What the Market Really Thinks About the May Jobs Report

lot of very big predictions right. And I want to bring in, uh that person, Mark Grant, chief strategistic Hilltop Securities, who nailed the fact that President Trump was going to win the election in November and also has gotten bond calls right as well as oil calls. Mark, thank you so much for joining us now. Uh. In your latest note, you were talking about oil, and as we see right now, oil is pois for its biggest weekly drop in at

least four weeks. Um are we heading lower here? I think so, Lea's I think, first of all, thank you for your kind comments. I feel like if I could bow on the radio, I would do it. Yes, I think oils had probably fifty where we are exactly at

this moment is the technical support level. I think we're gonna break it and head down towards I think the American shale oil producers are in a fabulous position, the best position we've been in fifty years, to begin exporting oil and bringing in revenues, increasing our tax base, and in fact the numbers are so bigly said that it can literally balance the budget if we start moving in

that direction. Mark Grant, I want you to talk about risk and several of the items that you've recently written about having to do with risk and how people see not to be able to perceive it, and you use the quote from Warren Buffett. Risk comes from not knowing what you're doing. Yes, but I think that's the correct statement. I think Mr Buffett nailed at the There are a number of ruth areas right now that I will not be involved in, uh, just because that's personally the way

I do business. With the big institutional accounts I talked to, Fannie Mae and Freddie Mack are both a lot of risk. I don't want anything to do with their bonds because we don't know what they're gonna do with those two agencies Um, you could look at the European Bank deet right, the European Bank debt, the Tier one bonds I think have a tremendous amount of risk. Banco Popular Air is likely to go over the edge of the cliff and then we're gonna have to see how Europe deals with

that situation. Uh. There have been big pain trades in both bonds. I said yields were going lower. I think I may have been one of the three people in the world at set it and everybody talked that everybody we're gonna have three percent yields right now in the tenure were to sixteen this morning. And as Lisa mentioned, oils the other big pain trade. OPEC keeps saying, you know, they're going to cut back and cut back. The problem they have is we can produce more than they can.

So just to continue that thread, cheap loans to buy things such as automobiles, commercial mortgage backed securities. Right, those are two other areas PIM, and I'm glad you mentioned one would be subprime auto loans. I think the automobile market has been saturated in a way almost like the sub prime real estate market was. Was very cheap credit and I think we're about to end get to the end of that cycle, so I want nothing to do

with those securities. And then c mbs, a commercial mortgage asset back bonds of real estate, especially anything connected with retail stores. Amazon On and the Internet companies are just eating the lunch of the traditional retail stores, and I see a huge problem in that area of credit as well. Well, let's talk about what you do. Like I'm wondering now that we see a ten year yield on the treasury of two point one six percent, do you think that

yields go lower from here? Are you advising clients to buy. I'm advising clients to um go into a mixed picture, which I call cash flow investing, which is to buy corporate bonds five to ten years space to get a yield of around four percent. By the way, corporate bonds right now, even after taxes, have better yields, and municipal bonds, and then take half of their money and go into

what I call closed in bond funds. They are about hundred or seven or so I like, and they're all yielding around at ten percent and higher, and they have a monthly check, which I think is critical. So a ten percent yield. Actually, because of the compound, interest is worth about eleven point one percent. So you put the two together, you're getting around seven and a quarter seven

and a half percent on your money. And I think most of the run inequities is done, and I think that's a very good place to put money, both for institutions as well as for individuals. You know, Mark, I just want to push back a little bit because you said corporate bonds, in particular, leverage ratios have reached their all time highs with some of these particularly investment grade companies.

They've been packing on debt at a faster pace than they've been increasing their revenues, and it's been heavily weighted towards telecommunication companies that face somewhat uncertain future. Does that concern you at least one? I think that's a fabulous point you're making. It. Does it concern me when interest rates are this low? No, that would be my short answer. You know, I pay attention to it, I look at it. But you have to bear in mind the additional debt

is going in at such low interest rate. It's given profit margins that they're just increasing the size of their business we're doing stock buy backs in some cases, but I don't have a big concern about it now. So Mark, this looks like a very low yield picture that you're advising your clients to expect. How much have estimated forecasts for turns that you're talking with your clients about, how

much have they come down? That've come down substantially. The reason we're in this very low interest rate environment, my opinion, is the ECB and the Japanese Central Bank now have bigger balance sheets and the FED. The yields in Europe and and Asia are much lower, some of them negative. At one point we had over eleven trillion dollars in negative yielding securities that we're now down to probably around

eight trillion. But the the monetization of debt by the central banks all over the world has been huge, and that just is pushing yields down. And and then I think, of course with the FED, that Mr Trump has the ability at any point in time here to appoint four members of the FED, if not more, but we know for for sure. I think they are going to be

business people. I think the FED is going to become much more pragmatic, and I think that a call for this return to normalcy, which is an economic theory I think is going to get too overturned. And as as the new members of the FED are appointed, Mark speak if you can just briefly about pension liabilities that exist in the United States when it comes to municipalities, their bond issuance and also UH, the risks that may be

attended to those that people don't really understand. Certainly been the amount of pension liabilities is the biggest that's ever been unfunded pension liabilities. I've advised that the institutions I speak with, insurance companies, money managers to stay away and or take more assertive action in terms of I municipal pension funds. Uh, they're in a lot of them are

in big trouble. We've seen, you know, some announcements in the press about some but it was recently estimated by the Houver Institute that Connecticut, for example, and their municipalities had about sixty five billion dollars and unfunded pension liabilities. We can look at Dallas, we can look at a number of other cities that have been mentioned in the press for worth, and they're just huge problems out there having to do with these pension funds. Thanks for sharing

your thoughts with us. Smart Grant is the chief strategist at Hilltop Securities, giving us his view of risks that currently exist in the market that people may not be paying attention to. We were talking earlier about the report that came out today disappointing headline number also showing that wages are not going anywhere. But perhaps uh there is more optimism here uh than meets the eye. I want to bring in Neil Data, who's head of US economics

for Renaissance Renaissance Macro Research, who joins us by phone. Neil, thank you so much for joining us. I want to start with the idea that perhaps this job's report shows that the FEDS policy of holding rates low is actually still helping get people off the sidelines. That was a sentiment that you seem to express in a Bloomberg News article yesterday. Uh is that how you read this? Well?

I don't read this report that way, because the labor force participation rate uh fell and um you know, it fell for prime age workers as well, so to fifty four year old Um you know. But I think the general trend for for prime aged participation has been up broadly speaking since early UM. You know, if you look at UM, I think what you're trying to get at is UM. It is definitely true that UM. I think easy monetary policy generally is UM. You know, pulling people

back into the workforce. UM. You know at the margins, right, so you know, for example, UM, part time for economic reasons, that's down, right, the U six unemployment rate, that's down. If you look at those not in the labor force that want a job right now, that's down. So UM. You know that's the sign of a healthy labor market, is that's your you know, long term unemployment is down.

So I mean that that tells you that if the labor market is strong enough to pull down the unemployed, for the people that are the most difficult to bring into employment. UM, that's saying something. I mean. So if you take a look at, for example, within the Peril Report, I mean leisure and hospitality earnings, UM, that number relative to total private sector earnings hourly earnings is over six.

So you know, when you have a sector like leisure and hospitality, which is you I think most would agree a low wage sector UM rising relative to other industries in terms of wage growth. Um, So that's that income inequality in some respects of declining. Right. So, UM, I mean I think the labor markets are tightening. Um, I think the FED is going in June. Um. I think there was enough in this report, and I mean it's

about taking a holistic approach. I mean, I think there's been enough to date to suggest that, you know, the headline payroll number today is probably not quite as weak as as this was reported, and I think the underlying trend rather is is probably so much stronger than the

number we got today. UM. So you know, and I'm and I'm I think there's enough in there to, um, you know, to kind of draw some encouraging signs about the outlook, Neil, Is there enough in there to draw any conclusion about what's going on with the yield curve and why it is flattening so much? Oh? Well, I mean I think that. I mean, I think that's um, that's me. That's all vious. I mean, the wage number was sluggish and labor force participation rate fell, which implies

lower potential GDP. At the same time, I think, you know, the odds of a June hiker fairly much set in the stone at this point. Um. You know, while this number was weak, it's not quite as week to shift the odds of June. So you know, the FED hiking and potential growth is slowing someone at the margin based on this data point at least, and so you get

you get a flatter yeel curve. UM. Now I do think that, you know, you have to weigh this, as I say, against the data that's come in, and GDP tracking is in the vicinity of around three to four percent in the current quarter. That was the Atlanta FED report, right, Well that was yesterday. I mean, we'll see what what what number they come up with today. I mean the trade numbers, for example, probably pushed that number a little

bit lower. Um, you know, but at the end of the day, I mean GDP growth in the second quarter is going to show a meaningful rebound relative to the first UM. And you know, I think the odds are that when you average out the first two quarters of the year, you're growing at about two and alf for sense, So you have to weigh that against against this job's number. So if you have stronger GDP growth but somewhat slower

employment growth, what does that mean? That means productivity is going up right, and that's yeah, sorry, good, No real quick question. If this report does signal some kind of slowing down of the the employment picture, do you think this takes the third hike for off the table for the Fed. It's possible. It's certainly possible. I mean, it's also possible that the GDP numbers are relatively healthy and that core inflation firms and the FED can still go

in in um in September. I mean, I think the big story is, you know, in sten the FED needed overwhelming evidence to hike. Now they need overwhelming evidence not to and we're not there yet. I want to thank you very much for joining us. Neil Data is the head of US economics for Renaissance Macro Research, giving us his thoughts about today's jobs report and also about the future of US GDP performance. We want to take a moment to let you know about something new from Bloomberg.

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at bloomberg dot com slash lens. Yesterday we got the announcement from President Trump that he plans to withdraw the US from the Paris Climate Accord, making the US one of three nations g tobally that are not part of this pact. To get a better sense of what the implications really are, I want to bring in Rob Barnett. He is based in London, our senior energy policy analysts

for Bloomberg Intelligence. Rob, you know, after some closer examination, we're getting a lot of reports that perhaps this will make no difference whatsoever with respect to the US is adoption of UH environmentally friendly sources of energy. What's your take on this, Well, depends on whether you have a medium term or long term view. In the medium term,

it really doesn't make a difference. Trump had already signaled that we weren't going to do the Clean Power Plan and other types of policies in the US, so frankly, being in the Paris agreement or not didn't really change the landscape for policy in the US. But to your earlier point, the the industry has already been shifting to lower emissions without having the Paris Agreement or without having many of the policies that President Barack Obama was pushing for.

Emissions were declining by an average of about one point three percent a year in the US for the last decade. So we've seen market declines without really having the policy. None of those fundamental underlying factors have changed that have been allowing for that decline to occur, Rob, Can you tell us a little bit about cap and trade programs,

how they currently work, and whether they are successful. Sure? So, capin trade, one thing is that often gets used in almost synonymous terms with Paris, the Paris Agreement, or any of the policies being discussed in the United States. But the thing is cap and trade is far from the norm. Less than ten percent of emissions around the world are subject to cap and trade programs, and that's where you have a tradeable credit for where emitters trade for the

right to emit carbon oxide into the atmosphere. Now there are use such programs in the US, for instance, out in California if you want to admit CEO too, it costs about a little over fourteen dollars per ton right now. But the interesting thing about that is for the jurisdictions that do have captain trade California, Europe, parts of Asia, they don't care whether Trump's in the Climate Paris Climate

Agreement or not. So right now, the withdrawal of the US has very little impact on the resolve of lawmakers and those jurisdictions to continue with those kind of programs. You know, Robbie started out talking about how in the short term it's hard to see that there's going to be a significant difference. What about the long term, Well, over the long term, it is quite likely that policy is going to be needed to continue to drive emission's lower.

Uh if we're going to hit this uh you know, two degree warming threshold, so having temperatures go no more in two degrees. So interesting to note that Paris itself didn't get us to that to degree threshold. So even if you if all countries complied with Paris, you wouldn't get there. So an incremental policy, new policy is needed to drive emissions lower over the long term, at least

with the current technology mix. So if you had a future president who thought like President Donald Trump does on this issue, you might not see those kinds of policies coming in and driving those new technologies into the marketplace. But at least in the short run, it's not that meaningful. Long term though, if you look out over kind of twenty thirty, forty years, UH, it would be meaningful. So it just depends on how long we continue with the

president who doesn't really want to tackle the issue. Well. The President yesterday and speaking in the Rose Garden about the US withdraw from the Paris Climate Accord, mentioned the coal industry. What are your thoughts about the coal industry and is there a revival likely to happen? Certainly not in the US, and we're seeing the UH use of coal slow globally, so uh the plants that have already

closed in the United States, they're not coming back. It's interesting the note, even with President Trump and his pro coal rhetorical stance, we're continuing to see coal plants UH closures being announced from companies like A E. S and others that have said even since he's been elected that they're going to close their coal plants. And over in Europe and elsewhere, you're seeing a lot of resolve to tackle coal. So France, Emmanuel mccrolan has said he wants

to close all of the coal plants in France. Bye. Here in the UK they're aiming to have all coal plants closed by so none of them is changing in spite of the rhetorics that's coming out of President Donald Trump. So in our view at least, it's going to be very difficult to uh drive incremental new coal demand from loosening some of this policy. In the U S. It's

just not gonna work. Just gonna mention that just yesterday Brighton Point power Station in Somerset in Massachusetts, that's the largest qualifier plants in New England UM went dark on Wednesday. It's part of the shutdown. It's been underway for several years. That's right. You've got to keep in mind that New England is one of the parts of the US that is pushing very hard on the issue of climate whether you have a president like Donald Trump in place or not.

In the Northeast, just like in California, they've got cap and trade in place, so Brighton Point would have been subject to that trading program and it and it increases the cost of using cold if you if you have to pay for those emissions. So uh certainly uh in any state where you have that kind of program in place, you're gonna see less uh less emphasis on using cole, more emphasis on natural gas and renewables. Thank you very much.

Rob Barnett as our senior Energy policy analyst for Bloomberg Intelligence, joining us from London. Just go to b I go on the Bloomberg for more information. Thanks for listening to the Bloomberg P and L podcast. You can subscribe and listen to interviews at Apple Podcasts, SoundCloud, or whatever podcast platform you prefer. I'm pim Fox. I'm on Twitter at pim Fox. I'm on Twitter at Lisa abramowits one before the podcast. You can always catch us worldwide on Bloomberg Radio.