New worries as job market tightens

Out of fear of pricking its massive financial bubble, the Federal Reserve is falling behind the curve. That will encourage further inflation gains.

By MSN Money Partner Jul 3, 2014 4:51PM
Man reading job listings © Tetra Images, Getty ImagesBy Anthony Mirhaydari, InvestorPlace

Thursday's pre-holiday surge by the  Dow Jones Industrial Average ($INDU) over the 17,000 level -- a level it had been pawing since early June -- on a better-than-expected June jobs report has sent investors into full-on eyes-bleeding, foam-at-the-mouth euphoria.


The economy added 288,000 positions (mainly part-time) as the unemployment rate fell to 6.1 percent, which was the Federal Reserve's year-end 2014 forecast.


These folks look more and more like zombies instead of bulls, mindlessly repeating predictions like the Dow tagging 20,000 by year end ignoring a growing list of problems. Like the fact investor positioning and sentiment is at extremes. Or that stock valuations have returned to peaks seen in 1929, 2000, and 2007. Or that the Iraqi government is in stalemate as Sunni extremists capture more territory. Or that breadth in this latest push has been terrible, a sign of narrow buying interest. Or that the market hasn't had a meaningful correction since 2012.


But above all, folks don't realize that the tightening of the job market, while being wonderful news for middle-class families, threatens the Fed-fueled liquidity bubble that's been boosting the market in the first place. Here's why.

The economic fantasy

Like the all market bubbles throughout history, whether Dutch tulips or shares of, the latest one features all the telltale signs: A suspension of disbelief, greed compromising good stewardship, and the subscription to the maxim that this time is truly different.


This time, it's the belief that the Fed and other central banks will always support markets. No matter what. And that interest rates will stay low for longer -- maybe forever, if former Fed chief Ben Bernanke is to be believed.


That's a great fantasy. But it's exactly that: A fantasy.


Because despite man's best efforts, we've yet to tame the business cycle. Instead, the Fed's efforts to control the economy over the last 20 years have merely exacerbated it in a series of booms and busts that are growing in magnitude and the resulting fallout. The Fed held interest rates too low for a time in the late 1990s, blowing the dot-com bubble. It did it again, but more aggressively, in the early 2000s to fuel the housing bubble.


And now, the Fed has been doing it since 2008 to fuel a bubble of unprecedented size and scope.


It's not just stocks that are overvalued, but bonds as well. You can see this in the way stocks are no longer responsive to downside earnings revisions and in the way bond yields no longer respond to increased corporate leverage at a time of peak stock valuations and very compressed bond spreads.


In other words, fundamentals don't matter at a time of very high prices. Like when Las Vegas condo prices were justified by "home prices never go down" as mortgage affordability was plummeting. Or when money-losing tech IPOs were justified in the 1990s by the "Internet changes everything" meme.


A simple Taylor Rule analysis considering slack in the economy (which is narrowing as the unemployment rate falls) and inflation (with consumer price inflation already at 2.1 percent and rising) suggests the Fed should have already raised short-term rates to near 2 percent from 0 percent right now.


Put simply: Out of fear of pricking its massive financial bubble, the Yellen-led Fed is falling behind the curve. That will encourage further inflation gains. And inflation is ultimately the kryptonite that will end this fiasco. Because once inflation is unleashed, the Fed will have no choice but to smash its bubble to maintain faith in the U.S. dollar and prevent a catastrophic bout of "stagflation" -- the combination of inflation and economic stagnation -- of the type seen in the late 1970s and early 1980s.

Thursday's job gains only make this worse be further narrowing the slack in the economy. The Congressional Budget Office estimates that "full employment" is currently at 5.8 percent -- only 0.3 percent away from where we are now. At the current pace, we should hit that level by September or October.


When that happens, wage pressures will build and further lift inflationary pressures. And while that's great news for working folks, it'll force the Fed to acknowledge that it's running out of justifications for cowardly holding interest rates too low for too long. Not only that, but a rise in labor costs will put pressure on corporate profit margins as well.


Remember, the Fed's QE3 bond buying program is on track to end in October. Should inflation surge, as I expect, we could see the first interest rate hike much sooner than folks anticipate. Analysts at JPMorgan today moved up their rate hike estimate by three months from the end of 2015. But that's still too optimistic.


The Fed could very well be forced to act by the end of the year.


The silver lining in all this is that the inequality gap between the wealthy and everyone else should finally start to normalize as corporate profits as a share of GDP normalize from record highs and labor share of income pushes higher.


My hope is that any stock market turbulence caused by the deflating of the Fed's liquidity bubble doesn't jeopardize this.

Bottom line
For now, I continue to recommend investors prepare for the tailwind of inflation with a focus on one of the few areas of the market not stupidly overvalued: precious metals and the related mining stocks.

Examples in my Edge Sample Portfolio include the leveraged ProShares Ultra Silver (AGQ) and NovaGold (NG), which are up 24 percent and 27 percent, respectively, since being added in early June.
More from InvestorPlace

Anthony Mirhaydari is founder of the Edge and Edge Pro investment advisory newsletters, as well as Mirhaydari Capital Management, a registered investment advisory firm. As of this writing, he had recommended NG to his clients.

Jul 3, 2014 6:53PM

The June employment gains is an aberration. The truth is the labor market is week and wages are backwards. A lot of people I know were just laid off at the end of June.  The unemployment office phone lines have a two hour wait. If you are 60 years old laid off and no work nobody wants to hire you. Hang tight, pound the pavements, eat crow, and wait to get social security at 62.  It is very bad out there.
Jul 4, 2014 12:30AM
The jobs report is a lie. The unemployment rate is more like 12.1-percent  -- not 6.1-percent. The U.S. has not gotten back the jobs it lost in the Great Recession. Those jobs are gone, out-sourced. Part-time work is all that is left. Two or three of those piece of crap part-time jobs still won't equal one real job.
Jul 3, 2014 6:11PM
If you look at the stock market over 15 years or so, the net increase over this time is actually not out of line.
The recent rise could result in another bubble if the traders pump the market  to get the little guy in near the top and and then dump leaving the small investor to hold the bag. That is why the small investor should be using dollar cost averaging and buy into his retirement plan every paycheck.

Why is that when the average Joe gets a little raise, the scourge of inflation is about to be released on the economy?
The average middle class family needs his wages to rise at least with inflation to power the near 70% of the economy dependent on the consumer. Otherwise inequality only increases and the little guy can not save or invest in retirement.

Jul 4, 2014 5:47AM

I could care less about the U-3 headline 6.1%; that number is completely misleading.  The U-6 number, which someone posted as around 12.1%, is more realistic because it includes people employed in part-time jobs.  The problem is that neither includes people who have completely dropped out of the workforce.  Factor that in, and you have a number significantly higher than the U-6 number.  Right now, the most reliable number out there would be the workforce participation rate, which does include people who completely drop out of the workforce.  That number has been consistently maxing out at around 63%. 

As for a tight job market, I guess you could characterize it as a tight market if you are talking about jobs where a person can afford things like food, a place to live, gasoline, a wife, and some kids off of just that one job.  But for the jobs that are out there, they simply can not find people, period.  If you're wondering why, look at the first sentence of this paragraph and you'll know why no one is taking these jobs.  Even if you take two or three of these jobs, the only thing you will be able to afford to do is sleep wherever you can take a crap.  Do I blame people for dropping out completely, putting a sign on the side of a pickup truck, and dumping piles of crap in abandoned gravel pits for $50 a load?  No, but a nation of jobbers jobbing for cash money by the day is not exactly what I'd call a road to economic progress.

Truth of the matter is this:  if you want to hire people who are actually worth hiring into the jobs that are out there, the pay rates have to come up, and come up significantly.  What are companies getting for their $8 per hour right now?  Kids who have to find a job because they've just turned 18; momma can't collect a child support/welfare/SSI check for them anymore.  If you don't ride their backside like a racehorse, they disappear for their entire shift, talking and playing games on their cell phone.  People with drug, alcohol, and gambling problems.  They're especially drawn to convenience stores because of scratch tickets; they steal scratch tickets to nail a fast score so they can finance their habit.  Over twenty years in outside contract retail asset protection tell me this much:  when you pay $8 per hour, you are getting exactly what you pay for in terms of employees.  If you want employees who actually know how to work, show up when they're supposed to, don't show up drunk or stoned, and don't steal from you, you are going to have to pay a minimum of $5 per hour over that $8 per hour.

Jul 3, 2014 8:05PM

Finally an MSN article that's spot on. Truth telling is refreshing and indeed a refreshing change from some of the Band-Aid articles we see on here. Careful my friends this bubble just grew a little today but that thin vapor is near its breaking point. Get ready for the hangover it's been a long party.

Not only all this but there's growing instability in the Middle East possessing a wild card we can't be sure of just yet.

Jul 4, 2014 1:06AM
Did I or did I not read here on MSN a couple of weeks ago, about companies cutting benefits and wages?? Now a couple of weeks later, all of a sudden, they're worried about the job market tightening?? I'm no economist, but if the unemployment rate is coming down and the job market is tightening, HOW ARE COMPANIES GETTING AWAY WITH CUTTING BENEFITS??? And now, the fed is getting worried about inflation?? They should have thought of THAT back in 2008 when they set out multiplying the money supply by a factor of FOUR OR FIVE!! Got news for the author of this article, pressure to raise wages comes from INFLATING THE MONEY SUPPLY, NOT the other way around. Workers always want more money, of course, but for the last 40 years, they HAVE BEEN SCREWED BECAUSE OF INFLATION!!!! Take a good look. Even the government's own figures will show that prices are FIVE TO SIX times higher now, than they were 40 years ago.
Jul 3, 2014 7:36PM
There are no "small" investors.  There will not be.  I get a kick out of those thinking that the stock market is other than fabrication. It can go to 30,000 and would not make one iota of a diference in the "real" world. More inflation and more devaluation of the dollar, This is econ 101 people.
Jul 3, 2014 9:49PM
Turns my stomach to read some of these pansy azz posts, I've been working for 36 years and never been out of work for more than one week. At one point I had to sell refrigerators at Sears during the day and deliver pizza's at night. I know what it's like to be middle age and have to take menial jobs and learn a whole new career, it's humiliating, but I'm proud of the fact I never took government aid. How people can go years on relief and not find work is beyond me, I see hundreds of little brown people working the fields on my way to work each day, most probably just crossed the border yesterday and found work. Is it just me or are Americans losing pride in themselves.
Jul 3, 2014 9:04PM
With all of it's faults, this is the best country on the face of the earth. I am proud and glad to be a citizen of the United States of America.
Jul 3, 2014 9:48PM
Mr. Mirhaydari, for 16 months you've been preaching this same message and you refuse to ever admit you were wrong; or admit any of your past predictions were completely off the mark. Of course the market can't continue this past amazing run, and yes, there will be correction.  However you continually mislead investors - and it's showing.  This post was out 4 hours ago and you've had what - 6 comments? Your readers are abandoning you, and MSN only occasionally  pulls in your articles - for entertainment I assume.  You continually advise to invest in precious metals to avoid the coming "apocalypse."  Really?  Invest in gold?  Sure, if you listen to the ads on Fox News and want to live in a bunker.
Jul 4, 2014 4:36PM
Job market is great if you are a mexican national.
Jul 4, 2014 11:41AM
With companies cutting hours and benefits the way they are, even one real job isn't a real job anymore. The jobs report is a total and complete fiction. And with the plundering of all public and private pensions, and how Social Security and the 401K are nothing but revenue streams, and with the value of the dollar plummeting almost as fast as inflation is rising, you will never retire. It is all a big fat lie.
Jul 4, 2014 4:31PM
Inflation is running wild in WI. $6.99 for a quart of brake DOT 3  brake fluid, ridiculous! $3.49 a gallon premium unleaded in Iowa, $4.15 a gallon in WI.  Look at what a decent pair of shoes costs anywhere if you can find them.  Good reasonably priced USA made shoes have been replaced by over priced Chinese shoes that are shot in 6 weeks verses 2 years for the USA made shoes I always wore.
Jul 4, 2014 7:34AM

Tony Baby...I see you are back. How did you manage to do it?


You play around with numbers to much. Of course things go up and down....they always have. Your article almost suggests that you can time the market.


Tell me Tony...was the market in 2000 higher than in 1929? Was the market in 2007 higher than 2000, is the market now higher that 2009? Do you think the market in 2018 will be higher than 17,000? Do you think we are higher today than in 1900 when the DOW was 68 ?


Please tell me exactly when to get out and exactly when to get back in.


I to can forecast...."I promise you it will be cold in Canada this winter".

Jul 4, 2014 2:03PM
lets see......if you get a part time job, which is the only jobs available, andyour now making a third of what you were in your last position.....its great.....obviously your mortgage will be cut by 2/3 as will the rest of your expense......happy days are here again!!!
Jul 4, 2014 4:40AM
Tighten? I just never see the growth they claiming on the job report. I have interviewed few places and most companies adopting ganged interview(Two or more interviewers) craps in one room. I guess they don't have any better work assignment but to hang out in the room staring or listening to you. If I'm owning a companies those junks better be working else they be out the door regardless of the position held. I need everyone to contact your job bank such as simplyhired, careerbuilder, etc. to raise awareness. This gang interview is design to give employers their sick personal preferences. They select you based on your racial background or your lesser than perfect skillsets.
Jul 6, 2014 7:38PM

But the trouble is jrlphx, is that those who WANT to work, CAN'T find work.

The other thing I've noticed over the last 30-40 years, is that upward mobility has slowed WAY DOWN!! Used to be a college education practically guaranteed you a well-paid lifelong career [with BENEFITS, mind you], and now??? These people are graduating with debt of $20,000 to $40,000 or MORE, and CAN'T find a job for much more than minimum wage. I know what you're saying, and it USED to be true, but I don't think it's that way any more, unless you're rich and well-connected. Or willing to become a crook on Wall St.

Jul 7, 2014 9:37AM
The only reason the unemployment numbers are going down is people are running out of their Unemployment Benefits. The Federal Government has stopped all of the extensions and therefore when you run out of benefits you are no longer counted as being unemployed.  More lies from our government. 
Jul 4, 2014 10:27AM
Everybody has had some sort of Government Aid be it Directly or Indirectly. Some Folks just don't realize just how much Government Dollars(Taxes)Flows directly or indirectly back to Farmers, States, Medicare, etc. So I would be careful about bragging about how anyone did or didn't ask for Government help in their Lifetimes.

Concerning Jobs, just because a certain group of Folks are willing to work for Slave Wages here hardly means we as Americans  should do the Same. We fought hard and long to get to the Point where Jobs actually paid meaningful Wages with Benefits and now over a Decade or so, we are far too willing to give that away. Aka the Wage Gap moving from once 40 to 1, to 400 to 1, to fast approaching well over 1000 to 1.

Then we have the usual suspect ranting on and on about how Wrong Anthony has been on the Markets. Well it's literally impossible to predict the given Date of an implosion when the Global FEDS keep manipulating and printing to Infinity. However that hardly means that won't be the case in due time.

So my question has been this, as the Global Feds have already printed well over $10Trillion Plus to advert falling into a Global Recession, what will they do for encore, print another $10Trillion? We can't continue to print our Way out of this Debt Crisis. Not unless at some point a variety of things take a Major Haircut likely starting with the Stock Markets. And that would just be the beginning of the Pain.

Jul 4, 2014 8:34PM
U6 unemployment is still north of ten percent.  Obamaville don't work.
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