A weak March jobs report signals the failure of QEII and the onset of QEIII

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On Friday, the US Bureau of Labor Statistics reported that employment growth slumped to 120,000 new jobs for March, which was well below the consensus expectation of 200,000. More importantly the March data was well below the 258,000 new jobs created on average in the first two months of 2012. The US stock market was closed for the Good Friday holiday but the US stock futures markets sold off sharply, giving an indication that there could be strong selling pressure on Monday. Unfortunately, I’m getting a sense of Deja Vu. In both 2010 and 2011 we saw the expectations of strong economic recovery during the beginning of the year drive a stock market rally in the early part of the year only to be reversed when the recovery failed to materialize. Although it’s only one data point, I continue to believe there are serious downside risks for the US market. In addition, the data coming out of China continues to support a slowdown and Europe is already in recession. Thus, there are significant downside risks for for the Indian stock market, if FII’s go into “risk-off” mode.

For those who have read my earlier posts, I view Russell Napier of CLSA as being the greatest market strategist alive. However, I think I’ve found a new contender for the title and his name is Albert Edwards (AE) and he works for Societe Generale. Admittedly, I had never seen his work until recently but his current market views are almost the mirror image of mine. In a recent strategy piece, AE agrees with Russell’s S&P target of 400 but thinks we’ll achieve it through a deflationary bust causing US treasury yields to hit new lows rather than resetting upwards. Furthermore, he states “ultimatley, I would concur that there is also going to be ‘the great reset’ on US yields as well, but that will come after a frenzied orgy of balance sheet debauchment (both Fed and Federal) which will make events over the last three years look like an afternoon tea-party with the Vestal Virgins.” I don’t think the case for financial Armageddon has ever been made so eloquently. Basically, AE thinks that the end of QEII will be bad for risky assets and that the current bubble in equity valuations can’t be supported once the Fed’s stimulus is pulled away. Although both Russell and Albert have the same target on the S&P, they differ on how we get there. Unfortunately, this also means that your portfolio has to be positioned differently depending upon which scenario you see unfolding. Personally, I’m leaning toward the argument of Albert Edwards. I think that treasury yields will rally from here as the risk rally comes to an abrupt end following the end of QEII. I realize that I’m going against the view of Bill Gross, but I can still be right in the short-run while his negative views on treasuries will be right in the long-run. I think QEIII is inevitable but we’ll have to see the S&P near the 2010 lows before the Fed takes any action. As a result, I think it makes to sense to take off any bearish bets you may have on US treasuries as the downdraft in equities will cause a flight to safety and possibly the dollar. On Friday, the US equity markets were closed for Good Friday but the bond market was open for a half day. More importantly US treasuries rallied with the yield on the 10-year Treasury note falling to 2.06%. I agree with the view of ECRI that the US will be in a recession by 2H2012. Whether the March payrolls number is the first of a string of disappointing data to come out of the US remains to be seen, but I would be taking cautious view of global equity markets and the Indian market in particular.

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