When Bad News Becomes Good News

June 5,  5:00 pm EST

It’s jobs week.  We’ll get the May jobs report on Friday.

As we’ve been discussing, the market is on Fed watch, looking for a rate cut from the Fed.  And as the Fed says, they are closely watching the data for signs of deterioration in the economy.

On that note, there are few data points more scrutinized than the jobs data.

This morning we had a glimpse of what the Friday report might look like.  The May ADP jobs report today showed just 27k jobs added.  That was a huge miss.  The expectation was 180k.  The government report due on Friday is expected to show 185k new jobs.  If that number comes in much lower (i.e. slower job creation), is that enough to prompt a June rate cut?


Equally, if not more important to the Fed, is the sharp decline that continues in crude oil.    As I said last week, there are two clear influences on Fed policy over the past few years. Stocks and crude oil.

As for oil prices, the Fed has a history of acting when prices move sharply lower. Low oil prices weigh on inflation, and inflation is already running at very soft levels.

Why is that a bad thing?  Inflation that’s too weak, can threaten deflation.  They have the tools to deal with inflation.  They raise rates.  But the tools are limited to deal with deflation.  They cut rates.  But when rates hit zero, they have to get creative (like QE, negative rates, etc.).  And the consequences of losing the deflation battle are big.  When people hold onto their money thinking things will be cheaper tomorrow than they are today, that mindset can bring the economy to a dead halt. It’s a formula that can become irreversible.

Adding to the deflation threat, there is a global financial stability threat that comes from low oil prices. As we found in 2016, when oil prices crashed, the shale industry is very vulnerable.  Defaults started lining up in the industry, which makes banks vulnerable.  When banks are vulnerable, credit tends to tighten and the financial system can quickly become unstable.

So, what is the magic number for oil?  $50.  A recent Dallas Fed survey has the breakeven level for shale producers at $50.  Crude traded as low as $50.60 today.

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