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Treasuries traded lower on December’s employment data, the result of the 2.9% increase in average hourly earnings over the last 12 months.  This is the greatest jump since the recession ended in June 2009.  It is believed job and wage prospects will increase even more following any successful legislation aimed at stirring growth such as tax cuts and reduced regulatory over reach.

Will the economy enter into a period of cost push inflation, defined as the viscous cycle of higher wages that produces greater inflation?  Typically such scenarios beget considerably higher interest rates.

I will continue to argue however, the 62.7% labor participation rate (LPR)—near a 37 year low–is suggesting considerable slack in the labor market given the vast majority of the drop in the unemployment rate from over 10% to 4.7% is the result of workers leaving workforce, not strong job creation.  If the LPR was around 2008’s level of 66.5%, the unemployment rate would be around 8.5% to 9.0%.

BUT what is the quality of this latent job pool?  Does this huge pool of workers possess the skills required?  I will write that if there is bona fide welfare reform, many of these chronically unemployed will be forced to be retrained, a retraining either by personal necessity or from companies itself.

If monetary velocity accelerates, the result of a greater demand for capital, demand pull inflation will escalate, which will then assist in greater demand for more skilled workers which in turn will permit retraining.  It is the reverse of the last eight years.

Is this why value stocks are outperforming growth for the first time in eight years?  Probably.

Last night the foreign markets were mixed.  London was up 0.27%, Paris down 0.74% and Frankfurt down 0.53%.  China was up 0.54%,  Japan down 0.34% and Hang Sang up 0.25%.

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Ken Engelke

Chief Economic Strategist Managing Director

The views expressed herein are those of Kent Engelke and do not necessarily reflect those of Capitol Securities Management. Any opinions expressed are statements of judgment on this date and are subject to certain risks and uncertainties which could cause actual results to differ materially from those currently anticipated or projected. Any future dividends, interest, yields and event dates listed may be subject to change. An investor cannot invest in an index, and its returns are not indicative of the performance of any specific investment. Past performance is not indicative of future results. This material is being provided for informational purposes only. Any information should not be deemed a recommendation to buy, hold or sell any security. Certain information has been obtained from third-party sources we consider reliable, but we do not guarantee that such information is accurate or complete. This report is not a complete description of the securities, markets, or developments referred to in this material and does not include all available data necessary for making an investment decision. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. If you would like to unsubscribe from this e-mail distribution, please reply to this e-mail and indicate that you wish to unsubscribe in your response.