"When misguided public opinion honors what is despicable and despises what is honorable, punishes virtue and rewards vice, encourages what is harmful and discourages what is useful, applauds falsehood and smothers truth under indifference or insult, a nation turns its back on progress and can be restored only by the terrible lessons of catastrophe." … Frederic Bastiat

Evil talks about tolerance only when it’s weak. When it gains the upper hand, its vanity always requires the destruction of the good and the innocent, because the example of good and innocent lives is an ongoing witness against it. So it always has been. So it always will be. And America has no special immunity to becoming an enemy of its own founding beliefs about human freedom, human dignity, the limited power of the state, and the sovereignty of God. – Archbishop Chaput


Friday, June 6, 2014

Jobs Day Arrives

Yesterday was "one down, one to go". Today was the "one to go" day. We got the employment numbers and they came in stronger than the number that the market was looking for. The reported number was 217K for the month of May beating analyst expectations of a 210K increase. The unemployment rate fell to 6.3%.

The response of both the Dollar and the gold price was very interesting. The Dollar initially bumped up while gold dropped slightly but then both reversed course with the Dollar moving lower and gold moving higher. Both markets then reversed course once again. The result of this is to provide evidence that investors/traders are uncertain in their outlook for both interest rates and inflation.

I find this price action noteworthy enough to repeat something that I have been writing about for some time now - that the main factor preventing any inflationary pressures from gaining a foothold in the US economy has been slack in the labor markets.

Along this line, let me make a special note here - coming from the emails that I receive blasting me for being ( insert unprintable curse words here)  'stupid enough to believe the government's numbers'.

Whether it is the stated inflation rates coming from the CPI/PPI, the GDP numbers, or as is the case for today, the employment numbers, I am constantly insulted and reviled in private for detailing what the feds are reporting and how the market is responding to such numbers, as if reporting on those and commenting on those is now considered by that crowd to be "consorting with the enemy".

I have said it previously and will repeat it here however, those GIAMATT perma gold bulls had better STOP ROOTING for lousy economic numbers as if somehow that is going to be bullish for gold, and had instead better be rooting for evidence of growth that is strong enough to generate inflation.

They can repeat their mantra that QE is going to last forever and that the Fed is never going to end it until the cows come home but the facts are quite simple - the Fed has engaged in 4 rounds of QE  ( if you count operation twist in there you could change that number ) and is now tapering the last round. The commodity markets, including gold and silver, both rallied strongly during rounds One and Two, as most everyone on the planet expected that policy to produce a rate of inflation that the Fed was looking for. It DID NOT. Why should any more QE ( as they affirm constantly is guaranteed) going to produce something different, namely no inflation? Answer - it won't - at least not until the employment picture improves in my opinion. That has been the problem all along - namely that the liquidity that the Fed is providing has not made it into the broader economy in a large way as evidenced by the falling Velocity of Money rate.

People must have jobs and they must feel that their jobs are secure enough before they are going to dig themselves deeper into debt by taking on new credit. It is that serious growth in consumer credit that is needed to at least, at the bare minimum, put in place the groundwork necessary for Velocity of Money to increase. Without that, inflation is not going to be an issue.

Traders/investors who dig deeply into such things understand this. This is the reason gold (and silver for that matter) have gone nowhere the last few years. Not because they are constantly manipulated at the Comex or regularly smacked down by evil bullion banks doing the bidding of the government but because investors have NO EXPECTATION of GROWTH fast enough to generate any upward inflationary pressures. If you doubt that, go back and reference that TIPS spread chart that I have provided as evidence. As far as the broader market participants are concerned, it is a near perfect environment for stocks - slow and steady growth with little inflation and extremely low interest rates.

If gold is going to mount a sustained rise, it will at least need inflation to be a concern in the minds of traders, not that it is the best inflation hedge out there ( I happen to think that crude oil is actually a better one ). Nonetheless that means any pickup in interest rates must lag the inflation rate and we need to have an environment in which the general commodity sector as a whole is rising. We have had neither. Simply put, inflation is no where remotely a concern of most traders and the reason it is not, is because of the employment picture and the data connected to that ( consumer credit, VM, etc.).

I am wondering, now that we have gotten some back to back readings of +200K job gains,  if the market is now beginning to take a look inside the headline number of these jobs reports and keying in on the "Average Hourly Wage Growth" number. The jury is still decidedly out on this, based on the movement in the bond markets today with yields actually declining. Still, that being said, the YoY ( year over year) rate of growth for that hourly wage is 2.1%. The Average Workweek came in a 34.5 hours but it is that former number that has peaked some interest. Neither number is evidence that growth is anywhere near strong enough along that front to fan inflation pressures; yet. That average hourly wage growth number is going to take on increased scrutiny in the upcoming months in my view. Investors are going to be looking to see if these wage gains can get back to the level that they were PRIOR to the 2008 Recession.

I guess what I am trying to say here, and perhaps not clearly enough through all of the statistics that I am referencing, is that investors might be coming around to accepting that job growth, while not setting the world on fire, is at least steady enough so that they can now shift their focus somewhat to wage growth or the lack thereof. In other words, they are less concerned about the outright employment numbers and perhaps becoming more interested in whether or not the ingredient to push inflation into the mix is beginning to appear- namely, increasing wages.

We'll have to see if that is the case but that will require that we get no more sub 200K job number readings. There is a bit of chatter out there today that the rebound in this month's readings were due somewhat to pent up job demand that resulted from the inclement weather early in the year and that there is a risk of this demand leveling off somewhat resulting in the number in subsequent months to actually decline from this month's reading. Again, that may be the case - we will just have to wait and see.

I will get some more up later on as the session progresses and we get to see the action across more of these individual markets. For now ( and this could change ) traders are buying stocks, interest rates are ticking slightly lower ( no inflationary concerns), the Dollar is slightly firmer, and gold is a bit lower. Silver has fallen below $19 once again, which is now serving as overhead resistance and copper is down nearly 2%. That China news is dominating the red metal. Let us hope for the sake of the gold bulls out there that China does not turn its attention to gold-backed loans! If you want to see what might happen to the yellow metal should they do so, just look at copper.

Corn and especially wheat, are higher today. Looks to me like some pre-weekend short covering is occurring right now after their big drops this past week.


  1. Wow, gold getting blowtorched.

    Economy is booming, stocks are soaring, terrifying collapse continues in the mining sector.

    Way to go, KWN.

    Great calls the last 6 months, LOL....

    30, 40, 60-year veterans turned into complete fools.

  2. Amen Brother Dan
    As I told some one a couple years ago. I share all your fears about debt and the corrupt financial system. However, as long as the Fed keeps pulling rabbits out of its hat things will continue as is.
    Until some thing significant in the complex chaos of our sub par systems changes the results will continue as they have.

  3. Hubert; Far be it for me to second guess you, as you have consistently had a pretty hot hand for quite some time. My question is, why not begin the bearish campaign in the Russell 2000 instead of the S&P? have a good weekend!

    1. Hi Steve,
      You are probably right, actually I'm watching a very little number of indices at the moment : SP, Nasdaq, gold, Silver, Copper, and a few french stocks which I don't mention here.
      As I'm spending quite little of my time at trading, I don't use alerts, I didn't program some setups, and I'm watching when I have time, i.e I have to trade on the longer term units usually.
      I'm quite amateur in this business, contrary to Dan and other traders here who seem to spend more time / manage it more seriously.
      To me, it's more a leisure / small additional source of revenue.
      My short on SP500 is so small I don't dare tell you how much it is (on CFDs :)), but I'm risking quite little money even if we rush through 2000. I see no sign of weakening on the shorter time units yet, so obviously my short trade today is not "recommended" and probably won't end very well :)
      That's why the line is very small, just in case we hit precisely 1950 and bounce down.
      My real short trade (if I do it) will occur later on probably in the 1950-2000 area if I have more time to watch SP500 on a regular basis.
      Sorry for the blah blah... all this to say that I didn't even check Russel 2000 :)
      Have a great weekend,

  4. It's not a matter of believing the governments numbers. It's a matter of astutely gauging the markets reaction to those numbers, and positioning yourself accordingly.

    Don't Fight The Tape

  5. Looking at the velocity of money using M1 (the most liquid metric) it is interesting to note that in spite of all the Fed juice pumped into the economy the wealth effect trickle down nonsense is not working. This stock market recovery has not been fueled by the insatiable US consumer as some here constantly state. If the Fed continues to pull back it's stimulus it will be interesting to see how this consumption reliant economy can stand up without crutches.

    BTW it seems velocity of M1 peaked in Q4 2007 and has dropped consistently ever since. This metric fell again in Q1 2014.

    1. This comment has been removed by the author.

    2. M1 has been decreasing since 2008 http://research.stlouisfed.org/fred2/series/M1V

      M2 has been in freefall for over a decade http://research.stlouisfed.org/fred2/series/M2V

      And MZM since 1980 http://research.stlouisfed.org/fred2/series/MZMV

  6. My complements to you, Dan, for being a straight shooter in all matters financial and spiritual. I very much appreciate your wisdom and insights. My hope is that this note of encouragement can is some way offset the unwarranted rudeness and crudeness that undeservedly has been coming your way. I pray for your continued well being and continuation of the service and sanity you are providing to folks like myself.

    1. S Al;

      Many thanks for the encouraging words. Folks such as yourself are the reason I keep at this.

  7. Thanks for your analysis on the metals Dan, you've saved me some money the last few weeks.

    Can you explain why people keep saying that QE isn't making its way into the broader economy? I know that a lot of low interest money is sitting idle. But if most of QE is going to deficit financing through direct treasury purchases or MBS laundering into bank treasury purchases, doesn't the bulk of it get spent immediately into the economy through entitlements, govt. procurement and salaries, etc.? Thanks for any clarification.

    1. Gregory;

      My way of looking at it is that in spite of the near zero interest rates, which has been intended to boost the real estate markets in particular, that consumers have not been willing to take on new debt until recently. In a debt based economy such as ours, for the economy to grow rapidly, consumers ( and business), seeing that the consumer accounts for the bulk of spending, have to be increasing the amount of debt that they are willing to take on. For example, they need to be going into debt using credit cards or bank loans, etc, to borrow in order to buy cars, furniture, big appliances, RV's, ATV,s Boats, TV's, Phones, tablets, etc, in increasing numbers. Many, fearing job losses, stagnant wages, etc, were in no position to do so or were fearful of so doing.

      That appears to be slowly changing. We have certain sectors in this economy which are doing phenomenally well such as the oil and gas industry for example.

      The big thing to me has been the totality of employment picture, whether that be the actual jobs and the wages. Rising wages are needed to spark increased spending ( or debt).

      Some of the retail areas are hurting but others are doing well. It is a mixed bag. I am just trying to figure it all out like anyone else.

      What I do know is that if we could ever get a business friendly administration in this nation, we could see the economy grow much more rapidly. The tax code needs to be revamped, the regulatory burden needs to be streamlined and that big job killer, the affordable care act, needs to be scrapped and redone from the ground up. That would help improve things tremendously and might get some of these people off of food stamps, disability rolls, etc

    2. Let me extend by adding a Business Friendly Administration activist enough to undo and fix administratively the things Congress is unwilling to do.

    3. Amen, Mike.
      Thanks, Dan - what about the bit about QE not making it into the broader economy? Is your point that these funds are just getting parked after they circulate once, so the impact on inflation and growth is minimal? That would make some sense to me, but the way this is usually talked/written about, it's as if the QE funds never get into the economy at all.

      Any thoughts on why commercials are pretty neutral on gold but still wildly bearish on silver? Just greater concern about China/slowing economy? (they're all still forecasting 3% growth).

      Thanks Dan

  8. "It is that serious growth in consumer credit that is needed to at least, at the bare minimum, put in place the groundwork necessary for Velocity of Money to increase."

    We sure got that today.

    Billion prices project has been showing higher inflation than the CPI for about a year. Eventually either the CPI will catch up with it, or the BPP will catch "down" with the CPI. I suspect the former will happen.

    Several states raising their minimum wage recently will eventually start showing up in wage growth - espcially if more cities like Seattle adopt a $15 minimum. Inflation in the Seattle area is already running ahead of the national average. If you want a textbook example of how to drive up inflation, look no further than the Seattle area. I live here and it's pretty much booming - subdivisions being built everywhere around me, with houses sold before they've even started breaking ground ... Boeing has a backlog of thousands of planes, Amazon is hiring up the kazoo and building a huge 3-tower complex downtown ... they're expanding and repairing roads and bridges all over the place here ... etc., etc. Classic case of demand-pull inflation going on around here.

  9. Here's a really good example: In San Francisco, inflation sans food and energy is running at 3.3% y-o-y. With overall inflation running close to 3%. As everyone knows, the Bay Area is doing quite well these days. And based on housing prices, some might say too well.

  10. The Fed ignores inflation in food, gas, insurance etc, the things people actually need daily to survive. Inflation is well above 2% already if those items are counted.

    Basic math shows that interest rates can never be normalized again or debt would fail everywhere.

    A historical normal 5% interest rate would mean about 1 trillion a year in interest payments on the nation debt. Car loans would fail, housing would fail again etc.

    The same mistakes that caused the 2008 collapse are just being repeated again.

    The Fed could never fight inflation even if they ever got it in their calculations. So they will just keep counting items that show little inflation as long as they can.

    Same reason that interest rates can never go up in Japan.

    This is the elephant in the room that is not talked about.


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