De Groote Financial Group June 10, 2016 No Comments

Federal Reserve’s Labor Market Conditions Index (LMCI) Drops to Lowest Level Since May 2009…

The experimental data series was revised lower in April as well, from minus 0.9 to negative 3.4, which is the second-lowest reading since the crash.

What it means – The Fed developed the LMCI, a composite of 19 separate indicators, to get a better handle on changes in the labor market beyond the monthly nonfarm payroll and unemployment figures. It’s notable that the LMCI dropped dramatically at the same time that non-farm payroll figures also fell out of bed. I don’t think you needed the 18 other indicators to decipher this one. Employment just hit the brakes. With GDP growth at a mere 1.4% in the mighty fourth quarter of 2015, and a paltry 0.8% in the first quarter of this year, the U.S. economy had already dropped into a lower gear.

This brings up the elephant in the room. Will they or won’t they? Will they raise rates in June or even July… or will the central bankers take a pass? Who knows? Even if they do raise rates this summer, it’s hard to see how they would do it again this year. Investors shouldn’t count on higher interest any time soon.

$10 Trillion of Government Bonds Now Yield Less Than Zero…

Bond yields around the world keep falling as central banks maintain buying pressure. In the UK, the 10-year Gilt bond yield fell to 1.26%, a record low.
What it means – To say that we’re living in an historic moment is an understatement! Of the roughly $70 trillion of government bonds outstanding around the world, almost 15% charge investors to own them. As for the low yield in Britain, they trace their bonds back to 1694. The 1.26% yield today is just as crazy as the 16% yield of the early 80s, which was only 35 years ago. For those who watch long interest rates, the 50-year Gilt yields a miniscule 2%.

But just because rates are historically low, that doesn’t mean rates can’t remain this low for some time, or even drop a little lower. Don’t expect higher rates.

Huobi and OKCoin, Two Chinese Bitcoin Exchanges, Account for 92% of All Bitcoin Volume… The price of the digital currency jumped over $500 in recent weeks, reflecting strong demand.
What it means – The Chinese government has a problem. The nation ties its currency to the U.S. dollar, so it is much stronger than it would be if it floated. But if the Chinese allow the value of the yuan to drop, then foreign investors and wealthy citizens will try to get their funds out of the country, which is exactly what has happened over the past two years. The Chinese central bank has spent more than $1 trillion of its foreign reserves combatting the outflow of funds. Recently, the government lowered the amount of funds that could be taken out of the country, and closed popular loopholes (like using local credit cards to buy insurance in foreign markets).
Bitcoin is seamless. Use one currency to buy Bitcoin, and then redeem it in another currency. This explains why the digital currency is suddenly so popular in the Middle Kingdom. Don’t expect it to last. As more people use Bitcoin to rid themselves of yuan, the Chinese government will notice. If it becomes too prevalent, the government will restrict it or ban it altogether. Ask yourself, what would that do to Bitcoin?

Japanese Prime Minister Abe Recommends More Foreign Workers…

Buried in Abe’s platform for July elections are recommendations to increase the number of skilled guest workers, the number of foreign students allowed to remain after their studies, and a shorter wait time to apply for permanent residency.
What it means – There’s less here than meets the eye. Abe’s voicing a concern that everyone already understands. The Japanese workforce is shrinking. They need more people to keep things going. But the proposals he put forth don’t allow for unskilled labor, which is what the country needs most, and they aren’t talking about sufficient numbers to move the needle anyway.

Japan has about 900,000 foreign workers in a population of 127 million. By comparison, the U.S. has 17 million foreign workers in a population of 325 million… and we have roughly 12 million illegal immigrants, and many of them have jobs. Even if Japan doubles their number of guest workers – which they are not suggesting – it wouldn’t come close to solving their labor force problem.

Cadillac to Replace Some Dealerships with Virtual Stores…

GM’s Cadillac brand will close some of its 925 traditional dealerships, allowing potential buyers instead to experience the cars through virtual reality headsets.
What it means – They think they’re Tesla, or maybe Ferrari. They aren’t. This works for other brands because they operate from a position of scarcity, a market condition Cadillac doesn’t enjoy. Cadillac has almost three times the number of dealerships as BMW, and yet the German auto maker beats the pants off of them, as do other rivals. Cadillac is making the move to save money by not having cars on hand, but this makes no sense.

Cadillac isn’t losing sales because it carries too much inventory. It’s losing sales because people don’t want the cars. Not having them on hand will just make it that much harder to sell. Good Luck GM.

Doug De Groote, CFP®
Managing Director

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