their solvency go?

Having seen this done once, Greek citizens are logically concluding it could happen to them next, so they’re bailing. Both the country and its citizens—and its mega-wealthy, criminal oligarchy—are looking pretty stupid here. But don’t imagine this scenario couldn’t play out in the U.S., which, BTW, has similar “buy-in” powers already on the books in case they’re “needed.”

All of which comes back to the bond action here in the U.S. and the resulting market nervousness. For a variety of reasons, not the least of which are an anti-capitalist Administration and a Congress purposely rendered permanently inert by a cadre of socialist (aka, “progressive”) Democrats, the Federal Reserve’s years-long QE policies have been rendered ineffective.

That means the central bank is now being forced to return to “normal” and likely depressive monetary policy before any real recovery has brought U-6 down to reasonable levels. This presents a Herbert Hoover-style scenario, which is the real reason why investors are increasingly irrational and spooked. It’s ugly, ugly, ugly and trading the markets effectively is now becoming impossible.

We apologize for blathering on about all this interlocking complexity. Most people tune it out because it’s too complicated. That it is. But it’s also a reason why today’s markets, hemmed in by economic nonsense that has nothing to do with normally functioning capitalist systems, are heading for a state of permanent and disastrous empathy.

Pretty soon, nobody will any longer “believe.” That’s what really caused the 1929 Crash and over a decade of Great Depression. The way it’s going, American citizens, like the Greeks, will lose their “belief.” And then what will investors do?

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Terry Ponick
Biographical Note: Dateline Award-winning music and theater critic for The Connection Newspapers and the Reston-Fairfax Times, Terry was the music critic for the Washington Times print edition (1994-2010) and online Communities (2010-2014). Since 2014, he has been the Business and Entertainment Editor for Communities Digital News (CDN). A former stockbroker and a writer and editor with many interests, he served as editor under contract from the White House Office of Science and Technology Policy (OSTP) and continues to write on science and business topics. He is a graduate of Georgetown University (BA, MA) and the University of South Carolina where he was awarded a Ph.D. in English and American Literature and co-founded one of the earliest Writing Labs in the country. Twitter: @terryp17