Friday's Unemployment Report Didn't Sink the Markets
Saturday's Wall Street Journal had a very predictable above-the-fold headline: "Grim Job Report Sinks Markets." Sadly, for the world's leading business publication, and for the myriad other media outlets that led with something similar, the headline was utter nonsense.
That's the case given the simple truth that markets never price in the present, rather they always price in the future. What spooked the markets on Friday was not a jobs report that pointed to sluggish economic activity in the present, but a weak jobs report that will author policy responses that will make things worse in the future.
Indeed, imagine if in response to Friday's number President Obama held a press conference to say that with the economy struggling he would seek to make permanent the '03 tax cuts, slash federal spending to free up capital for entrepreneurs, open the borders to foreign products and immigrants, cease any and all new regulations while putting all existing ones under review, and then to top it off, he announced jointly with Treasury a plan to strengthen and stabilize the value of the dollar? If so, readers can rest assured that stock markets would have soared; limp job creation totally irrelevant to a bright future made bright by a suddenly chastened President pushing to remove federal barriers to economic growth.
Of course that's not what happened on Friday, and markets tanked not because of some Keynesian measure of employment, but instead fell because all indicators point to worse policy down the line. Stock markets discount what's ahead, and what's ahead isn't very appealing to investors.
First up, and very clear to those with a pulse, is that the jobless number points to the Federal Reserve pursuing yet another round of "quantitative easing." On its own this is anti-growth because measures meant to keep rates low protect those who commit capital to the dead money sector that is housing, and if not housing, QE protects those who invest in the total capital destruction that is government spending. Economies going backwards tend to repel investors, and with QE a screaming tautology that the Fed will be supporting yesterday's economic mania combined with economy-sapping government waste, investors on Friday were in a sour mood.
Second, and this was made most evident by a spike in the price of gold, quantitative easing has long correlated with dollar devaluation. To put it very simply, a Bernanke Fed that's meddled its way to the slowest recovery since the Great Depression will have a new excuse to make things worse; its interventions fully supported by an Obama administration that believes like the Bush administration before it that a weak dollar is the path to prosperity. Notable here is that investors weren't asked about how policies of dollar debasement impact their capital commitments, but since all investment is by definition a purchase of future dollar income streams, policies aimed at devaluing those income streams logically turned off investors.
Of course if the markets had soared on Friday absent any pro-growth statements from President Obama, those in our midst who tilt Republican would have said the rally was a function of investors pricing in a Mitt Romney victory come November. No doubt the jobless report boosts Romney's election chances, so why the sagging stock markets?
The answer to the above is pretty basic, and it's bad news for Republicans oddly optimistic that the supposed party of growth has finally learned its lesson. Investors don't think so, and the reason they don't has to do with Romney - though a great businessman - not having much more of a clue than Obama about pro-growth economic policy.
To understand why, one need only consider what Romney has promised to do his first day in office if elected. Specifically, Romney promises to proclaim China a "currency manipulator", which is the private equity legend's way of saying he'll start a trade war. Or, more to the point, Romney promises to open his Administration with yet another stock market crackup.
The above is the case given the simple truth that trade wars invariably retard the natural drive toward labor specialization (basically the advancing economies that investors cheer), and instead promote the flailing industries of yesterday. Tariffs and other trade barriers prop up the losers if the previous sentence wasn't clear, and investors don't like losers.
Of course currency brinksmanship with China (remember how the dollar tanked when Treasury Sec'y Geithner bashed China's currency policies in his confirmation hearings?) would be viewed by the markets as a signal of Romney's desire to further devalue the dollar, which means the economy would suffer tariffs and the backwardness made inevitable by devaluation. If this isn't understood, please re-read paragraph six from this column which goes over what stock market investors are buying when they commit capital.
And then if we ignore Romney's odd view that top earners - meaning the vital few whose vision and hard work drive our economic advancement - don't need tax relief, we must keep in mind his comments on spending cuts in a recent interview. When asked about real spending cuts as opposed to the reductions in planned spending growth at which both parties have become expert, Romney responded:
"If you take a trillion dollars for instance, out of the first year of the federal budget, that would shrink GDP over 5%. That is by definition throwing us into a recession or depression. So I'm not going to do that of course."
Of course to those of us with a basic understanding of economics, a trillion confiscated from the wasteful feds and returned to the private sector would be wildly stimulative. That Romney doesn't see what is screamingly obvious is a signal to the broader markets that a Romney victory largely means Obama-lite minus the statist rhetoric.
Back to stock markets that discount the future, Friday's number painted an ugly portrait. Investors don't like President Obama, the Fed's QE hubris increasingly horrifies them, but Romney's a weak alternative. The policy future is bleak; investors simply voted.