Traders Not Fully Accepting the Implications of Today’s Dismal Employment Report

By DoctoRx

After today’s miserable employment report that supports, unfortunately, the downbeat view of the economy found on this blog for some time, please look at the chart below from Yahoo’s Finance section with an open mind. This is a five-year chart of the yield on the US 10-year Treasury bond. If this were a stock or commodity, then simply based on the chart, one would be bearish. One would be looking for the downtrend to continue. 

Today’s news supports this trend, in my opinion. 

This supports the “barbell” strategy I have been personally following and have been describing in my posts.

Please note that I “get” that a weakening economy will increase the fiscal deficit. I am also aware that empirically there is no correlation between deficits and Federal interest rates. There is, however, a correlation between private credit demands and interest rates.

The marketplace now allows the US Treasury to borrow for 3 full years at an annual interest rate of less than 0.70%. This rate dropped on the employment news, aware that a weakening economy increases the deficit. Markets have been known to be irrational and wrong, but so far since Bush 43 acceded to the Presidency, correctly taking the “under” on the economy has correlated with taking the side of lower interest rates. 

The US real economy may have more similarities with Japan than the authorities want to admit. We are now at all of 5 basis points yield on the 6-month Treasury bill. Pros and not retail buy this sort of debt instrument. They are obviously not looking for hyperinflation. I will have more on interest rates in a subsequent post.

The employment report is bullish for gold because it supports the likelihood that more monetary inflation is on the way. It is not bullish for any other commodity. Silver is mid-way between gold and the rest of the commodity sector. Silver, which would typically be up 2X or 3X the rise in gold in the up-cycle beginning last summer (“up-cycle” referring to the economy’s recovering from a minor “growth recession” earlier in 2010), is only up as much as gold on the futures market, whereas oil, which has no monetary characteristics, is down 2%. I suspect oil is headed for $80 as its next major move, perhaps by the fall, and $60 is not out of the question down the road in a more severe economic downturn. The stock market, which is down less than 1%, reminds me of Wile E. Coyote who refuses to look down and therefore does not fall.

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