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Weldon's Money Monitor: Bad Beats...CPI and Payrolls on a Bluff!!!


Are you all in?


Big Slick took his 'baddest-beat' ever, at the World Series of Poker Circuit Tour Main Event qualifying at Harrah's Showboat Casino in Atlantic City this weekend. In fact, I was sent packing by the SINGLE LOWEST probability draw in all of Hold-Em Poker, and one of the worst gambling 'plays' by an opponent I have ever witnessed.

Back-to-back sixes, the last two in the deck, on the final two cards, gave my opponent, holding 10-6 off-suit (a WEAK hand), a 'set' (trio) of sixes, to beat my pocket Kings, after he had already twice refused to throw in the towel with his junk hand in the face of my aggressive betting.

Not only that, but when my opponent raised my post-flop bet, with nothing, on a stone cold bluff, he turned to me and said, "I've got nothing, but I am going to hit runner-runner to make my set, and bust your big pocket pair."

And that is exactly what happened, as if he KNEW it would.

I despise 'bad-beat' stories, BUT my experience connects DIRECTLY with the current evolutions and gyrations unfolding in the capital markets, as relates to the 'read' the markets are getting on the macro-scenario.

Someone is going to experience a BAD BEAT.

We still expect that someone to be the US consumer.

We 'ante-up' with a dissection of Friday's Payroll report, which implies that the consumer, as represented by the labor market, holds a strong hand. BUT, in fact, the labor market is BLUFFING, as it ACTS strong, while in reality it holds a far less superior 'hand.'

The Labor Market 'acts' strong, ala the headlines:

  • Payrolls RISE by + 215,000 in November.
  • Average Hourly Earnings RISE + 0.3% in November.

More jobs and expanding income, strong???

NO, not nearly as strong as is being 'represented.'

First, we expose the 'bluff' within the 'cards' being held by income:

  • Average HOURLY earnings rose, yes, but HOURS worked FELL, and did so by a great enough magnitude as to cause WEEKLY earnings to DEFLATE.

Next, the 'bluff' attempt within headline job creation is exposed when we reveal the hole cards held by the Household Survey:

  • Employment FELL (-) 52,000 while Unemployment ROSE by +149,000, with 148,000 civilian workers falling out of the Labor Force.

Sure, the Unemployment Rate fell a tic, to 5.0%, but note the following revelation:

  • Total Unemployed, Plus Discouraged Workers, Plus all other marginally attached workers, as a percent of civilian labor force ROSE by a tic, to 5.9% from 5.8%, and has now risen significantly from the low of 5.5% posted in October of 2004.

Indeed, the American Heritage College Dictionary defines "discourage:"

"To deprive of confidence, hope, spirit."

Indeed, if the labor market held such a 'strong' hand, WHY would the number of DISCOURAGED workers be on the RISE, amid an INTENSIFIED DEPRIVATION of HOPE and SPIRIT?

And, more importantly as far as the Fed is concerned, a further EROSION in consumer confidence. Note the exposed hole cards, and the bluff:

  • Not in Labor Force, Discouragement up + 3.1% yr-yr.
  • Not in Labor Force, Reasons other than Discouragement down by a sizable (-) 10.3% yr-yr

No wonder consumer confidence indexes are hitting new LOWS.

Worse yet, note the bluff represented by a decline in the Average Duration of Unemployment, as those registered as Unemployed for 27 weeks or longer fell, implying strength, but in reality, those same people, representing LESS unemployed, in fact represent the DISCOURAGED would-be-workers who have been out of work SO LONG, that they have LOST HOPE, and simply dropped out of the equation, EXCEPT, as calculated by the RISE in the Unemployment Rate for ALL workers, INCLUDING the DISCOURAGED.

Moreover, and even WORSE yet, the Number of Unemployed for Less than 5 Weeks, and those Unemployed for 5-14 Weeks, AND those Unemployed for 15-26 Weeks ALL ROSE.

So, the bluff is a decline in the duration of unemployment.

The reality is a rise in the number of long-term discouraged and the NEWLY unemployed.

In FACT, the total rise in the number of Unemployed between 1-week and 26-weeks is +161,000, almost entirely neutralizing the headline increase in jobs, at +215,000.

Most specifically, the overall bluff is exposed within the macro-reality defined by the action in Aggregate Hours Indexes and Average Weekly Earnings. Observe the details:

  • Average Weekly Hours, down (-) 0.1 to a lowly 33.7 hours
  • Index of Aggregate Weekly Hours, down (-) 0.1%

This, DESPITE a HUGE rise in the Index of Aggregate Weekly Hours (up +2.4%), and the Average Weekly Hours (up +0.7 hours), posted by the Construction =industry.

Perhaps most telling is a sizable DECLINE (down 0.4%) in the Index for Aggregate Weekly Hours in the Retail Sales industry.

And thus, despite a rise in the Average HOURLY Earnings, thanks to a lower HOURLY Aggregate index, weekly take-home pay FELL during the month of November:

  • Average Weekly Earnings, down $6.88 per week, to $551.00, a decline of (-) 1.2% for the month

Here too, perhaps most telling is the action in the weekly earnings of workers in the Retail industry:

  • Average Weekly Earnings, Retail Sector, down a HUGE (-) 2.4% during the month of November, marking its SECOND STRAIGHT sizable monthly income deflation, for a cumulative two-month decline of (-) 3.2%.

Indeed, we cannot ignore a FIFTEEN percent annualized DEFLATION in total private weekly earnings, LED by a TWENTY percent rate of annualized DEFLATION in Retail worker income over the last two months.

And finally, we observe the always insightful readings attached to the Labor Department's "Diffusion Indexes of Employment Change," revealing the following details:

  • 12-Month Diffusion Index, Private Non-Farm Payroll Growth FELL to 59.0 from 60.6 in October, marking the first sub-60 reading in fourteen months. Note the progressive slide in this indicator over the last 4 months:
    • Aug '05 - 67.3
    • Sep '05 - 62.2
    • Oct '05 - 60.6
    • Nov '05 - 59.0

This strongly suggests that the longer-term macro UPTREND in this index, one that began in March of 2002 when the index posted a low at 30.2, is OVER.

Further, note the 6-Month Diffusion Index over the last five months:

    • Jul '05 - 64.0
    • Aug '05 - 61.5
    • Sep '05 - 62.4
    • Oct '05 - 57.9
    • Nov '05 - 55.6

Utilizing the BLS database and chart creating capability, we take a visual perspective on the labor market's bluff, starting with the chart on display below plotting the 12-month Rate-of-Change in the 6-Month Diffusion Index (underlying index figures shown in the table directly above).

INDEED, this chart provides FULL support to our macro-thought-process, in terms of suggesting that the TREND towards job creation is OVER, as might be defined by the decline below ZERO in the longer-term ROC of that index.

Smoother is the 12-Month ROC of the longer-term 12-Month Payroll Employment Diffusion Index and CRYSTAL CLEAR is the implication that longer-term employment growth has FIZZLED, on a trend basis, in terms of the breadth of job creation.

HENCE, if we are correct, and the TREND towards job creation of any significance is indeed OVER, then this would make the current eco-expansion driven job creation the MOST SHALLOW ever.

According to recent research report from Merrill Lynch, the average growth rate in Payroll Employment during the last five 'cycles' has been +3.0% versus the current +0.7%. WORSE, Wage and Salary growth has averaged a reflationary expansion of +8.4% annually during the last five cycles, which is TWICE the current cycle growth of +4.2%.

Again, as we detailed in the data highlighted before, the RETAIL sector is LEADING the way LOWER, in terms of average weekly earnings. We revisit this dynamic from the visual perspective, with a specific additional focus within the context of the 2004-05 wage-income reflation being the SOFTEST ever, as defined by the 12-Month ROC, seen below.

In FACT, as defined in the chart below, the DEFLATION in Average Weekly Earnings in the Retail Sector (3-Month vs 3-Month ROC basis, as plotted below) IS simply the worst EVER.

Changing gears, we note overall Private Sector job growth, as defined by the headline payrolls and strong signs to suggest that job creation has in fact peaked, and has in fact done so at a HISTORICALLY LOW rate.

Evidence the following chart blitz, extracted from the BLS web-site, starting with the 12-Month ROC of Total Private Job growth (seen in the first chart on display below), which has rolled over to the downside, making a significant SECULAR lower-high and posted a HISTORICALLY SOFT peak growth rate.

Indeed, note the consistency of job growth gains of 5% yr-yr, seen during past cycles, leading to a sub-par growth rate in the post 1990's recession peak and a LOWER peak rate in the post 1997-98 crisis and, now, a LOWER high in the post-bubble-deflation-reflation.

WORSE yet, in the face of a growing workforce able population, the NET 12-month change in jobs has also rolled over from a historically LOW peak level, as noted in the chart below.

In rapid-fire fashion, we rip through additional visual evidence to support our macro-thematic thought process implying that headline labor market strength is merely a BLUFF. We note the lower high, and downside roll-over in the 12-Month ROC of the Total Aggregate Hours Index.

The 12-Month ROC of the Aggregate Hours Index for Goods Producers

And the 12-Month ROC of the Aggregate Hours Index for Manufacturers

Continuing, we observe the TRULY HISTORIC lower high posted in the 12-Month ROC of the Aggregate Hours Index for Non-Durable Goods Producers, which FAILED to even reach positive territory. Making it by FAR, the SOFTEST non-reflation EVER.

And, Retail, with the 12-Month ROC of the Aggregate Hours Index for this consumer-sensitive sector on display below, posting its SOFTEST reflation ever. And, more importantly, PLUNGING back below zero in November.

YES, note the close-up of that chart below, showing the plunge into negative territory by the ROC of the Retail sector Aggregate Hours Index.

Last, but FAR from 'least' - in fact, MOST importantly) within the SECULAR macro-situation - is the complete LACK of 'income' reflation, and the outright DEFLATION in 'real' wage-driven earnings.

Evidence the SOFTEST reflation EVER, within the 12-Month change in Payroll defined Average Hourly Earnings, seen in the chart below.

Long-time regular readers KNOW just how critical we consider this to be, in terms of the MISSING LINK to a full-blown reflation in the real economy, and in 'real' income growth induced consumption. In FACT, we note the eerily similar long-term 'pattern' in the chart below, compared to the chart above, as we plot (below) the 12-Month ROC for the Core U.S. CPI.

Indeed, sight unseen to the naked eye, Consumer Price inflation may have ALREADY hit its macro-peak for this cycle, and if so, it also would mark the SOFTEST 'reflation' in core-CPI in decades.

Sure, we can hear it now, 'Weldon is on tilt, thinking inflation may have already peaked full-tilt - we must be on full-tilt, right???

Well, let's evidence the 12-Month Annualized Rate for various components to CPI-U, compared to the year-end 12-Month Annualized Rate posted for each of the last few years, which reveals the following sequence:

  • All-Items up +5.1% versus up +3.3% in 2004, and up +1.9% in 2003.


  • Transportation is up +17.1% versus up +6.5% in 2004, and up +0.3% in 2003 and, compared to minus (-) 3.8% posted for 2001.
  • Energy is up + 42.5% versus up + 16.6% in 2004, and up +6.9% in 2003, and compared to the negative rate of minus (-) 13.0% seen during 2001


  • All Items Less Food and Energy up + 2.0%, DISINFLATING from the +2.2% posted in 2004.

More 'tellingly,' we note that the current +2.0% rate is also BELOW the AVERAGE rate seen over the last eight years, since 1998, a figure pegged at 2.1%, implying that OVERALL, NON-ENERGY inflation was a little higher than average last year and a little lower than average this year.

And, both the 3-Month and 6-Month ROC of Core CPI have FALLEN back BELOW the 12-month ROC, suggesting a significant deceleration, if not an outright softening.

Hence, in terms of a nearer-term softening, we note the following MONTHLY figures for October as apply to one of the above mentioned HIGH reflation sectors, which itself is now softening:

  • Transportation DOWN (-) 1.3% LED by a (-) 4.4% monthly plunge in the price of Gasoline.

On the other hand, we note Housing Costs rose +0.9% during the month of October, the second straight monthly increase, resulting in a two-month cumulative annualized inflation rate of nearly +8%.

And yet, we already KNOW that this dynamic IS 'softening,' as per the recent SOFTNESS in housing related data for November.

Indeed, we can rewind and come FULL circle to note the strength of the Construction sector in terms of job creation and hours worked.

Without strength in construction, Payroll growth would be significantly 'softer,' and the Aggregate Hours Index would be softening even more intently than is highlighted above.

Hence, softness in the housing data equals softening inflation pressure.

VOILA, peruse today's housing-related data.

And, most surprisingly, we observe CLEAR CUT EVIDENCE of a softening CPI dynamic, as defined by the CPI-W readings for individual rates of inflation by CITY, ala the year-over-year rate in October relative to September. Note:

  • Chicago is +3.7%, softening from +4.4%
  • Los Angeles is +5.4%, softening from +6.0%
  • New York is +4.5%, softening from +5.2%

Also noteworthy is the downside softening leadership shown by the region of the country with the softest real-estate market reflation, the Mid-West:

  • Mid-West Urban City, more than 1.5 million residents, +4.1%, down from +4.8% yr-yr posted in October
  • Mid-West Urban City, 50,000 to 1.5 million residents, +3.7%, down from +4.2% yr-yr in October.
  • Mid-West Non-Metropolitan, less than 50,000 residents, +4.4%, softening from +5.4% yr-yr in October.

The FACT of the matter is this: From Jackson Hole in Wyoming to Jackson Heights in New York City, the yr-yr rate of CPI-W and CPI-U is SOFTENING.

Full-tilt ... NOT.

Not us anyway, though we might suggest that US industry is on full-tilt as output and productivity SOAR, without ANY concurrent reflation in consumer income to support higher final goods prices.

Of course producers, with expanding margins thanks to rising productivity, do NOT NEED TO RAISE PRICES.

For sure, see ANY shopping mall in the US one-week ago, on the Friday following Thanksgiving, when retailers were all but GIVING GOODS AWAY.

This type of SECULAR DISINFLATIONARY pressure is NOT going to change.

Ultimately, the reflation in wealth assets masks a DISINFLATION in actual wealth, and more accurately, in the relative standard of living - as might be defined by the relative strength of the paper currency AND YIELDS - relative to gold. We rewind to revisit a chart we used last week that exemplifies this point, as noted below, defining a Yield-Adjusted price of Gold that has exploded to a NEW ALL-TIME HIGH above $1000 per ounce.

Within that context, we note the chart on display below, in which we compare stock market wealth relative to yields against the price of Crude Oil relative to yields. Wealth was reflating during most of the nineties from Sept '93 thru Sept '02 specifically, when the stock market led the appreciation in yield adjusted crude oil, but now the OPPOSITE is true, reflecting the wealth and consumption power DESTRUCTION that has already occurred via energy price inflation.

Finally, we conclude today's Money Monitor by 'calling' the 'bluff,' and flipping over the cards, to reveal the BAD BEAT taken by the income-reflationless, savings-void, debt-ridden, house-value-bonded US consumer, as defined in the chart below. It reveals the DEFLATION in the S+P Index relative to the Yield on the US 2-Year Note on a longer-term Rate-of-Change basis as a proxy for the dominant underlying force.

Yet, stripping away the 'REALITY' of the odds, we might say that the U.S. consumer does not yet realize that he IS 'beat.' We say this since the nominal value of the S+P 500 trends towards intensified reflation, and is likely to continue to do so as a result of the HIGH POWERED money and credit growth dynamic we have highlighted herein, and in last week's Money Monitor focus on the U.S.

Subsequently, we cannot yet get bullish on bonds, NOT until disinflation becomes MORE evident in housing.

Hence, we worry about the state of the consumer.

The point is the U.S. consumer holds JUNK hole cards, and is on the BLUFF, but without the knowledge that he is 'drawing dead.' We are only willing to play pocket ACES, in the current environment.

Conclusion: Gold is akin to pocket Aces held in the hole, providing us a 'hand' that should be played aggressively.

We remain BULLISH the bullion market, particularly when denominated in foreign currency terms, a stance that is only solidified by a correct 'read' of the current macro-data-reality.

No positions in stocks mentioned.
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