ASH BENNINGTON: Welcome to Real Vision. It is Friday, December 4th, 2020, just after market close in New York. This is the Real Vision Daily Briefing. I am Ash Bennington, joined shortly by Real Vision managing editor, Ed Harrison, but first with today's stories, Jack Farley.
JACK FARLEY: Thanks, Ash. Blessed if it does, blessed if it does not, that seems to be the destiny of the US equity market. Let me explain. The non-farm payrolls data came in today. The US added 245,000 jobs. That sounds good, but it is the smallest monthly growth we have seen since March by far. The smallest since January, actually. It is also well below the median estimate of 460,000. In fact, of the 78 economists surveyed in the Bloomberg median estimate I just mentioned, only six of them had forecasts that were below the actual number of 245,000. The labor force participation rate dipped from 61.7% to 61.5%, and that means that 656,000 Americans in aggregate exited the labor market over the last month.
This means that the ominous square root figure of the labor market that many have been talking about, including Ed, is continuing to take shape. Lastly, it remains the fact that every single industry, and I mean every single industry in the US, employs fewer workers than it did one year ago. The data released today suggests that the damage to the US labor market will endure and that the economic scarring will last long after this horrible virus has been overcome. What did the equity market do on this bad news? Well, if you thought that it would plummet, you were wrong because US equities were actually up today, with all three indices making minor advances.
The bond market concurred with Treasurys selling off as investors exited safe assets in order to jump into that sweet pool of equity risk. The spread between 30-year and 5-year Treasurys reached a four-year high of 130 basis points as long bonds felt the greatest pain today. In fact, the 30-minute move in the 10-year today was the biggest we have seen since AP called the US presidential race for Joe Biden on November 7th. The narrative that is making the rounds today is that these negative data prints in the US labor market are actually good for stocks and for risk assets, because they motivate Congress to pass the stimulus bill, as well as for the Federal Reserve to extend their emergency lending programs. this.
There actually is some evidence to support We have seen that fiscal and monetary authorities this year have been extremely responsive to the labor market. With their interventions, they have buoyed risk assets. That is one argument. It does make sense, but there is another argument that the reason stocks went up today is because we are in a period of unbridled bullishness, it is not so much that bad news is good news. I wanted to mention It is that all news is good news.
Before I flip it back to Ash and Ed, that Lyn Alden and Hugh Hendry had a dialogue today about the Eurodollar and international trade. Definitely check that out if you get a chance. I might also mention that Lyn Alden wrote a very detailed article expressing her views in greater depth. I will definitely check that out. I will leave a link to that in the description below. With that, let us go back to Ash.
ASH BENNINGTON: Thanks, Jack. Welcome, Ed.
ED HARRISON: Thank you. What I just noticed that by the way while you were talking before, is that your lower third, I have your name, they had it misspelled. It said Cash Bennington. I do not know if you saw that.
ASH BENNINGTON: That would be like the perfect name for finance writer.
ED HARRISON: It would be in fact, and I do not know about the stuff here because it is really funny. It is going to say Cash Bennington, by the way, I got them to put that as the lower third, just so you know. I have the story behind that, by the way, in terms of Cash Bennington is that I was talking to you the other day. Every time I think of the name Ash, Ashley, I think about Ashley Cole, the great halfback or it was right back from Chelsea and Arsenal. Sorry, not Tottenham. When he switched from the London side Arsenal to the London side Chelsea people call him Cashley Cole because he was all about the money. That is why he was making the switch. Cash Bennington, Cashley Cole, there is some rhyming going on there.
ASH BENNINGTON: Ed, I am clearly all about the money. Why else would someone leave banking to come to journalism? I was going to say happy jobs day to you, but maybe the better greeting would be not so happy jobs day.
ED HARRISON: No, not at all. You were going to tee it up. There was the chart that says it all. What is it? A picture is like 1000 words or something like that. This chart is totally like that. I got it from the New York Times, maybe we can put that up there on the screen. It is a cumulative change in jobs since before the pandemic and we were running 152 million jobs in the economy in February. Of course, that fell off a cliff but we have slowly worked our way back. The way that we worked our way back, though, tells a lot from my perspective. It tells you where we are in this cycle, how the cycle has been going. What do you see when you see that chart, Ash?
ASH BENNINGTON: You teed it up beautifully. Let us go through the numbers really quick, and we will come to it. Look, 245,000 nonpayroll jobs added. That is off 638,000 prior. That is below the consensus at 500,000. At the very bottom of the consensus range, that number that we got today is 38% of the prior month's number, of October's job creation number, or put differently, it is 2.6 times higher last time than this time. We saw a slight decline in the unemployment rate from to 6.7% from 6.9%. That is on a declining LFPR. That is the labor force participation rate, which dropped from 61.7% to 61.5%.
Talking about charts, Ed, my one chart says it all for today. It is something that you have been talking about now for months, which is this inverse or reverse radical sign recovery. If you look at this chart, this is really striking. It looks as though you reverse engineered it to look like the reverse radical sign that we have been talking about. This is in fact the civilian labor force participation rate that we have been talking about CIV Part on the St. Louis Fed Fred database. It is an incredibly ugly chart and it really tees up very nicely all the things that you have been talking about now for months.
ED HARRISON: Yes, so it is not good. When I look at this chart about the cumulative change of the jobs numbers before the pandemic, the number that you are talking about, the 245 number is at the bottom of a range that is swooping across in a way that it is almost like if you drew a line through all of those numbers, it would not touch the previous line ever. It is actually going like this in a way like that. Maybe it goes like this, and then over a period of five years, it drifts off upward. There is no way to get to Nirvana with 245,000. It is a relatively big number in normal cycles but in today's cycle, given that we are still 9.8 million jobs short of February 2020, 245, that is not a whole lot.
ASH BENNINGTON: Yes. Rewind it back, take a look at the job destruction that occurred in February, March, April, we are not getting back to where we were, and that is the reverse radical sign. Once again, to pick up on something that you mentioned, the consensus range here, 200,000 to 610,000, a massively wide range showing a huge dispersion of views among economists, and we came in at the very bottom.
ED HARRISON: The interesting bit is when I looked at the numbers, the one that stood out for me interestingly was civilian noninstitutional population. That is how many people are eligible to actually have jobs were adults. The number went up a million between November of last year and this year. If you think to yourself, okay, I am looking at these numbers here, and we are 9.8 million short of where we were in February, but actually, the population is growing over time. It is growing by a million, so it is not that you actually have to get back to square one, you have to go even further.
If you divide a million people added to the labor force each year or to the civilian population, not necessarily the labor force, it depends on whether they are in the labor force, then you get 80,000 jobs that you need to create every single month. 83,333 to be exact, to keep up with just the rate of growth of the economy. That is a lot of jobs. What it is telling you is that we have only created 160,000 extra jobs this particular quarter over just pure population growth, this particular month. Not good, not good at all.
ASH BENNINGTON: That is a really incredibly important point. It is like the target is moving higher every month organically just because of the growth of the potential civilian labor force. These are folks who are non-institutionalized, and not active duty military service personnel. It is a really broad measure of that potential labor force population.
ED HARRISON: What do we do with this data? Because on the back of it when I looked at the data as it came out this morning, markets were doing really well, the bulls were definitely in control. They were not in control just in terms of the equity market, but everything was up. Gold was up, interest rates were up, crude oil was up, Bitcoin was up, equities were up. Across the board, the bulls are looking through these numbers, and they are seeing a vaccine and its wide distribution on the other side, and saying that it does not matter. It does not matter that this number was 200,000 light. We are looking through this and we are thinking about the future.
ASH BENNINGTON: This picks up on another point that we talked about on Real Vision Daily Briefing all the time, which is the notion of timeframes. I am curious to hear your thoughts, rather, on what the expectations are, for how far into the future markets are looking and how they are making that discounting function?
ED HARRISON: I do not think of markets as being that prescient, per se, I think of markets as being bullish or bearish based upon the sentiment at the time, the liquidity that has been injected, et cetera, the narratives that are playing out, and they create momentum, and then they go forward. I am just looking at the numbers. The Dow was up 248 points, eight tenths of a percent, S&P up nine tenths of a percent. That is a pretty good day for a day in which you were light by 200,000 on the non-farm payrolls. The headline here on investing.com is the Dow hits record above 30,000. I do not know where your Dow, 30,000 Dow is, by the way, Ash, as bulls feast on stimulus hopes.
Basically, what is happening is that there are hopes of some stimulus. That is the narrative that is being spawned. That is not necessarily how much the market is discounting one way or the other. What is really going to happen is that the market has a narrative. It is spinning that narrative at that time based upon the sentiment, and then incoming data changes that narrative. At some point, if the data are so dramatic in one direction or the other, it spins up a completely different viewpoint in terms of the market.
We have not reached that point in terms of negative, the long, hard, cold winter, whatever you want to call it, but there may come a point at which point, there is just too much negative numbers in terms of the COVID crisis, and it is affecting the economy for people to overlook it.
ASH BENNINGTON: I should say, to pick up on that point, Dow Jones Industrial Average closing at 30,218, and S&P 500 closing at 3699 today, just below the 37 handle, and a 52-week high, meaning this is not just a post crisis high, this is a high going back to 2019.
ED HARRISON: Nice, yes. Who would have thought that 275,000 people dead, millions infected by a virus would mean new highs in the markets. The fundamentalist in me says it is all bullshit, meaning I do not buy it for a second. I am not a momentum guy. I believe in the real thing, and there is no way that you can have a backdrop, an economic backdrop like the one that we have had, irrespective of how much stimulus gets applied, and say that that is one that is bullish for the for the economy, and therefore bullish for shares and they should go higher.
The market is not trading on actual fundamentals. It is trading on sentiment. It is trading on momentum, trading on liquidity, and that can go on for a very long time, but eventually, it is going to trade on fundamentals.
ASH BENNINGTON: There is so much there. Absolutely right. It can go on for a long time. It can remain irrational for a long time. This is clearly based on sentiment and as you point out, also the liquidity component. When we talk about these numbers, I do not want to give too much credence to that because it is always possible that you can get an unusual calculation, you can get a weird number for whatever reason. We saw that at the beginning of the crisis, when some of the metrics were not being calculated properly, but if you just step back and you take a look at the big picture, this is the seventh month in a row where we have seen deceleration of job growth. This is, once again, we said it here before, death by the second derivative.
ED HARRISON: What do you make of this, by the way, the fact that, to me, it was pretty much an unabashedly negative number. It was not terrible. Let us put it that way. Remember, 245,000 jobs being created in the year say, 2017, that would have been a pretty good number. When you are short, as many jobs were short, it is not really that great a number. What do you make of the fact that the market is rallying so much on the back of a number like that?
ASH BENNINGTON: Two points. It would be a great number, if we had not had massive job destruction in the six months, or eight months prior to this, but it is like someone gives you $500, it is great, but they owe you 10 grand. It is this idea that you have this massive gap. We get so focused on the flow variables that sometimes, we do not pay attention to the stock variable and the stock variable on this point, metaphorically, is the idea that you have this huge gap in jobs that were just massively destroyed. As you point out, even when things remain, even if the civilian labor force, if the population is growing, then the civilian labor force is growing, you need to create additional jobs. You did the calculation, you said it was around 83,000 a month, that is just to stay flat.
These numbers, while they sound on a headline basis, impressive, it is really filling in that hole at an incredibly slow rate. To get to the second part of your question, what do I make of it? It is precisely what you said earlier. This is about sentiment. This is about understanding or pricing or repricing US equities, which are seen as this forward looking at, after all, what valuations are stock markets based on? It is the future cash flows, is you are pricing future cash flows. For some reason, we see this perception on a sentiment basis that investors think, that other investors think that those prices are going higher. It is a Keynesian beauty contest, even though this economy is no beauty.
ED HARRISON: We have had a decent number of people come on recently who have talked about looking through. I think, Kevin Muir, Jay Pelosky. I think I have also talked to Peter Boockvar about the post-vaccine economy and so forth. I spoke to Gary Shilling today. That is an interview that is going to come out on Monday, or is it next? It is on Wednesday. Honestly, he said, yes, I am looking through as well, but the mountain you have to climb before you get there to be able to look through is immense. Interestingly, just as I was saying that, across my screen here, that the US Department of Labor put out an email, it says plus 344,000 jobs. They did not use the 245 number. They were talking about 344,000 private sector jobs.
People are playing up the numbers, whatever numbers they can. As Shilling was saying, you are talking to administer, to distribute and administer the vaccine to everyone in developed economies to the point where people are going to go gangbusters in shopping and get that pent up demand in there. Probably a year is what he is saying. It is a year from now, what happens in that year? That is the big question. When we talk about a long, cold, hard winter, he said, it is not just the winter, Ed, it is the spring and the summer, as well.
When we talk about it from that perspective, what happens? What happens in the stimulus front? What happens in the business formation front? What happens on the jobs front? There are a lot of things are going to happen in that year, and some of them are going to be bad on a permanent basis. I think that the sentiment that we see today, I do not think I am going to go out on a limb, but this is probably the first time that I would have said it as starkly as I do, is excessively bullish. I think that it will decline over time and there will be a knock-back, a pullback of a significant measure at some point in time as people start to realize how much damage is going to be done.
ASH BENNINGTON: It is interesting, we are in this period of just the politicization of facts, reporting different numbers, spinning things in different ways. On the other side of the coin, to your point about DOL coming out with different numbers, we had Joe Biden. I saw a few minutes before we get on, a report about the President Elect Joe Biden calling this job report grim.
ED HARRISON: Well, generally speaking, it is grim if you look at it. We can qualify, we can say 245 is a great number, and as the Department of Labor said, 344 private sector jobs, that is even better. We were at 600,000 last month, and we were expecting 500,000 this month, and we are still short almost 10 million, that is not a good number no matter how you spin it, but hey, more stimulus.
ASH BENNINGTON: Another open question. Where are we right now with-- we are sitting here on December 4th, and we are not going to know for another--