Markets are closed in Australia today in honour of the Queen’s Birthday. Happy birthday Your Majesty. We’ll be a bit briefer in today’s Daily Reckoning so you can enjoy your full holiday.
When the market does get back to work tomorrow, it’ll have a few things to figure out. First off, are there really any bargains left? We’ve started seeing news paper articles about the market rising to 4,500 and beyond, now that the worst is behind us (so they say.) In point of fact, the S&P/ASX 200 is up over 26% since hitting its March 6th low.
Twenty six percent used to be a good year, even in the boom years. Now we have a 26% rally in just under three months. And that’s just the index. Some particular shares have bounced even higher. So where do we go from here?
Well, U.S. stocks closed up on Friday. Even though the U.S. jobless rate rose and is now at 25 year high of 9.4%, the news was apparently better than expected. U.S. employers cut 345,000 jobs in May. That was the smallest number of layoffs since September of last year.
It certainly would be a good sign for the economy if employers started hiring again. But for now, less firing is good too. And of course if the unemployment numbers continue to get less bad, the economy itself might start to get better. Keep in mind, however, that in recent recessions (at least in America) the unemployment rate continued to rise even as the recession technically ended.
Why? Well, we have no idea. We can imagine that in a balance sheet recession, employers are less likely to simply hire back workers after the tough times past. The whole nature of a balance sheet recession is to realign expenses and debt with income. It’s a structural change at the balance sheet level.
But it’s also a structural change for the economy, getting used to less debt. We reckon this means the pace of the recovery in employment is going to be pretty slow over all. And of course, the slower recovery in employment probably means slower recovery for retailers and the consumer economy. So…don’t expect a return to the status quo ante.
The market will also have to sort out bond yields. Good luck with that Mr. Market! The U.S. Treasury is set to auction another US$65 billion in bonds and notes this week. On the menu is $35 billion in three-year notes, $19 billion in ten-year debt, and $11 billion in 30-year bonds. This should be interesting.
This week’s auction is a lot less than the $101 billion in debt auctioned off in late May. But we reckon you’ll see the same trends confirmed here. That is, global investors (and central banks) will move toward the shorter maturity debt (three-years) while the Fed may have to pick up some slack in the ten-year auction.
What investor in his right mind would ever loan money to the U.S. government for thirty years?
In any event, bond yields spiked again on Friday. Both two-year yields and ten-year yields zoomed up. It’s still an open question whether this is happening because investors would rather own stocks, or for some other reason.
We’d say that “some other reason” is the end of the nearly 30-year bull market in government bonds. And if that’s the case, the consequences for other investments are going to be large. More on that tomorrow.
for The Daily Reckoning Australia