The Times They Are A-Changin’

As we approach the end of summer, here’s my perspective on economic issues worth watching.

Employment
The big new noise is the July employment report. Job growth surged, according to the Department of Labor. The US economy added 255,000 positions, according to the Department of Labor, far more than the 180,000 increase that economists had been predicting. Average hourly wages rose 0.3 percent, also higher than expected. The unemployment rate remained unchanged at 4.9 percent.

I am going a bit out on a limb here, but I go back to what appears to be some changes in the pattern of hiring and layoffs as the US has shifted from an industrial to a service economy. Ordinarily July is a big layoff month as factories historically shut down for a good part of that month to install new, more productive equipment. In addition, some service entities, including educational facilities, also have reductions in force around that time. But the times they are a-changin’. School facilities are altering their schedules, and factories don’t necessarily have to close for upgrading. Typically, close to one million people leave the work force in July. That gets seasonally-adjusted to a positive number about which we all talk. As I have said, I have never met a seasonally-adjusted person. It will be interesting to see what happens this year with the labor market relatively tight and the patterns changing. This affected the numbers in May and June with May being understated while June more than made up for that understatement. The pattern YTD is about 100,000 short between the seasonally-adjusted numbers and the unadjusted numbers. Let’s see how the job numbers play out in coming months—revised numbers will be released in September. Meanwhile, I think we should pay more attention to the wage numbers, which are rising. Over the year, average hourly earnings have risen by 2.6 percent. Higher wages are a big component of the Fed’s inflation gauge. Both the July employment numbers and higher wages could affect the Fed’s thinking in September.

Brexit
In the meantime Brexit continues to be newsworthy. Bank of England Governor Mark Carney has taken precautions to ease the potential downside for Britain. In response, instead of punishing the UK, the EU has an opportunity to move toward a more United Europe. It has to take a harder look at what has to be done throughout Europe on the fiscal side and with regard to the debt and negative rates. The question is, will it? I think it has to. Raw democracy may get in the way.

What else?
As I have previously observed, I think the emerging markets with some volatility are where the growth is. India has to fall in that camp. The reform steps are a start. One has to remember that India is the world’s largest democracy. Whether Indian Prime Minister Narendra Modi can navigate his way through this is another question. I think he can, but it will be a volatile road.

As I have said before I find the Americas the most interesting set of markets. They have had quite a run in anticipation of change from Cape Columbia to Tierra del Fuego. Just think if our focus was to make America great in the broadest sense of the definition. We still have long-term issues of growth globally. It will be a slower pace overall, but the opportunities may prove to be broader. Maybe a measure of stability in real assets and some understanding of the value of illiquidity premiums become a focus. So, pay attention to the Americas, all of them.

A Different Liquidity Trap

Liquidity has its dangers. The evidence is fairly clear that humans (and that category includes most investors) tend to make economic decisions that are not in their best interest. Liquidity, as it turns out, can enable this irrational behavior.

Let me back up. Behavioral finance is a young science that uses psychology to understand irrational thinking. A well-known experiment in the field gives a good illustration of the phenomenon. Imagine you could save $7 on a $25 pen by traveling 15 minutes away to a discount store. When asked, most people say they would be willing to do that. But they would not be willing to travel 15 minutes to the same discount store to save $7 on a $488 suit.

“What’s going on here?” asks Dan Ariely in his bestseller, Predictably Irrational. Saving $7 should mean the same to the consumer regardless of the item being purchased. The problem, he says, is relativity. Wrongly, most of us see a $7 savings on a $25 pen as somehow worth more than a $7 savings on the $488 suit. Yet, the return on investment of the time spent is the same, having nothing to do with what is being purchased.

It’s not just social scientists who are poring over evidence of our irrational behavior. Dalbar, the Boston firm that evaluates the financial services industry, has been studying money flows in and out of mutual funds for 30 years, and concludes that investors can be their own worst enemy. They tend to make bad decisions at critical points, in both up and down markets. The worst case was October 2008 when equity investors lost 24.21% while the S&P 500 Index lost 16.80%. The second biggest underperformance gap took place in March 2000, when the S&P surged 9.78% but investors took home only 3.72%.

Dalbar’s studies show a substantial spread between returns of funds and the returns of the investors in those funds, primarily related to timing of investments.  Philip Maymin of New York University and Gregg Fisher of the investment management firm Gerstein Fisher, wrote a more academic piece a few years back that reached similar conclusions. Their title says it all: “Past Performance is Indicative of Future Beliefs.”

Which brings me back to the subject of liquidity. The ability to convert any asset into cash immediately and easily sounds like a perfect goal for investors. In 2008, the opposite happened as liquidity decreased for every asset except cash and short-term Treasury bills. The experience was not easily forgotten. In fact, behavioral finance tells us that investors remember losses more vividly than gains, even if their gains are greater. Investors reasonably concluded that step one in avoiding similar losses required staying liquid.

It’s no surprise that liquid alternative mutual funds experienced a 22% annual growth in assets (excluding commodity funds) between 2010 and 2014, versus 12% for mutual fund industry overall.  Investors were also looking for potentially higher, risk-adjusted returns, of course, but that goal had to include liquidity.

As the above referenced studies suggest, though, the liquidity “trap” can come at a cost, behaviorally speaking. The ease with which the average mutual fund investor has been able to buy and sell securities does not always turn out to be an advantage.

Does that mean investors should protect themselves from themselves by allocating assets to illiquid investments?  It’s a question more will be asking as private equity, considered one of the least liquid of investment alternatives, makes its way to the retail market.

Traditionally, private equity has been available to institutional investors or high net worth individuals—accredited investors–who could meet the high minimums and who could afford to lock up a portion of their assets for years. Private equity mutual funds now coming to market (full disclosure: our firm, Altegris, offers one) give a broader group of investors access with characteristics similar to mutual funds.  But, importantly, they do not offer daily liquidity. Thus managers of these private equity funds can ignore the market’s demand for instant performance and untimely withdrawals.  They can focus intensely on investments that generally take more time and potentially more effort to work.

Of course, private equity funds haven’t marketed themselves as a safeguard against irrational behavior. It’s their track record that has attracted university endowments, foundations, pension funds and wealthy investors. To wit, in the 25 years through September 2015, the Cambridge U.S. Private Equity index returned 13.4% annually compared with 9.9% for the Standard & Poor’s 500 index, according to Cambridge Associates.

We have just passed the seven-year anniversary of the bull market, making this the third longest rally in history.  When the rally ends, behavioral finance studies suggest many investors, trapped by the ability to sell, will sell at the bottom and fail to get back in as the market recovers. We have already seen that in the increased volatility experienced over the last 12 months. Illiquidity might prevent you from doing just that.

This requires a very close look at what one’s liquidity requirements really are, which, of course, depends on one’s investment goals. That 3.5% illiquidity premium, as measured by the performance of the Cambridge Associates Index vs. the S&P 500, can compound into some large numbers for a child’s education or a different kind of retirement if it is maintained.

Of course, past performance is no guarantee of future results. This applies to both the liquid and illiquid markets. The odds are that we are in for a five to ten-year period of a “Warren Buffet market,” with lower GDP results, lower equity returns and greater dispersion. As Buffett recently observed, investors should be on the lookout any time the market value exceeds the value of GDP.

With a potentially lower return from the traditional markets, meeting an investor’s financial goals today does require a fresh look at allocations and some real discussions about the liquidity trap.

 

A version of this article was originally published on ThinkAdvisor here: http://www.thinkadvisor.com/2016/05/25/a-different-liquidity-trap

The End of the Beginning or Beginning of the End (Redux): Written Commentary

For those of you who did not have the time to watch the video on this topic, below is a more complete text of what I had to say:

  1. Tragedies in Orlando and in England by themselves are difficult to comprehend and clearly represent elements of extremism that indicate some “permission” to behave at the raw end of emotions. This has on the margin an impact on the US elections and the Brexit vote. The next few days may tell us what direction this pushes voters’ thought process.
  2. This adds to the near-term elements of uncertainty. But, what happens if the first event, the Brexit vote, is REMAIN as opposed to EXIT? This removes an element of uncertainty against a backdrop of central banks already having provided liquidity to deal with a negative vote. This reminds me a little bit of Y2K. If the vote is EXIT we may already be set up for that. If it is REMAIN we have a lot of “excess liquidity” in the system.
  3. In the meantime, while economic data, as always, is mixed globally—in the US, with the exception of some of the employment numbers which we can’t ignore, other numbers could be said to support Fed action: Core CPI is up 2.2%, year-over-year unemployment claims remain low, wages and housing seems to be fixed, GDP may surprise, and wages are up not just in the US but elsewhere, up 10% in China, about 2% in Europe, and even up in Japan.

All this would support rate increases by the Fed, but as I said in a recent video, it may wait for the July employment report which isn’t available until first week in August. Why July? We are seeing major shifts in hiring, firing and exit patterns in the employment rolls. If nothing else, this makes it very difficult to “seasonally-adjust” (SA) any reported numbers. We had a reported seasonally-adjusted number for May of +38,000. As one can see in the tables below, 651,000 not-seasonally-adjusted (NSA) persons actually joined the payroll, which is well below the 900,000 number for May, 2015. YTD, the total employment numbers SA and NSA are 748,000 and 476,000 respectively. This compares to final numbers for 2015 for the same period of 1,033,000 and 881,000.

There will be further adjustments when the BLS adds the pluses and minuses from the data on another 20% of its 650,000 establishments as it completes the May survey over the next two months. Given the first seasonal-adjustment to 38,000, which is less than 6% of the NSA number, it wouldn’t take much to move the month into a negative number. The last time May was a negative number was in 2009 (-303,000 SA) when the NSA additions to the payroll that month were only +384,000. On the other hand, July could be an upside surprise. As one can see from the table for 2015, July is a big month for reduction in real payrolls. This is a result of reductions in the educational field and changing patterns in retailing. And, it is typically a big shutdown month for manufacturing entities to make changes to processes. Given that the industrial sector has become a smaller part of the makeup of the work force while more in-line changes are taking place, this number could surprise. How this gets translated into a seasonally-adjusted number is difficult to judge. It continues to amaze me that so much weight is put on this seasonally-adjusted number. Seasonal adjustments are difficult enough in a stable environment. When patterns of hiring, firing and exits from job participation are changing and the mix of services versus industrial continues to favor services, any single number has to be viewed with some circumspection, but has to be recognized. There are other numbers that give a better view of what is going on in the labor market as the Fed ponders.

TBL_Blog_OTM Change_Jan11-May16_032816

However, markets may anticipate and the excess liquidity will be put to work in a risk-on mode if the Brexit vote is Remain.

We will be paying attention to employment to determine if this is the end of the beginning or the beginning of the end—an expression I stole from Anatole Kaletsky at Gavekal. I think we are at the end of the beginning of what has been a strange cycle. There is more to come. In the meantime, my comfort level with fundamental analysis is low, while the more sophisticated trend followers are seeing movements that to me support a continuation of the cycle. These uncorrelated sets of strategies deserve some attention as well as less liquid strategies of those who can handle the illiquidity and take advantage of the time arbitrage that exists for those managers who do not have to deal with the needs of investors who fall into the liquidity trap—something I just wrote about in Think Advisor.

The Rest of the Americas: Reprise

We are continuing our review of what has happened since we laid out our expectations in our Perspectives at the beginning of the year. We had a view that one could find all manner of investment opportunities, long and short, without moving beyond the continents of the Americas. Given the volatility of the markets and the currency and commodity movements since then it is time to take a fresh look—particularly at the rest of the Americas. Below is a reprise of our expectations and our update of how the expectations have changed. Commodity and Currency movements as well as specific governance issues may cause a greater dispersion in results for the rest of the year.

 

CIO PERSPECTIVES RECAP: JAN 2016

The Rest of the Americas: Still some Economic Issues but an Improving Picture as One Moves from North to South 

Canada, in many ways, is a large natural resource company. Until the energy picture improves, there remain issues as a new and different government starts to grapple with the current environment. In addition, while the Canadian banks avoided much of the turbulence experienced in the US from the mortgage fiascos, their housing market has gotten somewhat extended from growth that occurred under the umbrella of high energy prices in the early part of this decade.

On the other hand, we see elements of reform and a better competitive environment globally in Mexico. Lower energy prices have slowed development and reform in this sector, but other sectors continue to move forward. This remains a good story of growth, reform and development.

Moving further south, if the project stays on schedule, by mid-year the expanded Panama Canal should be in operation with the ability to receive the Post-Panamax cargo ships that carry two to three times the previous loads that could make it through the canal. This will change patterns of traffic to the east and west coast ports of the US from East Asia, reduce transportation costs, and, most likely, produce a shift of traffic via the Suez Canal back to Panama. It could likely result in some increased infrastructure spending for some of the US ports as well as the supporting rail and truck traffic from these new patterns of shipping. An under-the-radar change that could have some unintended consequences positive and negative.

With the Argentina election leading to major change combined with elections in Venezuela and pressure on Brazil to change, the center of gravity on reform and a better investment environment in South America may be moving in the right direction. There is no question that the overall economic situation in South America is quite dependent on exports of hard and soft commodities. Until the commodity supply/demand picture improves, it may be difficult for the overall investment environment to improve significantly. We may be entering an environment where some prices are falling below operating breakeven. Let’s keep in mind, though, that energy is a big part of the cost of extraction and refining for most hard commodities. Miners and refiners will keep producing if there is a dollar contribution toward fixed costs. With the metals priced in dollars for the most part, the currency weakness many of these countries have seen is a further reduction in costs. It is possible as we get later into the year modest increases in demand combined with reductions in supply may shift the patterns. At the same time, it is highly unlikely that we will see major improvements in governance and economic results early in the year in these three countries mentioned. However, the tone has shifted. This is an opportunity for the US to affect the rate and quality of change in these three important South American countries with an impact on the whole continent.

While the change in our relations with Cuba gets media attention, a similar reaching out by the current administration to change relationships with the three countries is a real possibility. One will be able to find all of the varieties of investment opportunities within the Americas with similar risk characteristics as exist throughout the rest of the world. This is a slight overstatement, of course, but just saying…

One does have to be careful of what is going on with capital flows. The countries in South America are dependent on export growth primarily tied to commodities. While Argentina may be coming out the other side of its ability to access the capital markets, it is not clear that other countries can make it through this period without some degree of financial stress. But, the Americas represent an unusual somewhat isolated set of investment opportunities across the equity, fixed income, and fixed asset markets, both public and private.


 

TODAY: MAY 2016

Commodity Movements push much of the Americas to Unsustainable Levels—too Fast, too Soon

 Below are three bar charts showing returns in local currency and dollar-based YTD for most of the capital markets worldwide as well as a specific focus on the Americas and commodities.

 

Fig1_2016-Equity-Market-Americas_051616

Fig2_2016-Equity-Market_perf_051616

Fig3_2016-HardSoftCommodities_051616

In part, the commodity run has to do with the weakness of the dollar against many currencies. Gold and possibly other precious metals are primarily moving because of the dollar, but also because they can act as sources of real returns against an expectation of rising inflation, low interest rates, and, maybe low equity returns. Our expectation had been a likely shift occurring on the commodity front as we moved into the second half of the year. In part, this was based on a step-up by China on the fiscal side which would increase demand and prices for a variety of commodities as infrastructure and support of inventory building took place. It would appear that China has already started that process. Unfortunately, I think this could lead to some disappointment later as China backs away from this fiscal push, much as they did after the 2008-2009 debacle. China did keep things going with prices peaking in 2011. There has been some slowdown on the supply front, with much uncertainty about OPEC and Saudi Arabia, specifically regarding oil, but other supply slowdowns elsewhere including the fires that rage in the Canadian oil sands region. Of course, the rise in prices could reflect concern about the Cushing Fault—one of our cocktail conversation expectations. Even 60 Minutes is now talking about earthquakes in Oklahoma.

That aside, as we pointed out in our Perspectives piece, China is the biggest source of supply and demand in the hard commodities, and effectively, controls the markets. Higher prices may lead to bad economic decisions regarding maintaining or even increasing production in response to the prices. These increases will likely end when China stops supporting the price and/or the dollar begins strengthening as it becomes clearer that a recession is unlikely—slow growth, but growth, wage increases and hiring pushing up consumption but not necessarily profits. Last month, for example, total compensation for all those employed was actually up 0.7% March to April. That’s a pretty healthy annual rate.

So what does one do now? The Americas look a bit ahead of themselves. While we are seeing change in Latin America, there will be some major hurdles for the major countries on governance and fiscal budgets. Commodity prices could continue to provide a lift if what is going on in China continues. I think we will start seeing more dispersion in the results in Latin America as the year unfolds.

We have already indicated that we expect the slower growth of the global economy to produce dispersion among country and company results. Below are two tables that show what has happened in the US specifically by industry with the energy industry as a poster child.

 

Fig4_Blog_S&P-Dispersion-by-Sector_051716

Fig5_Blog_S&P-Dispersion-by-Sector_EnergyBreakout_051716

This does require a broader and more specific look across more asset classes and more managers to take advantage of the dispersion and the spread we could likely see between the liquid markets and those with an ability to buy into less liquid sectors. The opportunity set is getting broader and requiring a real understanding of risk and a real understanding of liquidity requirements.

Lastly, so much of what I discussed depends on what happens here in the US as well. As my colleague, Lara Magnusen, recently pointed out in Bloomberg, any positive economic data out of the US may convince investors that the Fed will indeed raise rates at their next meeting. The knock on effect here is that you could see some real strength in the dollar, and thus reversals in commodity markets generally.[1] The rest of the Americas are thus dependent on a highly correlated set of variables affecting commodity markets, and, ultimately, the broader economic landscape.

[1] Bloomberg.com, May 1, 2016, Gold Keeps Shining as Funds Miss Out on the Best Rally in Two Months

Beginning the Look Back at What We Expected for 2016 (and Beyond)

At the beginning of the year we wrote a Perspective on “What to Expect in 2016 (and Beyond).” There were several expectations of which many were not likely to play out until later in the year. For example, our views on commodities staying flat were based on dollar strength and China not beginning its full-fledged fiscal response to its growth until later this year. Dollar weakness and the steps China has taken already have pushed the timing up with gold being the poster child for this change along with the major industrial commodities. Stay tuned on this one. This could be temporary.

It is our plan to comment in “Outside the Boxes” on various of these expectations as differences unfold along with a complete review at mid-year. Below, is the first of these reviews.

This update, having to do with the Presidential race, was in our “…cocktail conversations…” section along with an earthquake prediction and a view on dietary habits and their impact on historically defensive stocks. While this would ordinarily be a part of cocktail hour, it is my view that what is happening in our electorate as witnessed by the Trump phenomenon, could reinforce elements of volatility and dispersion in the investment markets, particularly in a slow growth environment. The thoughts reference the markets, but also raise some questions about the 230-year experiment this country has been having with democracy.

The blog starts with a reprise of what we said at the beginning of the year followed by the “update.”
Worth paying attention.

 

The January 2016 Reprise

Screenshot of What to Expect in 2016 for 5-5-16 blog

 

The May 2016 Update

 

“I’m sentimental, if you know what I mean,
I love the country, but I can’t stand the scene.
And I’m neither left or right,
I’m just staying home tonight,
Getting lost in that hopeless little screen.
…I’m still holding up,
This little wild bouquet,
Democracy is coming to the USA.”

—Leonard Cohen  

Democracy lyrics © Sony/ATV Music Publishing LLC

 

The Winning Ticket 

It certainly looks like it will be Trump and somebody on the Republican ticket. It is still critical for the ticket to have the highest odds of winning Ohio and Florida. One would think that a reconciliation with Kasich would have been the answer. Hillary Clinton, the presumptive Democratic candidate, has to consider a similar logic. While history suggests that Vice Presidential candidates are selected more for their contribution subsequent to the election, this year could be different. It has certainly been a different primary season.

 

Democracy: Head, Heart or Gut

I started this update with the lines from one of Leonard Cohen’s many great songs, “Democracy.”
These thoughts express my sentiments pretty precisely. This may be one of the most democratic elections we have had in a long time. The constituencies have been motivated by non-establishment candidates on both sides to vote as they feel in terms of their innate fears and beliefs coming from the gut and the heart. This is in contrast to the more “enlightened” fears that would come from the head, calling for preservation of the system. This is what, historically, has been presented by the “Establishment.”

There have always been differences in the views between the two major parties of what really is important in the system, but the outcomes have been conventional and, ultimately, supportive of global commerce, finance, and an expanding role of government. In this election, the anti-establishment elements may end up determining what will appear to be a different path. Although, I would expect that the ultimate differences will not be long-lasting.

The historical evidence suggests this uncontrolled versus enlightened democracy was not envisioned by the forefathers of this 230 year experiment. Democracy in its raw form is coming to the USA.

 

Pay Attention

Nevertheless, the uncertainty that may come out of the conventions and then, the election outcome, combined with what will be a slow growth period globally will likely lead to continued volatility and wider dispersion in financial and investment results. This does require a fresh look at allocations and investment strategies for the near-term as well as the next several years.

A Flat Market Year-to-date

If one was fortunate enough to avoid the noise of the first three months of the year, one could point to a flat equity market for the year-to-date (YTD) with the 10-year treasury yield declining from 2.24% to 1.91% as the yield curve flattened. Most were not fortunate enough to avoid the noise and the liquidity trap that led to some selling at the wrong time and not much buying. The poor macro guys were making all kinds of bets, while the hedge funds tried to make the most of the dispersion amongst individual securities.

We have written about greater volatility and greater dispersion as a characteristic of a slow growth economy, which produces increased differentiation of earnings performance and a generally slower growth in overall equity performance. We believe this condition will be with us for some time to come as the global economy works its way through industrial overcapacity and the recession produced in the global industrial sector. In the meantime, service sectors around the world and disruptive information technology have been the primary source of jobs. Ultimately, IT will change the mix of talent needed. That is already showing up in the JOLTS reports with quits and job openings at high levels. While one can see the dispersion in individual stocks, we also see dispersion in the pace and the drivers of economic growth in both developed and developing markets. It is worth looking at the dispersion by industry within the US, and we have included a table showing what has happened YTD in the energy sector featuring the 10 best and worst performers year-to-date.

Fig1_TBL_Blog_S&P-Dispersion-by-Sector+EnergyDetail_032916

The US is, in our view, rightfully, on a path back toward normality led by Fed action without much fiscal help. Odds are if the economy continues to produce job growth and, ultimately, wage increases, we will see additional increases in the Fed funds rate this year (See Altegris Perspectives, “What to Expect in 2016 (And Beyond)” for some specific forecasts made as the year began on Fed rate hikes, oil prices, the markets, and a few other variables).

There are two variables at work, which would appear to be affecting the timing and magnitude of the Fed funds rate increases. One of them is bogus in my view, but the other one is a bit more troubling. The bogus element is the excuse of what is happening outside the US as a reason to both delay and reduce the likely Fed funds rate increases for this year. The second variable, which has not been made explicit, but, in my view, is a driver of the move away from being data-driven, has to do with the elections in November. The noise coming from both major parties—to the extent we still have two major parties—has, as a part of their message, been looking to what has really gone on at the Fed with finger-pointing blame for the rate of growth perceived to be lower than it should have been; and making sure that the next president makes it “right.”

There has always been a political consideration that the Fed has been required to acknowledge, even in Paul Volcker’s day. However, with the rhetoric coming from the candidates, I believe the Fed is taking a very cautious approach with a willingness to err on the side of not doing anything that could, in hindsight, be viewed as disrupting the growth path we are on. This likely means fewer increases than were originally anticipated this year and later in the year, unless the employment data forces the Fed’s hand. Our expectation as expressed in our Perspectives piece was for two increases this year. That is now appearing to be the general view (which likely means it’s wrong). If the general view proves to be wrong, I would think we would see more than two increases as opposed to a reduction. As I said in the Perspectives piece, the second half of the year may be very different from the first half—and that’s without the Cushing quake.

As long as we are dealing with unspoken strategies, one could take this even further into the world of strategic interlinkage of actions with an unexpected outcome: The lack of a Fed funds rate increase has had a negative impact on the dollar, and, along with some elements on the supply/demand front, has been a factor in pushing the WTI (Cushing) oil price up from a low of $26.68/barrel on January 20 to around $40/bbl now, while the spread has narrowed with Brent, which hit a low of $28.58/bbl on January 13, and is at the same price as WTI now. The $11/bbl increase in Brent is a huge benefit to Russia, which is pumping out a recent high of over 10.3 million barrels of oil a day. At the same time, the ruble has declined over the last two years relative to the dollar by 50% making every dollar received worth twice as much to the economy and reserves than it might otherwise. The sudden withdrawal of the Russian military’s support of the Syrian government, “mission accomplished” combined with noises about reaching some type of settlement desired by many of the significant Middle East oil producers seems coincident with the interesting move of oil prices off their lows. We will see how long these prices hold, but every day is a huge benefit to Mr. Putin, and some belief or hinted commitment that oil prices may stay a bit higher is reason enough to move toward being a part of a cease-fire and potential settlement. This is not a benefit to the US economy away from the oil and gas industry. It simply reinforces our view that growth will be slow and profit dispersion will be significant, and things happen in this world that are more complex than the pundits think. It continues to require a relook at allocations and a realistic view of what kind of returns one can expect from the traditional liquid markets overall for some time to come.

The dispersion will lead to moments in time when the value proposition is overwhelmingly positive. Those are the most difficult times to make the buy decisions as opposed to selling at the bottom. We have written and “webinared” before about the illiquidity premium that is available and may be necessary to achieve one’s financial goals, as well as the increasing value of pattern recognition as Moore’s Law continues to increase the ability of those who know how to use the technology to the benefit of their clients. We will continue to see these unusual volatile moves as we work our way through this long low return environment. It is a different investing environment.

In the short term, I still believe we need to PAY ATTENTION to the employment reports as a major factor for the Fed, the economy, and, most likely, the elections. We will be getting the March report this coming Friday.

As one can see from the table of historical seasonally-adjusted and not seasonally-adjusted employment numbers, February, March and April typically make up for the actual declines in the employment rolls in January. However, this January’s decline—larger than many of the previous Januaries—along with the numbers of late last year, seem to indicate a changing pattern that is not necessarily being picked up in the seasonally-adjusted numbers. If the make-up actually occurs in February through April, the seasonally-adjusted numbers could be explosive.

Fig2_TBL_Blog_OTM Change_Jan11-Feb16_032816

This will make for interesting media responses. Of more importance will be what is actually happening to wage and weekly payroll increases and what that means for total wages, including additions to the payrolls. This does get pretty technical, and the changing pattern could lead to just the opposite of what I am describing. The wage numbers will be of more importance to the Fed and will likely become the topic that could drive the Fed’s decisions on timing and magnitude of funds rate increases against the backdrop of an adversarial political environment. The confusion that comes with these seasonally-adjusted numbers will add to the volatility and uncertainty about what the Fed will actually do.

To some extent it is noise; to another extent it is a signal, reinforcing the view that we are in a different, slow growth environment that will call for some real decisions on asset allocations and the choices of strategies to meet one’s goals. We can help with some of those solutions. They are not blanket solutions that apply to all investors, but instead do require some real understanding of what an investor or her advisor is trying to achieve over a specific time frame.