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June 5, 1998
Optimism is a wonderful thing. Enjoy its warm bath for long enough, without the slightest cold splash, and you begin to think you're invulnerable.
This morning, the labor department announced 296,000 new jobs in May, half again the forecast; revised March and April up another hundred-and-a-half; reported unemployment unchanged at 4.3%, a continuing 28-year low; and year-over-year wage growth at 4.3%.
Surely, someone noticed the inflation potential. Okay, surely not. Well, somebody certainly must be aware that with news like this, the Fed can't possibly ease.
Nobody home there, either. Nothing will distract these investors from their warm-tub frolic. Bonds are back down to 5.77%, mortgages to their 7.125% low, and the Dow is up 118 points at this writing.
The current basis for invulnerability is widespread belief that the export-based one-third of our economy is weakening fast enough to put out the fire in the domestic two-thirds. A slowing manufacturing sector is key to this theory, and we now have actual evidence of slowdown: the May purchasing managers' index slipped to 51.4 after 18-straight months at higher levels.
We also have actual evidence of unabated domestic heat: new home sales rose another 5.2% to a new record from last month's record; auto sales ripped to a 12% gain in May; and preliminary retail sales figures suggest full scale blaze.
Will one third slow two-thirds? Interesting math, there. Is manufacturing the big deal it once was? Or will our service exports offset a decline in manufactured exports? Remember, that fellow Gates is one of the low-wage, burger-flipping service-sector dweebs.
Any concern about the price of error is lost at sea -- in an ocean of capital chasing yield and return.
Results of this week's Mad Hatters' yield chase:
Russia -- where the RedFed kept overnight rates at 150% last week to plug a ruble ramble -- sold a $1.25 billion 5-year bond issue paying 12%. The bonds were over-subscribed in 25 minutes. "You vant junk? Ve hef junk to zell."
Great moment in kleptocracy, the popular new form of government found in Russia, and closer to home:
Remember the sting operation by American Treasury agents, who invited suspect bankers from Mexico to a money-laundering convention in the U.S., where the guilty could be arrested? Well, the government down there is so offended by our high-handed actions it began extradition and prosecution of our agents for "entrapment, money-laundering, and usurping the authority of Mexican law enforcement".
Peculiar things happen in a world with too much easy money sloshing around.
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