The horrible jobs report, which overshadowed the stock market at the end of last week, portends a 4th quarter reality that will disturb the financial markets as we continue to escape 2009. John Williams’ www.shadowstats.com forensics analysis of government data, namely U-2, U-6, and his SGS Alternative Data describes the brutality of the current recession/mild depression, in which, we find ourselves.
The unemployment report U-3 increased from 9.6 to 9.8 percent. Its broader counterpart, including those looking for full-time work while working part-time or, short-term unemployed for less than one year, reached 17 percent, climbing from 16.8. The SGS AD uses the 1980 BLS formula, adding back those unemployed for longer than one year, that changed in 1990, shows a whopping 21.4 percent unemployment, up from 21.2 percent, the previous month.
Job losses were reported at 263,000 in the September, payroll survey, while the household survey published an astonishing 785,000 jobs loss.
How will this affect the markets? Let me count the ways. Before I do, let us quickly review the landscape on the one-year anniversary of the 777 point drop in the DJIA. The immaculate rally from March, on less-bad economic data, advanced 62 percent, including a 15 percent 3rd quarter performance, before experiencing a gentle case of vertigo. The market is still below the September 30, 2008 DJIA closing level of 10,850.60 or the S&P 500 Index’s 1,164.36. Obviously, a two trillion dollar hot shot by all the President’s men can only do so much.
Look for the last three months of 2009 to resemble a junkie coming down from her high. The TALF programs face truncation to the chagrin of conditional omnipotent financial firms; Cash for Clunkers, is a bittersweet memory for green shoot data sets. The $8,000 tax credit for first-time homebuyers ends soon – the S&P/Case-Shiller index, reflected July home price increases in 20 cities, the most robust in four years – even as existing sells unexpectedly fell.
The good news is we are only losing a few hundred thousands of jobs each month versus 700,000 each month. However, the bad news is that 40 percent of managers surveyed stated they will layoff additional workers going into the holiday season. If I were betting on the unemployment rate reaching 10 percent this year, Alan Greenspan is, I’d take the over.
Bill Gross recently suggested that the personal savings rate might be up to eight percent, with a fundamental shift in consumer spending habits. This will create a conundrum for V-shaped recovery cheerleaders and administration spokespersons. There are two germane reasons the consumer will sit-out this round of re-inflating the economy: the trickle-down stimulus plan crafted in Washington never found Main Street and until jobs begin growing again, caution over self-gratification will prevail around kitchen tables.
Additionally, Baby Boomers – the greatest spending generation – have lost its former gluttonous appetite to acquire things just for bragging rights. The “New Normal’ braggadocio is whining about how little interest your various cash positions are earning in CDs, Municipal Bonds, and Treasuries – not what you have acquired in deprecating goods.
So, why become a gold bug, now, (GLD, GDX) you ask. The simple answer is the respite from Armageddon we purchased with poorly planned deficit spending during 2008’s financial implosion has an expiration date. Vigorish charged by the world for our initial greed and incompetent rescue will soon come due.
For starters, the US dollar is an abused orphan. An obscene and growing federal budget deficit notched a 6.7 percent increase in spending for the second quarter to offset the severity of the first quarter contraction of an annualized 6.4 percent. The consumer benefited little from this expenditure while financial institutions, and now private equity firms, benefited mightily. Germany and Japan are issuing dollar denominated debt to arbitrage our currency’s weaken future. Expect other countries and multi-national corporations to follow.
Last week, the IOC rebuffed President’s Obama schnorring for the 2016 Olympic Games for Chicago on the world’s stage in Copenhagen. The irrational right-wing schadenfreude response failed to ask the only germane question to his rejection; why? Is it because Barack has lost his mojo? On the other hand, might it be because the world is still sore that America sold trillions of dollars of worthless toxic assets, stamped AAA by US rating agencies, to every country and continent that could rub two nickels together, over the last five years? If so, what other nasty surprises can we expect in the future.
Eventually, the Feds must allow interest rates to rise. They will be hesitant to do so, peering into the rear view mirror, watching the horror of 2008 and rising unemployment claims, and not keeping an eye on the road ahead. The deleveraging that began at the end of 2008 will continue for many years with chronic European-style high unemployment, near 10 percent, plaguing the US. Our ability to repay ever-increasing amounts of debt, from a stagnant economy, eventually will cause reexamination by our creditors, to our detriment.
The 1980s to 2006 real estate phenomenon, that transformed 2,000 sq. ft. personal residents into 4,000 to 6,000 sq. ft. ATM machines, and altered average Joes and Janes into Donald Trump, has vanished like D B Cooper in mid-air. Notwithstanding, stagnant incomes, reluctant borrowers, and tight credit combine, will home values offers a stunted growth period over the next five to ten years – without robust inflation?
Stock markets in the US will devolved further into a volatile trader’s paradise, mimicking emerging markets. However, the stock index to gold ratio going forward will clearly show the lost of the dollar’s purchasing power.
That brings us back to gold.
This bleak future of less USA prestige and girth in the world is due to expanding deficits, inadequate tax revenue, rising interest rates, and a day of reckoning with the global financial system. A diluted dollar - and the usual third act of political instability, which follows, the first two acts of financial calamity and economic collapse – is why I believe gold in the next three to five years will raise prices $2,000 to $4,000 per ounce. Avoid the US Treasury markets, as well.
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