Featured Trades: (THE NONFARM PAYROLL BOMBSHELL)

1) The Nonfarm Payroll Bombshell. Any doubts about what the '?new normal' is all about were dispelled yesterday with the bombshell March Nonfarm Payroll Report showing a gain of only 54,000, the smallest in seven months, and a huge shortfall from the 190,000 consensus.

The headline unemployment rate bumped back up from 9.0% to 9.1%, taking the total number of unemployed to 13.9 million. The real U-6 unemployment rate including the long term jobless leapt to 15.8% totaling 24.1 million, and is closer to 20% in states like California.

Private sector employment rose by 83,000, with the biggest gains in business serves (44,000) and health care (17,000). Falls were seen in leisure and hospitality (-6,000) and manufacturing (-5,000). March and April reports were revised down 39,000.

The big hit was in government employment, which plunged by 29,000, all but 1,000 occurring at the local level. This trend is likely to accelerate in the summer, when many teachers already given pink slips are not rehired, as they were in years past. This is a trend that is likely to continue for another decade.

Let me give you a simple English lesson here. Spending cuts means job losses. Reducing the deficit means job losses. Balancing the budget means job losses. Austerity means job losses. And lots of job losses means slower economic growth. This reports shows that for every two workers hired by the private sector, one is fired by the government, leaving us with net job growth that is meager at best. Since the jobs recover started 18 months ago, the private sector has added an impressive 2.2 million, while the government has been shoveling jobs away half as fast.

This is a major ingredient of my long term forecast that American GDP growth has permanently downshifted from the 3.9% we saw from 2000-2009 to 2% for this decade. That is the harsh reality behind the chart below showing job gains during this recovery compared to those in years past.

As an investor and trader, you must know that the financial markets don't believe or understand this yet. Stay cautious and stay nimble, and for the time being, stay short.

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Featured Trades: (THE ECONOMIC HEADWINDS ARE COMING)

3) The Economic Headwinds Are Coming. Whenever someone is dead right about the long term outlook for the economy, I like to revisit their comments. So am once again running a conversation I had with my friend, David Hale, a month ago, back when investors were stumbling over each other to pile on risk assets, and the indexes were hitting new highs for the year daily.

I have followed David Hale's prognostications about the global economy for two decades, and have always found his views insightful, if not useful. Although based in Chicago (click here for his site), he is almost permanently on the road, consulting with foreign governments, major banks, and big hedge funds.

He called me recently while driving a rental car to some godforsaken Midwestern airport, holding a GPS in one hand, a cell phone in the other, and steering the wheel with his knees, to give me his current take. It is not a pretty picture.

The end of QE2 and Obama's many stimulus programs are about to create a major drag on the US economy. On top of this you have to consider the likelihood that the Bush tax cuts will not be renewed a second time. You can also take out the deflationary impact of high oil prices. Add it all up, and you come up with a negative 5% headwind in annualized GDP hitting at the beginning of 2012. Although the sedentary, Harris tweed jacket wearing David is not prone to making extremist, sensationalist comments, only one ugly word can come out of this: recession.

The bad news is that the markets don't know this yet. But they will. Using the traditional rule of thumb that equity markets lead the economy by about six months, that means you should start unloading your positions right about now.

The Economy is Facing Major Head Winds

Featured Trades: (HERE COMES THE DOUBLE DIP), (TLT), (TBT), (JNK), (SJB)

1) Here Comes the Double Dip. With yields on ten year Treasury bonds piercing below the 3.00% level through to 2.95%, you now have to take seriously the possibility of a double dip recession. This is particularly concerning given that bond markets are usually right, and equity markets are usually wrong, when forecasting the future direction of the economy. That makes stocks look especially expensive right here.

Look at the chart below to see that the ETF long dated bonds (TLT) has rallied a full ten points since I made my bullish call on fixed income in March. This was not an easy call to make, as the consensus then was for a coming collapse of Treasury bond prices in the run up to the end of QE2.

It was such a bold call that others talked me into keeping the position small, always a big mistake. As hedge fund legend George Soros taught me, 'Anything worth doing is worth doing big.' The chart for the (TLT) is now starting to resemble that for silver a month ago. You would be mad to initiate new longs here.

Which brings me to the chart for the inverse long dated Treasury short ETF (TBT). No security has been taken out to the woodshed and spanked more severely, falling 24% since its February peak. I made a killing in the (TBT) in December, nimbly stepped out in January, and never went back. The (TBT) has a double burden here, since as a -2X leveraged fund you are short twice the coupon on the underlying bonds. That takes the cost of carry to a hefty 7% a year, more than 50 basis points a month, down from the 9% we saw at the beginning of the year. When it gets to 6%, last year's low, call me.

There is one corner of the fixed income universe that continues to pique my interest. If stocks fall, junk bonds will not be far behind, as these issuers are least able to cope with the blunt force of another slowdown in the economy. They are historically very expensive, with spreads over Treasuries at all-time lows. That makes the newly issued short junk ETF (SJB) especially interesting.

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Is the Double Dip Coming?

Featured Trades: (RISK OFF RETURNS WITH A VENGEANCE)

2) 'RISK OFF' Returns With a Vengeance. I have not seen a day this ugly in quite a long time. From the second that a dismal ADP report came out in the pre-market, it was a steady slide, right up until the close. The S&P 500 couldn't rally even five points on the day, and closed down a stomach churning 30.66 points.

I knew that risk markets had to be peaking yesterday when several hedge fund managers called me to review my logic behind my current short positions, right after the S&P Case Shiller U.S. National Home Price Index showed that residential real estate had returned to free fall mode.

The Challenger-Grey ADP report, an indicator of employment trends, could not have been worse. Consensus expectations hovered around 190,000, but came in at only 38,000. Then the May ISM index plunged from 60.4 to 53.5, the lowest point in nearly three years. Moody's threw fat on the fire with several sovereign debt downgrades.

All of this comes on top if negative economic reports from China, Australia, and South Korea. The big picture is one of a global slowdown, with the US economy dragging the rest of the world into the ditch. Many were puzzled by a steady drip, drip of worsening economic news producing rising stock prices for most of last week. But I knew that once you reached the tipping point, the sell orders would pour in like a breached Hoover Dam. That is exactly what we got today.

Of course, it was a great day to follow a particular newsletter that has been pounding the table about the 'RISK OFF' trade for the past six weeks. Once the selling in stocks accelerated, it spilled over to commodities, foreign currencies, oil, junk bonds, and silver, pretty much anything that still had a bid. Treasury bonds and the dollar skyrocketed. It all added up to a one day, 3.5% pop in the value of the Macro Millionaire model portfolio.

All of this makes this coming Friday's May nonfarm payroll even more interesting, with economists back peddling their estimates so fast, they could well be Lance Armstrong racing in reverse. Goldman Sachs cut their number by a whopping 50,000. Confidence is melting by the second.

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Thar She Blows!

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Which Way Now, Lance?