12.31.13 - Investors Warned About Future Of U.S. Economy
Gold prices settled lower in thin holiday trading. Consumer confidence higher, U.S. stocks higher. Gold last traded at $1,202 an ounce. Silver at $19.39 an ounce.
The US economic yo-yo is back with us this last day of 2013.
Readers may recall that sales of existing homes were reported as being below expectations just yesterday, placing a damper on optimism about the real estate market, especially in the face of rising interest rates on mortgages.
Today the news is much better, with some caveats.
Home prices posted another big annual gain in October. The closely-followed S&P/Case-Shiller home price index was up 13.6% compared to a year ago, the largest 12-month gain since early 2006 (the height of the housing bubble). Prices have been improving at a faster annual rate every month for nearly two years. But with the prospect of rising mortgage rates, October prices were little changed from September.
The co-founder of the Case-Shiller index, Robert Shiller, issued a warning to Americans on CNBC this morning:
"We're sort of in the beginnings of another housing bubble," the Nobel Prize-winning economist told CNBC.
Investors should sit up and take notice of this warning. Bubbles hardly ever come to an end in an orderly, painless fashion and the last real estate bubble was a driving force behind the financial crisis, a crisis we're still trying to fully recover from.
One means by which the federal government has been trying to push recovery has been through unprecedented loose monetary policy from the Federal Reserve, including an extended period of negative real interest rates and a never before seen bond-buying program (QE).
One of the world's most successful investors, Jim Rogers, warns these policies have set the stage for a new economic crisis and even a collapse of the Federal Reserve in the next ten years. Rogers is bullish on the long-term prospects for gold and prefers gold coins over gold equities: “Gold will become one of the only refuges around,” he says.
In the immediate term, the party goes on. Irrational exuberance, a term coined by former Fed Chairman Alan Greenspan, accurately describes the current situation, especially in the stock market. The Dow and S&P 500 have soared to all-time highs in 2013. Both indexes are on track to record the biggest annual gains since the late 1990s. The NASDAQ has surged nearly 40% to highs not seen since 2000. It's no wonder consumer confidence is starting to recover.
The problem, of course, is that all of this euphoria in the equity markets is not supported by economic fundamentals, but by monetary "goosing" by the Federal Reserve. At some point the goosing will become less effective and when, out of necessity, it must cease altogether, the end will not be painless. All the more reason for investors to diversify into assets that have historically moved independently of the stock market--such as gold.
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12.30.13 - Economy Continues Giving Mixed Signals
Gold prices lower on profit-taking and thin trading conditions. U.S. pending home sales rise 0.2 percent, stocks flat. Gold last traded at $1,203 an ounce. Silver at $19.70 an ounce.
The mixed signals from the economy continue to trickle in.
Not long ago, real estate statistics were flashing continued recovery. Today, the statistics show rising interest rates are raising borrowing costs and suppressing sales of existing homes, threatening the real estate recovery.
Contracts to purchase previously owned U.S. homes rose less than forecast in November. Pending home sales increased 0.2 percent. The median projection in a Bloomberg survey of economists called for a 1 percent advance.
Higher borrowing costs may be suppressing home sales, but consumers don't appear to be having a problem spending borrowed money in other ways. Consumer borrowing is climbing at the fastest pace in more than five years. That may be a positive development over the short-term as consumers have been spending what they are borrowing, but over the longer-term it is bad for American consumers and thus the American economy. Sooner or later, bills from credit cards come due and eventually suppress spending on new purchases or, if consumers struggle to make payments, the red ink reverberates up and down the economic chain, starting with banks.
Debt, whether it is run up by the federal government or individual consumers, is troublesome to say the least. Given the overall uncertainty and mixed signals in the economy, this would seem a bad time for consumer debt to be rising fast.
Recently, the Federal Reserve turned 100. Pardon us if we don't celebrate. One result of Federal Reserve policy has been a huge increase in the cost of living of the average American. Most Americans now have no choice but to run up huge levels of debt to purchase items Americans used to be able to afford without credit cards and loans. Even items like homes, which have typically been paid by mortgage, require much higher levels of debt, even adjusted for inflation. More to the point, all of this has occurred because of Fed policies that have debased the dollar over time.
Most ominously, current Fed policy has accelerated these same policies to previously unheard of levels.
We mentioned in recent commentaries that as many as 70% of Americans polled say they feel the US economy is in poor condition, no matter what the economic statistics may say.
Wayne Allyn Root has written an excellent summary of why Americans feel that way for MarketWatch. The basic problem? Small business, the backbone of the US economy is overregulated and overburdened by big government policies. The article is well worth reading. Click here to read article.
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12.27.13 - Gold Shows Signs Of Strength For 2014
Gold prices settled higher Friday and gained .1% for the week. Euro surges to two-year high against U.S. dollar. Gold last traded at $1,214 an ounce. Silver at $20.05 an ounce.
While gold may have had a rough year, it is closing out 2013 on an uptick. Its three day rally is largely due to weakness in the US dollar tied to the continuation of the Quantitative Easing bond-buying program along with continued negative real interest rates.
Gold is up about 1.5% over the past 3 trading days while the Bloomberg US Dollar Index is down just over a half percent over the same period.
There is no reason to believe the dollar will sustain any real strength going forward given US monetary and fiscal policy.
That, combined with signs of increased global economic activity, bode well for gold in 2014. Many analysts expect the yellow metal to ride a recovery wave in broader commodities indices over the course of 2014. Metals and agriculture commodities are both expected to benefit from increased economic activity in the new year.
Despite signs the global economy may be picking up steam, polls show a whopping 70% of Americans have a negative view of the economy. The CNN/ORC poll showed most Americans view the economy as being in poor shape. This shows the limitations of government reports and statistics, often suspected of being influenced for political purposes. When 70% of Americans feel the economy is in poor shape, there is clearly trouble in the real world outside the Washington DC beltway and away from the fantasy world of Wall Street.
Some Americans are about to feel a sharper, tighter pinch from the economy soon. 1.3 million Americans are set to lose their unemployment benefits Saturday. Federal emergency benefits will end when funds run out for a program created during the recession to supplement the benefits states provide. The cutoff will initially affect 1.3 million people, but 1.9 million more will lose benefits by mid-2014 when their 26 weeks of state paychecks run out, according to the National Employment Law Project.
Proponents of smaller government point out that unemployment benefits were never meant to endure as long as they have in the wake of the 2008 financial crisis and the government cannot continue to pay out massive unemployment benefits indefinitely AND be fiscally responsible. Ultimately, only the private sector can provide true relief, in the form of jobs, for the unemployed.
Finally, one of Forbes magazine's expert contributors, a Wall Street adviser named David John Marotta, is worried enough about the impact of Obamacare, intrusive government and the national debt to recommend that clients stockpile firearms and ammunition in case of social unrest stemming from an economic collapse. This type of advice from a mainstream financial adviser is not something that should brushed off.
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12.26.13 - Economy Continues Sending Mixed Signals
Gold prices jumped after a larger-than-expected drop in weekly U.S. jobless claims. U.S. stocks higher on upbeat economic data. Gold last traded at $1,212 an ounce. Silver at $19.92 an ounce.
In the final days of 2013, news on the employment front is signaling a strengthening economy.
New jobless claims dropped by the most in more than a year in the latest week but economists cautioned over reading too much into volatile data around the holiday season. The number of initial claims for unemployment benefits fell by 42,000 in the week that ended Dec. 21 to 338,000. This is the biggest drop since the week ended Nov. 17, 2012.
This report follows two weeks where claims unexpectedly jumped by 75,000, eventually reaching 380,000, the highest level since March.
In other words, the economy continues to send mixed signals to the financial world. Some reports indicate recovery and some indicate weakening. With mixed signals from economic statistics, it's no wonder independent surveys show most Americans do not think the economy is actually in a recovery.
Despite the caution from economists not to read too much into the holiday-time employment report, Wall Street has been cheered and the stock market has advanced to a new record high in relatively light trading.
Bonds on the other hand are suffering in the wake of the employment report. The benchmark 10-year Treasury note yield hit 3% for the first time since September. Bonds are spooked because rising economic activity could mean higher interest rates, which pushes the prices of existing bonds lower.
Rising interest rates are also unlikely to help the real estate market--just the opposite in fact.
Gold, on the other hand, is rising today in the wake of the employment report.
There has been a development of significance in the gold industry.
Germany's Bundesbank plans to store half the national gold reserves in its own vaults by 2020. It will mean the return of 700 tons of the precious metal from the US and France. During 2013, the Bundesbank got back about 37 tons of gold from the US and France. The total value of the returned gold is estimated at 1.1 billion euro. This is all part of a program to increase Germany's gold reserves held in its vaults in Frankfurt, Germany. A large part of the German gold is now held in foreign banks, primarily in New York and Paris.
During the Cold War fearing a Soviet invasion the German government shipped two-thirds of its gold reserves to the UK, France and US.
Recently, the Bundesbank has been criticized for not holding its reserves in Frankfurt, so it has decided that some should be brought back to Germany.
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12.24.13 - U.S. Sees Mixed Economic Data
Swiss America will be closed Wednesday in observance of Christmas. Happy Holidays from our family to yours.
Gold prices settle above $1,200/ounce as traders look towards 2014. U.S. stocks higher on upbeat economic data. Gold last traded at $1,203 an ounce. Silver at $19.50 an ounce.
Investment markets will see abbreviated trading on Christmas Eve heading into Christmas 2013. Statistics recently released are indicative of a hot economy in the early days of winter 2013-2014 in some sectors but not all of the statistics paint such a rosy picture.
The Commerce Department said this morning that durable goods orders jumped 3.5 percent as demand increased for a range of goods (aircraft, machinery, computers and other electronic products).
This was the largest increase in nearly a year.
Meanwhile, new home sales slipped 2.1 percent in November. This was partially offset by the news that U.S. house prices rose 0.5 percent in October from September as buyers competed for a tight supply of properties for sale, according to the Federal Housing Finance Agency.
Both of these housing reports were tempered by last week's news that mortgage applications are now at 13-year lows. It is difficult to foresee a bullish housing scenario when mortgage applications are plummeting. With the economy heating up elsewhere, rising interest rates are likely, so demand for mortgages is likely to drop.
The strength in housing could be short-lived.
Retail performance is also mixed this Christmas. While retailers have generally reported good sales results, the latest data is not encouraging.
Fewer Americans hit the malls the last week before Christmas even as retailers poured on the discounts. U.S. store visits plummeted 21 percent and retail sales dropped 3.1 percent in the week through Dec. 22, signaling a lackluster finish for the most important selling season, Chicago-based researcher ShopperTrak reported.
All of these mixed signals have implications for Fed monetary policy and the US dollar. It is likely that incoming Fed Chair Janet Yellen will continue the loose monetary policies in the face of these mixed signals, which means weakness in the dollar going forward.
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12.23.13 - More Positive News For U.S. Economy
Gold prices slightly lower ahead of the holidays. U.S. stocks rise on upbeat consumer spending. Gold last traded at $1,197 an ounce. Silver at $19.41 an ounce.
There are real signs of life in the US economy according to the latest statistics from the US Department of Commerce.
Consumer spending and personal income were both up in November, giving impetus to the idea the economy is finally starting to recover in earnest.
Consumer spending increased 0.5 percent in November after rising 0.4 percent in October. November's increase in so-called real consumer spending was the largest since February 2012.
This is good news because it accounts for more than two-thirds of U.S. economic activity.
There is a worrisome aspect though.
Income rose 0.2 percent, rebounding from a 0.1 percent dip in October. With spending outpacing income growth, the saving rate (the percentage of disposable income households are socking away) fell to a nine-month low of 4.2 percent.
This means Americans are spending more by borrowing, running up high-interest debt on credit cards. Not exactly the makings of a robust, healthy economy.
Of course, the big story for the year has been Obamacare and it continues to dominate the news. It will have an economic impact to be sure. But it is also contributing to a steep erosion in Americans' confidence and trust in their government. The latest survey shows that just 35% of Americans approve of Obamacare.
Is it any wonder?
Sen. Joe Manchin (D-W.Va.) said Sunday that Obamacare could be headed for a "complete meltdown" if costs rise too fast and people are unhappy with their coverage.
“If it’s so much more expensive than what we anticipated, and if the coverage is not as good as what we've had, you’ve got a complete meltdown at that time,” Manchin said on CNN’s “State of the Union".
The senator said such a situation would result in the law collapsing under "its own weight."
Good or bad, the insurance industry, which helped write the law, is very much wedded to it now.
Syndicated columnist Charles Krauthammer made a dire prediction.
Appearing on Fox News Sunday, Krauthammer said all the exemptions the President has given to Obamacare will ruin insurance companies thereby necessitating the White House to ask for a huge government bailout of these companies next year. The economic impact of such a development will no doubt be a hot topic next year and insurance stocks should have an interesting ride as well.
One thing Americans appear to be doing less of is traveling to gamble. As a result, there is real trouble in gaming Meccas like Las Vegas and Atlantic City. With the proliferation of various forms of gambling from coast to coast and online, there isn't as much incentive to travel to the two big gambling hubs. The real estate market in both vicinities is in trouble with little to indicate any recovery is on the way. There is even talk of Atlantic City becoming another Detroit.
Between Christmas and New Year's we will devote a commentary to the review and outlook for gold. In the meantime, the president of MSI Global, Michael Ivanovitch, had an excellent commentary on CNBC Sunday entitled, "Some gold under the Christmas tree?"
In that commentary, Ivanovitch points out three factors that favor gold in the future:
• the inflationary potential of an excessive monetary stimulation in one-half of the world economy
• major instabilities that will be caused by the withdrawal of unprecedented levels of global liquidity
• dangerous geopolitical rivalries between new and established centers of economic, military and political power
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12.20.13 - Economy Continues Giving Mixed Signals
Gold prices lower on profit-taking and thin trading conditions. U.S. pending home sales rise 0.2 percent, stocks flat. Gold last traded at $1,203 an ounce. Silver at $19.70 an ounce.
The mixed signals from the economy continue to trickle in.
Not long ago, real estate statistics were flashing continued recovery. Today, the statistics show rising interest rates are raising borrowing costs and suppressing sales of existing homes, threatening the real estate recovery.
Contracts to purchase previously owned U.S. homes rose less than forecast in November. Pending home sales increased 0.2 percent. The median projection in a Bloomberg survey of economists called for a 1 percent advance.
Higher borrowing costs may be suppressing home sales, but consumers don't appear to be having a problem spending borrowed money in other ways. Consumer borrowing is climbing at the fastest pace in more than five years. That may be a positive development over the short-term as consumers have been spending what they are borrowing, but over the longer-term it is bad for American consumers and thus the American economy. Sooner or later, bills from credit cards come due and eventually suppress spending on new purchases or, if consumers struggle to make payments, the red ink reverberates up and down the economic chain, starting with banks.
Debt, whether it is run up by the federal government or individual consumers, is troublesome to say the least. Given the overall uncertainty and mixed signals in the economy, this would seem a bad time for consumer debt to be rising fast.
Recently, the Federal Reserve turned 100. Pardon us if we don't celebrate. One result of Federal Reserve policy has been a huge increase in the cost of living of the average American. Most Americans now have no choice but to run up huge levels of debt to purchase items Americans used to be able to afford without credit cards and loans. Even items like homes, which have typically been paid by mortgage, require much higher levels of debt, even adjusted for inflation. More to the point, all of this has occurred because of Fed policies that have debased the dollar over time.
Most ominously, current Fed policy has accelerated these same policies to previously unheard of levels.
We mentioned in recent commentaries that as many as 70% of Americans polled say they feel the US economy is in poor condition, no matter what the economic statistics may say.
Wayne Allen Root has written an excellent summary of why Americans feel that way for MarketWatch. The basic problem? Small business, the backbone of the US economy is overregulated and overburdened by big government policies. The article is well worth reading. Click here to read article.
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12.19.13 - Bernanke Announces Fed Tapering Plans
Gold prices fall after announcement of Fed tapering plans. U.S. stocks retreat on jobless claims jump. Gold last traded at $1,193 an ounce. Silver at $19.19 an ounce.
Yesterday the Federal Open Market Committee adjourned from its last meeting of the Ben Bernanke era. Bernanke announced afterward that the Fed would begin "tapering" its Quantitative Easing bond-buying program.
The stock market was euphoric and climbed over 200 points on the news. The reaction was clearly an overreaction. If one puts the policy change in perspective, it amounts to a lot of, well … nothing.
The "tapering" involves reducing the Fed's monthly bond purchases from $85 billion per month (just over $1 trillion per year) to $75 billion per month ($900 billion per year). By any measure, the Fed is continuing a massive, inflationary bond-buying program that has failed to achieve its goal of stimulating real economic activity.
What's more, Bernanke stated the Fed could decide to reverse the tapering if the economy did not improve. Given incoming Fed Chair Janet Yellen's reputation as an inflation dove who emphasizes the Fed's mission of increasing employment, that is a very real possibility.
So, essentially, Wall Street is applauding the continuation of a program that has not achieved its objectives, but has served to create bubbles in the stock and real estate markets. We all know from history, both recent and distant, that bubbles eventually burst or deflate.
As if on cue, the Labor Department came in this morning with another disappointing employment report. Applications for jobless claims increased by 10,000 to 379,000 last week, the highest level since March. If Quantitative Easing was really working, wouldn't we be seeing better results than this?
The new budget deal in Washington seems to have averted the chance of a partial government shutdown in early 2014, but there is still the matter of the debt ceiling, which is a completely different issue. The battle lines are being drawn, with Republican congressional leaders stating they want "something" in return for raising that debt ceiling. What that "something" is and whether they can get it from the Obama administration and Senate Democrats remains to be seen.
No wonder Americans don't trust their government. The Gallup organization reports 72% of Americans say big government is a greater threat to the U.S. in the future than is big business or big labor, a record high in the nearly 50-year history of the question. The prior high for big government was 65% in 1999 and 2000.
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12.18.13 - Fed Decides To Taper QE3
Gold prices close lower after Fed announcement. Stocks soar to Fed moves to taper QE3. Gold last traded at $1,235 an ounce. Silver at $20.03 an ounce.
The Federal Reserve Open Market Committee meeting adjourns today. This will be the last FOMC meeting presided over by current Fed Chairman Ben Bernanke. And later today, Bernanke will hold his last press conference as Fed Chairman.
The markets are relatively flat awaiting Bernanke's comments.
Bernanke's tenure at the Fed has created a new bubble that spells trouble going forward. By resorting to the Quantitative Easing bond-buying program on top of near-zero interest rates, the Fed has artificially pumped up the stock market and created a new bubble without actually doing much to stimulate the overall economy.
Where does it end? What will the impact be if and when the Fed does "taper" its bond buying? What will happen when interest rates start to rise?
In no sector is the danger more apparent than the real estate market, the sector that saw so much damage in the 2007-2009 financial crisis. Unbelievably, it could be set for another fall so soon. Housing starts in November hit their highest levels since 2008. But this might just be setting the market up for a fall. No sector is more vulnerable to a rise in interest rates than the housing market. When interest rates start to rise, demand for mortgages will fall.
By the same token, rising interest rates won't do the stock market much good either and reductions in Fed bond-buying will reduce the largesse that has been going into the market. And the news is no better for the bond market. Rising interest rates result in lower bond prices.
Yet the Fed finds itself in a trick box. Either it must start to tighten monetary policy, resulting in multiple declining markets or it must try to keep QE going, risking high inflation over the long-term and undermining the value of the dollar overall.
The news from the Fed will likely have a short-term impact on the gold market. Should the news out of the Fed signal more easy money policies, massive short positions in the gold futures market will start to unwind in the closing days of 2013, possibly pushing gold higher.
Finally, more details have emerged from the budget deal on Capitol Hill in Washington and they have many Americans outraged.
The deal does NOT cut overall spending. It doesn't even cut the rate of growth of spending. It scraps $63 billion of spending cuts and replaces them with two things:
1. Likely hollow promises of $22 billion in deficit reduction over the next 10 years.
2. $6 billion in cuts to military pensions, including cost of living adjustments to disabled veterans.
That's right, the only real cuts are to wounded warriors.
The US government will spend more than $1 trillion in each of the next two years, but Congress couldn't find anything to cut other than our veterans.
None of the architects of this deal actually served their country in uniform. Clearly, years as perfumed princes in the ivory towers of Washington DC have not taught them about the sacrifices better Americans have made for our freedom.
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12.17.13 - Experts Warn Of Dangers In The Stock Market
Gold prices close lower ahead of Fed decision. U.S. stocks lower, dollar mixed. Gold last traded at $1,230 an ounce. Silver at $19.84 an ounce.
The moment Wall Street has been waiting for has finally arrived.
The Federal Reserve Open Market Committee (FOMC) is meeting today and will wrap up its discussions tomorrow (Wednesday). Fawning members of the financial world are waiting with baited breath to find out what the Fed intends to do.
Because everyone is waiting, markets are mostly flat today.
Even so, one cannot help but to be a bit bewildered by the scene before us. Wall Street fat cats, Washington politicians and the big bankers all want to see if the Fed will continue policies which have in fact NOT worked to boost the economy.
Why?
Because the policies have pumped up a bubble in stocks. In other words, the Fed hasn't been working well for Main Street USA but it has been doing just fine for Wall Street.
Meanwhile, the US dollar suffers possibly irreparable damage from irresponsible, loose monetary policies.
In fact, another long-time financial expert is warning Americans to beware of the stock market due to the bubble inflated by the Fed.
Jim Grant, founder and editor of the highly-regarded Grant's Interest Rate Observer, warned today that the stock market is being pushed by the dangerous "monetary manipulation" of the Federal Reserve's $85-billion-a-month in quantitative easing bond purchases.
"What the Fed is doing is an exercise in price control. This is 'stocks.gov' [and] 'bonds.gov,'" Grant said. "The clear and present risk of the stock market is we're living ... in a hall of mirrors because the Fed's accommodative policy is distorting the calculations by which the market has been traditionally valued."
Paul Isaac, founder of $900 million hedge fund Arbiter Partners, agreed with Grant and pointed out that the Fed has created a trap in which any move to "taper" the bond-buying program will likely negatively impact the stock market. "The fact that the stock market is as nervous as it is about the taper is an indication that other people implicitly have some concerns that valuation relationships will change if you move anyway from the highly stimulative monetary policy."
Hans Olsen, chief investment officer at Barclays Wealth and Investment Management, went even further saying the stock market is in bubble territory because of the Fed's Quantitative Easing program.
And for those looking to bonds for safety, Olsen has an additional warning:
"You definitely have a bubble in bond territory as well," he added, saying all of this is due to "the rise in the Fed's balance sheet," which is approaching $4 trillion.
Observers shouldn't expect much change right now. This is current Fed Chairman Ben Bernanke's last FOMC meeting. The new Fed Chair nominee, Janet Yellen, is expected to be confirmed by the Senate this week and she will preside over the first FOMC of 2014. Yellen is known to be in favor of accommodative monetary policies to attempt to boost the economy.
Monetary policy was not the only focus of the news overnight. Fiscal policy is also making headlines as the bi-partisan budget deal passed in the House last week cleared a key hurdle in the Senate with a procedural vote that will essentially break down any serious opposition.
The deal is a double edged sword. On the positive side, it will avoid the crisis mentality associated with another possible partial government shutdown in the January/February time frame. That circumstance spooked international investors and weakened the dollar and demand for US Treasuries in the fall. But the deal does have a downside as well. It eliminates $63 billion in spending cuts in the near term in return for a promised $22 billion in deficit reductions spread out over the next 10 years. Given the size of the debt and annual deficits, such numbers are miniscule. Moreover, promises in Washington DC seldom materialize, especially promises made about policy ten years down the road. Critics are understandably skeptical the cuts will even materialize.
As a result, the federal budget will exceed $1 trillion in each of the next two fiscal years. This will further serve to undermine the dollar as the chosen method of servicing that debt has been the aforementioned loose monetary policy. The US government is spending at a rapid clip and flooding the world with dollars it does not want. So, the Fed is forced to buy those dollar assets itself.
It's a lot like a game of musical chairs. Sooner or later the music will stop. Who will have a place to sit?
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12.16.13 - Markets Remain Focused On The Fed
Gold prices close higher ahead of this week's Federal Reserve meeting while silver rallied 2.5%. U.S. stocks jump, dollar falls. Gold last traded at $1,244 an ounce. Silver at $20.10 an ounce.
As we embark on a new business week, the financial world is focused on the Fed yet again, specifically the meeting of the Federal Open Market Committee (FOMC).
Observers are hopeful they will see some indication of where the Fed will go in terms of monetary policy and, just as importantly, when.
No one knows for sure what the Fed has in mind and all observers must bear in mind there will be a new Fed Chairman. This changing of the guard will no doubt have an impact on Fed policy going forward. By all indications, Janet Yellen appears to be primarily focused on the Fed's role in reducing unemployment more than on the Fed's role in keeping inflation in check and promoting stability for the US dollar.
The economy continues to send mixed signals. One week we get a positive employment report out of the Labor Department and the next week we get a negative one. And the same mixed signals go for other economic reports from the various agencies and departments of the federal government. For instance, the Commerce Department reported this morning that industrial production reached an all-time high in November. But the news was tempered by the fact it may have been skewed upward by increased output from utility companies due to unusually cold weather.
Against that backdrop, it's hard to tell how Fed Chair Yellen will react.
Much of the financial press today is devoted to figuring out when the Fed will "taper" its Quantitative Easing bond-buying program. Opinions vary substantially making it very hard for anyone to figure out where things are going and when.
One aspect does seem fairly predictable though. Historically the Federal Reserve has not tightened during December. So, what ever comes out of this week's Fed meeting will probably just leave all of us waiting until the next meeting, which will occur in 2014.
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12.13.13 - Markets Quiet Ahead Of Next Week's Fed Meeting
Gold prices settle higher for a weekly gain of 0.5% as traders await next week's Fed meeting. U.S. stocks end higher, dollar hits five-year high against yen. Gold last traded at $1,234 an ounce. Silver at $19.60 an ounce.
Today might be described as the "calm before the storm," though it remains to be seen when and if a storm will come.
The markets are quietly heading into the weekend, not because traders are spooked by "Friday the 13th," but because everyone is waiting for next week's meeting of the Federal Reserve Open Market Committee so they may ascertain the future of US monetary policy.
For years now, the Federal Reserve has employed a very loose or "easy" monetary policy in an effort to stimulate economic growth in the US. This has included an unprecedented bond-buying program known as "Quantitative Easing (QE)."
Recently there has been great speculation as to when--and whether--the Fed will taper QE. QE has been a major reason why the US stock market has surged, but the bond-buying cannot go on forever. Or can it? There isn't a consensus on that, so market participants are understandably focused on what the Fed will do next week.
This also explains why the dollar is mixed today, edging up against the euro and the pound, but retreating slightly against the yen.
As for QE, there was an excellent commentary on Breitbart.com by Jason Scheurer, who compared the unsustainability of the policy to "a snake eating its own tail."
While some believe the US economy is turning a corner, yesterday's employment report is a sign of weakness. And even with recent positive economic reports, one cannot escape the fact that, over the past 5 years, the private sector has shrunk in 41 of 50 states.
This morning the Producer Price Index was released by the Labor Department and it showed the 3rd straight monthly decline in wholesale prices. But that figure is not to be trusted since it has been repeatedly skewed by falling energy prices. In each of the past three months, the core PPI, which excluded energy, has risen.
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12.12.13 - The U.S. Economy Is Sending Mixed Signals
Gold prices fall as Fed taper prospects grow. Stocks end lower, falls 3rd day in a row. Gold last traded at $1,224 an ounce. Silver at $19.55 an ounce.
The US economy continues to send mixed signals to investors. After a week of positive employment reports, the labor market turned negative again this week when the number of initial claims for unemployment benefits rose by 68,000 to 368,000, well above a consensus forecast of 335,000. That's the highest level of jobless claims in two months.
MarketWatch.com published a commentary this morning reflecting the mixed signals on the economy and related it to the stock market. The stock market is near record highs despite the fact the underlying economic fundamentals are far from positive. That's because the stock rise is being fueled by two things:
1. Debt
2. Irresponsible, unsustainable monetary policy.
Debt is being piled up by our government at a rate that is beyond alarming. The national debt is $17 trillion and the latest budget deal calls for annual spending to exceed $1 trillion in the next two years. In other words, there is no effort being made to control the debt, much less reduce it.
The Fed's Quantitative Easing policy of buying bonds on the open market to inject cash into the economy is the economic equivalent of a crack pipe. It has failed to produce a strong economy and will only serve to undermine the value of the US dollar.
All these factors point to the need for gold as a hedge in the future.
In other news, there seems to be a positive outcome in the works from a new federal banking regulation known as the "Volcker Rule."
According to Investopedia, the Volcker rule basically stops banks from doing their normal business (installment loans, residential mortgages, equity credit loans, deposit services) as well as trading on their own behalf. The rule was introduced following the recession of 2008, to control the risk associated with the financial sector. Wall Street banks were accused of accumulating an excessive amount of risk and unfair business practices due to the inability of regulators to properly monitor their complex instruments and activities. The Volcker rule aims to protect individuals by creating a more transparent financial framework which can be regulated with greater ease.
It will be implemented over the next two years and should curtail and eventually eliminate speculation by big banks in the gold and silver markets. This is a good thing as such speculation has been disruptive of the free market in the past. Often banks have had an incentive to attempt to suppress the price of precious metals to protect their business and investments in other sectors.
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12-11-13 - Budget Deal In Washington Far From A Sure Thing
Gold prices closed lower on news that a deal was reached to avert next month's looming government shutdown. Stocks end sharply lower, saw worst drop in month. Gold last traded at $1,253 an ounce. Silver at $20.32 an ounce.
There are reports of a budget deal in Washington to prevent another partial government shutdown. President Obama and House Speaker John Boehner have already praised the deal, but it appears it is far from a sure thing. Key Senator Marco Rubio (R-FL) has already issued a press release opposing the deal and House conservatives are just as skeptical. The deal is said to reverse previous caps on spending growth and results in federal budgets in 2014 and 2015 that exceed $1 trillion. The battle could just be beginning as Tea Party Republicans break ranks with leadership to oppose this deal.
Despite the fact that the US federal budget will exceed $1 trillion in the next two fiscal years, Standard & Poor's has downgraded its growth forecast for the US economy due to "significant downside risks" from federal spending cuts. This is curious, since there are no actual "cuts," but rather reductions in the rate of growth of future federal spending. It's enough to make one wonder who is running the show at S&P. Nevertheless, S&P has tremendous influence on the financial world, so despite the faulty reasoning, this development will contribute to the continuing pressure on the US dollar as global investors are discouraged from acquiring and holding dollar assets due to the downgraded S&P forecast.
Speaking of the dollar, there has been another development indicative of its diminishing role and prestige around the world. Representatives of the Singapore and Hong Kong stock exchanges signed a Memorandum of Understanding to combine their forces in rolling out more financial products denominated in Chinese renminbi. This is just the latest indication of China's move to supplant the US dollar as the world's reserve currency of choice. Because Singapore and Hong Kong have been the two most dominant financial centers in the Asia-Pacific region for decades, this development is significant, even though it has not received a great deal of attention in the US financial media.
For their part, the US financial media remain fixated on the Fed and its policy of Quantitative Easing. No one seems to know when--or even if--that Fed bond-buying program will end. While some observers are trying to predict when the Fed will begin "tapering" the program, others surmise they may NEVER do so. Such money-printing programs are akin to a drug addiction. Fed policymakers may never find the right time to tighten monetary policy out of fear it might wreck the economy.
Even if the Fed does end up tapering, it might not be negative for the price of gold. Why? Because the stock market is even more vulnerable to rising interest rates and tightening monetary policy than gold. If tapering creates a bear market in stocks, gold is likely to benefit. Historically, extended declines in the stock market result in a rising gold price.
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12.10.13 - Stock Market Flashing Warning Signs
Gold prices close at a three-week high on bargain hunting. Stocks, U.S. dollar fall as investors await news from Fed. Gold last traded at $1,261 an ounce. Silver at $20.32 an ounce.
Technical analysts are flashing warnings about the stock market as the price of gold rebounded sharply this morning.
Mark Hulbert of the well-regarded Hulbert Financial Digest said this morning that the stock market may be forming "a dangerous triple top of major long-term significance."
The Dow, in inflation-adjusted terms, is no higher today than it was at the 2000 and 2007 highs. If the market were to turn down from close-to-current levels — and thereby form a triple top — then it would mean on three occasions the market had tried, and failed, to break through to higher levels. According to the theory behind technical analysis, this would mean current levels represent particularly strong resistance — and make it that much harder for the market to break through in the future as well.
Other indicators are also flashing caution.
The Value Line Median Appreciation Potential, or VLMAP, represents the median of the projections made by Value Line’s analysts of where the 1,700 widely followed stocks they closely monitor will be trading in three to five years’ time. But for brief exceptions, the VLMAP currently is lower than it’s been in many decades. In fact, one has to go all the way back to early 1969 to find another time in which the VLMAP spent as long a period at or below these levels. From then until the market’s December 1974 low, the Dow fell more than 40%.
When coupling the bearish message of the VLMAP with the potential triple top of the inflation-adjusted market, investors should be worried about where the market is headed.
Americans should consider adding to their gold holdings in view of this development since gold has historically served as an effective hedge against steep, extended declines in the stock market.
Speaking of gold, it is now headed for its biggest daily rise since mid-October as the dollar is weakening, boosting the appeal of gold as an alternative. Silver is also trading at its highest levels in almost three weeks.
One reason the dollar may be weakening is widespread reports the Fed will not begin to taper its bond buying stimulus program any time in the immediate future.
Concerns about the stock market are said to be contributing to a lean Christmas shopping season for luxury items and high-end retailers this year. While some discount retailers are reporting robust sales, high-end retailers report tepid sales. This is yet another sign of what can only be described as an uneven economy. In other words, Fed monetary policy may be weakening the dollar, but there is scant evidence it is boosting economic activity.
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12.7.13 - Bullish Signs Emerging In Gold Market
Gold prices close higher as traders mull Fed comments. U.S. stocks extend gains, S&P 500 hits new high. Gold last traded at $1,234 an ounce. Silver at $19.70 an ounce.
Bullish signs are emerging in the gold market that could foreshadow higher gold prices.
Ironically, the first sign comes in the form of massive short positions in gold by investment funds. This contrary indicator often signals a shift in a market. When market players get too bearish, any exogenous event or unexpected factor can result in a rapid turnaround. That appears to be what is happening with gold right now.
The second factor is reports of robust demand from India, historically the largest consumer of gold. In fact, there is an outright shortage of physical gold in India right now and imports are said to be at a trickle. Premiums for existing gold are soaring. Such tightness in the physical market for gold often precedes an increase in prices.
In a related matter, Yale University's School of Forestry and Environmental Studies just published a report predicting shortages of virtually all metals, which could produce a commodities boom. The shortage is said to be created by the demand for many irreplaceable metals for use in high-tech applications and the study authors' chief concern is that a shortage of metals will stifle innovation.
There were also two interesting articles by New York media about government policies, one about Federal Reserve policy and the other about healthcare policy.
The New York Times ran a story yesterday indicating there was a consensus at the Federal Reserve not to begin tapering the Fed's bond buying program until sometime in 2014. When exactly in 2014 is still to be decided. This is bearish for the dollar.
The New York Post ran a different story by Michael Tanner of the Cato Institute that examined a new worry; the way in which the Obama administration has unveiled Obamacare has resulted in a skyrocketing number of people being added to Medicaid, a healthcare welfare program. If the trend continues, it could bankrupt both federal and state governments. The Congressional Budget Office projects, in part because of ObamaCare, federal Medicaid spending will more than double over the next 10 years, topping $554 billion by 2023. State governments pay another $160 billion for Medicaid today. For most states, Medicaid is the single-largest cost of government, crowding out education, transportation and everything else.
Evidently,no one foresaw that many ObamaCare’s enrollees would be Medicaid eligible. It’s beginning to look like yet another miscalculation, one that could have very serious consequences for the program’s costs.
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12.6.13 - Positive News For The Job Market
Gold prices close lower as traders react to stronger-than-expected jobs data. U.S. stocks rally Friday but finished down for the week. Gold last traded at $1,229 an ounce. Silver at $19.52 an ounce.
Economic statistics took a decisive shift to the positive today with a much better than expected jobs report and a report that consumer sentiment is back on the rise.
Both reports break trends in which the labor market and consumer sentiment had been declining.
The news on the job front, namely that more than 200,000 jobs were created during November and the US unemployment rate fell to 7.0%, took the markets by surprise. Gold was no exception. Initially gold fell on the news, but recovered sharply and entered positive territory. A decline in unemployment often signals stronger economic growth, which can increase gold demand.
Nevertheless, it may be too early for euphoria over the positive economic news.
1,148,000 fewer Americans held jobs this November than did seven years ago in November 2006, according to the data released today by the Bureau of Labor Statistics.
Back in 2006, 145,534,000 Americans held jobs. This November only 144,386,000 Americans hold jobs. That is a drop of 1,148,000 in the number of Americans working.
This decline has come even though the size of the nation’s civilian population and the size of the nation’s civilian labor force have both grown significantly over the last seven years. The unemployment rate would be higher today, but a lower percentage of the civilian population is participating in the work force today than in 2006. In 2006, the work force participation rate was 66.3%. Today it is 63%. That means more Americans do not have jobs and are not looking for work today than 7 years ago. This reflects a degree of hopelessness among American workers.
It's no wonder Americans don't believe President Obama when he talks of the "economic recovery." Rasmussen reports in its most recent survey, only 22 percent of respondents rate the economy as "good" or "excellent." Similarly, the latest CNN/ORC International survey found 39 percent believe the economy is still declining and only 24 percent believe it is recovering. The same survey in October found 59 percent predicting poor economic conditions a year from now, so there is precious little economic optimism out there. This puts a damper on the latest consumer sentiment number released this morning.
Of course, everyone in the investment world watches the Fed. This good news could easily turn into bad news in the eyes of Wall Street if an improving economy means that the Fed will start to "taper" its Quantitative Easing program. The fact that Wall Street is so focused on this narrow aspect of the economic and financial mosaic is further proof the stock market climb may be a mirage created by a Fed policy that will eventually end.
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12.5.13 - Be Wary Of Latest Economic Reports
Gold prices lower on corrective pull-back and economic data. U.S. stocks lower on jobless claims data. Gold last traded at $1,231 an ounce. Silver at $19.57 an ounce.
Jobless claims in the US fell below 300,000 for just the second time since 2009, but economists warn not to draw too many conclusions from this figure since making season adjustments during holiday periods notoriously skews November and December readings.
In other labor news, a labor movement of sorts is afflicting the nation's fast-food industry, with groups of employees picketing and demanding a minimum wage of $15 per hour. They're unlikely to get their wish, but this shows there is an underlying, organized movement involved here. Fast-food workers didn't suddenly rise up across America on their own. This type of activity could eventually result in wage inflation, which was one of the biggest components of the high inflation of the 1970s. Employment analysts point out that a raise along the lines of what the employees are demanding would likely result in 500,000 newly unemployed.
Another government economic report has also created a mirage of sorts. The economy grew at a 3.6% annual pace in the third quarter -- much stronger than expected, according to a government report released Thursday. But the main reason that growth in the nation's gross domestic product was so strong was because businesses are stockpiling larger inventories. Once one factors out the impact from the inventory boost, GDP growth would have been just 1.9%.
Why are businesses adding to their inventories so dramatically? It's not clear. It could be a sign companies expect demand will pick up in the future -- so they are stocking their shelves in advance. Or, it could be an indication that demand is weaker than expected and, as a result, goods are lingering on the shelves longer than planned.
Some evidence points to the latter theory, which would be discouraging news. Consumer spending did grow at a slower pace in the third quarter.
What's more, economists expect the fourth quarter GDP numbers to be weaker as inventories are unlikely to contribute to growth in the next quarter.
The recent economic news has not impressed the Dow, which is on pace today for its 5th consecutive daily decline. Whether this is a trend remains to be seen, but it is certainly worth watching given the warnings issued by financial experts like Robert Shiller and Bill Gross in recent days.
One thing unlikely to help the stock market, at least the banking sector, is an announcement late yesterday by Attorney General Eric Holder that the Justice Department plans to bring mortgage fraud cases against several financial institutions early in 2014. They plan to use the case that ended last month in JPMorgan Chase & Co's $13 billion settlement as a template. So far, the government seems content to make banks the scapegoat in the 2008 financial crisis induced by the sub-prime mortgage debacle, while essentially ignoring the chief role played by FNMA and other government entities in encouraging and incentivizing the very practices the Justice Department is now going after banks for.
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12.4.13 - Government Shutdown Looming Once Again
Gold prices jumped more than 2% on a short-covering rally. U.S. stocks move lower on 4-day loss streak. Gold last traded at $1,247 an ounce. Silver at $19.83 an ounce.
Federal Reserve monetary policy is once again in the news, with a word of caution from one of the world's most prominent bond traders and comments from the president of the San Francisco Federal Reserve Bank.
Pimco's Bill Gross issued his monthly investment outlook and warned that investors are playing a dangerous game in depending on Fed stimulus to keep boosting stocks. He even characterized the Fed's "medicine" of loose monetary policy as a "desperate gamble to promote growth."
As a result Gross says we now have, "artificially priced assets based on artificially low rates." In other words, a bubble. When that bubble bursts, Gross fears investors have nowhere to hide.
Meanwhile, at least one prominent officer of the Federal Reserve wants to continue the policies that Gross is warning America about. San Francisco Federal Reserve Bank president John Williams believes the Fed policy of Quantitative Easing is working and should be left in place until the Fed is “completely confident” the economy is on the right track. (This of course begs the question: if the policy was working, why is is taking so long for everyone to be confident the economy is on the right track? Could it be that the economy is NOT on the right track?) Williams' comments are significant because he is seen as a close ally of Janet Yellen, who is expected to take over for Ben Bernanke as Fed chairman early next year.
The Fed may be hard at work, but the rest of the government may not be for long. That's right, government shutdown is looming once again. Republicans and Democrats in Congress have been negotiating on a stopgap spending bill but are evidently not close to an agreement. They will soon break for Christmas, raising the prospect of another government shutdown in mid-January. This will no doubt loom larger and larger as an issue going forward, both for the economy and the financial markets.
The prospect of another government shutdown won't help the perception of US prestige which, by the way, is now at a 40-year low. According to Pew Research, for the first time in nearly 40 years, a majority of Americans believe the United States is less important around the world. 70 percent said the U.S. is respected less than in the past. If this is the perception of the American people, just think of the perception around the world from folks like the Chinese, who hold so much of our official debt. This type of perception can only contribute to the continued decline of the US dollar along with America's prestige.
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12.3.13 - Buy Gold Now While Prices Are Low!
Gold prices slightly lower as traders await economic data due out later this week. U.S. stocks fall for third day on taper worries. Gold last traded at $1,220 an ounce. Silver at $19.06 an ounce.
Gold is trading near its lowest levels since July. This likely represents one of the few bargains in the investment world today.
Ultimately, in order to be a successful investor, one has to buy low and sell high. Gold offers the opportunity to buy low right now, trading at its lowest levels in nearly 6 months.
What other investment category offers the opportunity to buy low right now?
Certainly, the stock market does not offer such an opportunity. Quite the opposite. More and more stock market analysts, including Nobel prize-winning economist Robert Shiller, are pointing out that the stock market is overpriced and vulnerable to a setback.
Bonds can't be seen as a bargain with interest rates starting to creep back up (when interest rates climb, bond prices fall).
Real estate has also climbed in recent months and only lately has suffered as mortgage rates climb.
Only gold is a bargain today.
Moreover, there are factors that point to the need for gold. Gold is inextricably tied to the US dollar as the world's reserve currency of choice. In fact, gold is the dollar's natural rival. When the dollar suffers, gold tends to benefit. Because gold is currently priced in dollars, a decline in the dollar is usually reflected in the dollar price of gold.
With this in mind, any discussion of gold must begin with a discussion of the prospects of the dollar. That dollar is hopelessly vulnerable due to the gargantuan US national debt (currently recognized officially at $17 trillion). Sooner or later, the US will be forced to service that debt with dollars cheapened by inflation. For that reason alone, gold is a vital necessity for every portfolio. Given that gold is near 6-month lows, investors should take advantage of this opportunity to acquire gold at bargain prices.
The banking sector is also back on the front pages of the financial press.
Yesterday, banking giant RBS spooked depositors and other customers when a technology "glitch" shut down the bank's online features and paralyzed customers' credit and debit cards in the middle of the holiday shopping season.
But more significant was a report in The Wall Street Journal that indicated a rather unhealthy consolidation in America's banking sector. Big banks are taking over smaller, community banks at a rapid clip. So much so the number of banking institutions in the US has dwindled to its lowest levels since the Great Depression. This is especially troubling since America's biggest banks have recently seen their ratings downgraded by both Standard & Poor's and Moody's, the biggest rating services in the world.
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12.2.13 - Experts Warn About Risk In U.S. Stock Market
Gold prices fall on better-than-expected U.S. manufacturing data. Stocks see late selloff on fears of an overextended rally. Gold last traded at $1,221 an ounce. Silver at $19.29 an ounce.
More market experts are warning investors about risk in the US stock market as trading enters the final month of the calendar year.
Nobel prize-winning economist of Yale University, Robert Shiller, warned Sunday that the recent sharp rise in equity prices in the U.S. is a dangerous development and it could signal the building of a financial bubble.
Shiller said he is concerned about sharp rises in stock prices, especially those in the financial and technology sectors, which he feels are overvalued. Overvalued assets create bubbles as their prices get detached from their true worth, leading to the collapse of a sector.
Shiller pointed out the stock market does not reflect the underlying fundamentals of the US economy, which are not strong.
"I am most worried about the boom in the U.S. stock market. Also because our economy is still weak and vulnerable," Reuters quoted Shiller as saying to Der Spiegel, a German magazine. "In many countries stock exchanges are at a high level and prices have risen sharply in some property markets. That could end badly.”
About the only factor driving the stock market right now is Federal Reserve monetary policies pumping money into the economy in what has been a failed attempt at boosting economic activity. About all Fed policy has accomplished has been to increase speculative activity in the stock market and undermine the value of the dollar. These outcomes become more difficult to sustain with each passing day. No tree grows to the sky and sooner or later the stock market will come down. As Shiller points out: it could be ugly. As for the dollar, there is no example in history of a nation leading itself to prosperity by debasing its currency. Why anyone thinks the US will be an exception is simply a mystery.
For now, the hope on Wall Street is the incoming Fed Chair, Janet Yellen, will continue the current policies and not rock the boat. But sooner or later Fed policy is going to be exposed as counterproductive, no matter who is at the top of the organization.
In economic news, there was some sobering news on construction spending this morning to add to the uncertainty in the US economy.
October construction spending increased 0.8 percent to an annual rate of $908.4 billion, the highest level since May 2009, the Commerce Department said. Economists polled by Reuters had expected an increase of 0.4 percent.
But there is once again a demon in the details.
The October construction spending was buoyed by a 3.9 percent jump in public construction projects, the largest increase since March 2004. But spending on private construction projects fell 0.5 percent, pulled down by declines in both residential and nonresidential outlays.
That could be a sign high interest rates are starting to have an impact on the economy, which bodes ill for investment.
The economy simply cannot depend upon the government to be the driver of investment over the long haul. If the private sector continues to contract, no amount of government "investment" will sustain US economic growth at healthy levels.
