Careful What You Wish For...
- About that “better than expected” jobs report…
- The problem with Fed tightening, as explained by Jim Rickards
- Fed tightening plans send gold up?!
- For once, Congress takes away a favor to the big banks
- Government reducing its role (seriously!)… explaining a “strangely reasoned remark”… bin Laden’s bankruptcy plot revisited… and more!
Welcome to Friday and The Most Important Jobs Report EVAR™.
Or so the elite media want us to believe.
The monthly jobs report from the Bureau of Labor Statistics is the last major “data point” we’ll see before the Federal Reserve meets on Dec. 15-16 and decides whether to raise its benchmark interest rate after keeping the rate near zero for seven years.
Jim Rickards rose early this morning and tweeted the following…
Neither turned out to be the case. The wonks at the BLS conjured 211,000 new jobs for November — more than the “expert consensus” was counting on. And the October and September numbers were revised upward. Meanwhile the unemployment rate is holding steady at 5.0%.
But beyond the headline numbers, there’s little to cheer about…
- Average hourly earnings grew an anemic 0.2% in November, dragging down the year-over-year increase to 2.3%
- The average hourly workweek shrank a bit, to 34.5 hours
- The labor force participation rate — the percentage of the working-age population that’s either working or looking for work — remains mired near 38-year lows
- The U-6 unemployment rate — incorporating part-timers who want to work full time and people who’ve given up looking for work in the last year — rose a tad, to 9.9%.
Ditto for the real-world unemployment rate from John Williams at Shadow Government Statistics. He takes the U-6 figure plus all the people who gave up looking for work more than a year ago. After hitting a three-year low last month, the number has ticked back up to 22.9%.
All of which reinforces a point Jim Rickards has been making the last few weeks: The Fed will be “raising into weakness.”
“The Fed is finally getting what it wants,” says Jim. “But be careful what you wish for.
“A rate hike now, in the face of global and U.S. economic weakness, could tip the global economy into a ‘growth recession,’ also known as persistent below-trend growth. It could also strengthen the dollar, giving a boost to deflation.
“Ironically, deflation could push the Fed even further away from its professed goal of higher inflation.
“A rate hike would be the wrong move at the wrong time. But that doesn’t mean it won’t happen. The Fed’s obsolete models have prompted bad policy choices for decades. A misguided rate hike now would be the latest entry on a long list of blunders.”
As Jim has explained in recent weeks, the Fed’s model works like this: It waits for data to come in… and then adopts a thesis about where the economy’s going and what it should do.
The approach has been disastrous. Here’s a table we shared six weeks ago demonstrating the Fed’s forecasting prowess — or lack thereof.
“Janet Yellen and her colleagues are fixated on deficient models of the domestic economy,” Jim goes on, “filled with mythical creatures such as NAIRU (the belief that there is some ‘natural’ equilibrium, noninflationary rate of unemployment).
“And the Phillips curve (the belief that there is an inverse relationship between employment and inflation).
“Both NAIRU and the Phillips curve lack empirical or theoretical support, but they are important parts of the Fed’s cargo cult belief system.
“The Fed is about to tighten policy and increase real rates in the mistaken belief that inflation is right around the corner. This policy will produce the opposite result — a stronger dollar, imported deflation and slower growth.”
[Ed. note: Jim reaches this conclusion using a model diametrically opposed to that used by the Fed. He starts with a thesis… and then constantly checks that thesis against new incoming information.
This approach — he’s taken to calling it the “Kissinger Cross” for reasons he explains here — has proven lucrative many times this year for subscribers of Rickards’ Intelligence Triggers. Only yesterday they were urged to close out two winning trades for…
- an 80% gain in 8 months
- and a 117% gain in less than 4 months.
Don’t miss out on the next Kissinger Cross trade. Learn how this simple and lucrative tool works when you follow this link.]
To the markets — where on this day at least, good news is good news again.
In other words, traders are shrugging off the usual “logic” of the last seven years that says good economic news will inspire the Fed to tighten monetary policy, which would be bad for stocks.
Heck, as we write, the Dow has recovered nearly all of the 250 points it shed yesterday — the big index is up 1.3%, at 17,723. Small caps, however, are lagging — the Russell 2000 up less than half a percent, at 1,176.
And go figure: Rising expectations of tighter Fed policy are propelling the gold price.
No sooner did the job numbers come out at 8:30 a.m. EST than gold popped more than 2%. At last check, the bid was up to $1,085.
But as for the oil price, the big factor today is not the Fed: It’s the semiannual meeting of ministers from the OPEC nations in Vienna.
Conventional wisdom had it that the ministers would leave their production ceiling set at 30 million barrels a day. Conventional wisdom was wrong: The ministers raised the ceiling to 31.5 million barrels a day.
True, the ceiling is bogus: OPEC member nations have busted through the ceiling for months now.
But the news has sent crude tumbling 2%, a barrel of West Texas Intermediate once again testing the $40 level.
Congress did the right thing for once, Part 1: After a week of heavy content in The 5 — not least yesterday’s epic downer — we figure we owe you some good news going into the weekend.
Remember how two weeks ago we fantasized that the Federal Reserve would go on strike and no one would miss them? Congress was looking to raid some of the Fed’s accounts to fund the next highway bill. The Fed tut-tutted about “using the resources of the Federal Reserve to finance fiscal spending.”
Well, Congress went and did it anyway. And it’s the Fed’s biggest member banks that stand to lose the most. “The bill,” writes David Dayen at The Intercept, “pays for roads, bridges and mass-transit projects in part by reducing what is currently a 6% annual dividend on stock that the big banks buy to become members of the Federal Reserve system.”
The stock carries no risk whatsoever because the dividend gets paid out even in the unlikely event a regional Fed bank is disbanded. The dividend is a legacy of the Fed’s formation in 1913 — a sweetener to encourage banks to join the Fed. Never mind that nowadays chartered banks are required by law to join up.
The dividend is being cut from 6% to a rate pegged to the 10-year Treasury note — which at the last Treasury auction was 2.304%. Final passage in the highway bill might come before day’s end.
That’s the good news. Unfortunately, the highway bill also reauthorizes the Export-Import Bank — a Depression-era exercise in corporate welfare critics rightly deride as the “Bank of Boeing.”
And as for the Fed going on strike… that remains firmly in the realm of fantasy.
Congress did the right thing for once, Part 2: The federal government is about to reduce its role in public education for the first time in 50 years.
Or so the experts who’ve examined the Every Student Succeeds Act of 2015 tell us. It’s a 1,000-plus-page monstrosity, passed by the House, still pending before the Senate. As with the highway bill, there’s much not to like.
But get this: “The big change,” writes NYU education historian Diane Ravitch, “is the reduction in the role of the federal Department of Education (ED). This is the first big downsizing of the federal role since the original Elementary and Secondary Education Act of 1965 was passed. There are strict limitations on the power of the secretary to meddle in state or local education matters.”
The bill still reflects the contemporary fetish for standardized tests. But many other elements of the 2001 No Child Left Behind Act — the bipartisan demon spawn of Ted Kennedy and George W. Bush — will soon be history. Best of all, “States can drop out of Common Core without any penalty,” writes Ms. Ravitch. “Now the fight for a humane education system shifts to the states.”
Where it belongs, we daresay. We don’t recall the Founders saying anything in the Constitution about a federal role in education…
“Strangely reasoned remark,” reads the subject line of an entry in our virtual mailbag today.
“Sir,” the polite reader writes, “you said Chris Hedges is ‘a former war correspondent for The New York Times… Although he’s a man of the left, he recognizes how both parties sold the country out.’
“Mr. Hedges may have worked for the NYT, but he is about as much a man of the left as is Bill Bonner, which is to say he most assuredly is not (a man of the left).
“I would draw your attention to his posts on Zero Hedge, revealing a very realistic and balanced worldview. In his prior books and speeches, he offers his opinion that there has been a slow-motion coup d’etat by the left in America and it has taken over the country in small, incremental, nearly unnoticeable moves.
“If that is leftist, then he’s very confused. I submit he’s closer to a libertarian as, it seems, is Bill Bonner.”
The 5: We don’t spend much time at Zero Hedge. We’re guessing that site posts the Hedges pieces that jibe with its worldview and ignores the rest.
Mr. Hedges was active in the Occupy Wall Street movement and supported the Green Party candidate in the 2012 presidential election. But we don’t dismiss him as a “left-wing nutbar,” as a Canadian TV host once called him. He frequently speaks truth to power, and that makes him one of the “good guys.”
We made our “strangely reasoned” remark with a certain type of reader in the back of our mind — the kind who took offense in 2011 when we suggested the Occupy Wall Street crowd had much in common with the tea party crowd.
But we were hardly alone. A Venn diagram made the rounds of the Internet around the same time…
“Dave, love The 5. All this talk about how the Middle East is a mess — apparently, no one in the government has a memory or can read,” a reader muses after yesterday’s episode.
“We continue to walk into a pile of ***t and wonder why it smells, and it is always someone else’s fault. Nope, I think the blame is squarely with Washington and its enormously successful foreign policy!”
The reader then directs us to the tape Osama bin Laden released days before the 2004 presidential election. “We are continuing this policy in bleeding America to the point of bankruptcy,” he said.
Indeed. Hours after bin Laden was killed in 2011, we ventured to say he pulled off “the most brilliant leveraged bet in history.” The 9/11 Commission calculated the Sept. 11 attacks cost about $500,000 to pull off. Meanwhile, through the end of fiscal 2014, Uncle Sam spent $1.6 trillion waging the Iraq and Afghanistan wars.
Bin Laden got a return of 3.2 million-to-1. And counting.
Have a good weekend,
The 5 Min. Forecast
P.S. There is one word that separates the rich from the poor… The powerful from the weak…
And those who know it have a MASSIVE advantage over everyone else.
Click here to discover it now.
As noted above, the Federal Reserve’s forecasting record leaves, shall we say, much to be desired. Jim Rickards brings a completely different approach to forecasting. But we’ve seen a bit of confusion in our reader mailbag about his revolutionary “Kissinger Cross” tool.
Today, we’re inviting in Jim to explain its place in his tool kit… and how you can put it to work in your own portfolio…
The Third and Final Tool in My Kit
By Jim Rickards
When I partnered with Agora Financial last year, we outlined three distinct analytic services to help you understand the behavior and direction of markets and show you how to profit.
Each uses techniques not employed by Wall Street economists or government policymakers. That’s why their forecasts are so often wrong… and why we’ve been right.
These techniques include complexity theory and behavioral economics… the dynamics of currency wars… and causal inference or inverse probability.
We feel strongly that each deserves it’s own publishing outlet because they are distinct and complementary. You can think of each service as three parts of of one project. Here’s why…
Helps you understand the world around you and preserve the wealth you’ve already built. That’s why we employ complexity theory, which is the most useful for risk management and behavioral economics, which is key to estimating the response function of consumers and investors to various government policies.
Currency Wars Alert
Currency wars create strong, profit-generating dynamics that can last ten… fifteen and twenty years. My proprietary IMPACT System is designed to let you tap into those gains.
The Kissinger Cross Indicator we use here is the most effective tool for forecasting the economy and markets when faced with incomplete or uncertain data.
I’d like to focus on that last one — Intelligence Triggers. We’ve unveiled it to you over the past month. I’m convinced the timing couldn’t be better.
Not only was the Intelligence Triggers method responsible for helping me accurately predict that the Fed would not raise rates this year (see the Oct. 20, 2014 Daily Reckoning)… but it’s pointing to an even bolder forecast for 2016.
While this inverse probability method is not used on Wall Street or by policymakers, it is used at CIA and elsewhere in the intelligence community for solving difficult problems.
Last year’s Oscar-nominated movie The Imitation Game shows how this secret method was used by British intelligence to crack the Nazi Enigma code in the Second World War.
This was crucial in defeating U-boat submarine warfare in the North Atlantic, which allowed the resupply of Britain and Russia.
These techniques, used in combination with a dose of economic history included for guidance, result in better models and more accurate projections than the mainstream’s methods.
Using these methods, we can formulate an economic hypothesis, test that hypothesis, refine it based on those tests, forecast policy and sound warnings to you as policy pushes markets closer to the brink of collapse.
Data used in the formulation and testing stages are what we mean by “intelligence triggers.”
We have a proven track record using them. In late 2014, we developed a forecast for weak growth in 2015 based on the persistence of the depression of 2007, reduced labor force participation, the increasing prevalence of deflation, Fed tapering and the strong dollar. Our forecast was almost alone in its call for weak growth and no rate hike.
In mid-2014, the U.S. economy had just produced its best back-to-back quarterly growth since the global financial crisis, including a blockbuster 5% growth spurt in the period ending Sept. 30, 2014. Most analysts were predicting self-sustaining growth of 3% or more in 2015, with a “liftoff” in interest rates by mid-2015. Happy days were supposedly here again!
These rosy scenarios ran off the rails almost immediately, as we predicted.
The economy was not lifting off then, and it’s not lifting off now. It is back to the future: back to weak growth, low inflation, weak job creation and no rise in real wages. In short, the depression continues. Our 2014 forecast for 2015 has, so far, been borne out by subsequent data.
But our method means we won’t be stubborn. If the data changes… if we get new signals… then our forecast might change. That’s only reasonable.
This is the underpinning of my third and final technique… the indicator I’ve created using it… the way you can apply it to make the right moves with your money next year.
I’m not talking about my IMPACT System… or complexity theory.
Instead, it’s called the Kissinger Cross. And I’ve never explained it like I have today. Let me show it to you…
When the intelligence community gets a problem, invariably it’s what’s called “underdetermined.”
That’s just a fancy way of saying ‘you don’t have enough information.’
In my counterterrorism work for the CIA, we were constantly confronted with problems that could not be solved with the information available. That’s the nature of intelligence work — you never have enough information.
After all, if you had all the information, you wouldn’t need an intelligence service; a smart college kid could do the job. The reason you have an intelligence community is because it’s a very hard problem and you don’t have enough information. That’s why you have intelligence analysts filling in the blanks and trying to make sense of the puzzle, even when a number of the pieces are missing.
The CIA is divided into two main branches — the clandestine service and the analytical branch. The clandestine service is the “collectors.” They recruit spies and gather information from hard-to-get places. The analytical branch takes the information provided by the collectors and tries to connect the dots and draw actionable conclusions to deliver to policy makers up to and including the president.
The same is true in financial analysis. You may have a lot of information, but you always need more. Some of the most important information is buried inside company management or the Federal Reserve boardroom and not easy to get to.
So what do you do when you don’t have enough information?
You can throw up your hands. That’s not a good approach…
You can guess — also not a good approach…
Or you can start to fill in the blanks and connecting the dots.
To do that you need an analytical method — and I recommend using the same one we use at the CIA. We’re not sure how events are going to turn out, but we can come up with three or four different scenarios.
In all probability, for example, the market will see one of several outcomes.
One of them may be deflation. Another may be inflation. There could be a market crash. And maybe there’s a positive outcome, too, on the off chance that tough policies choices are made and crisis is averted.
Then, you take those outcomes and model them to determine the possibilities.
A lot of analysts don’t get that far. They put a stake in the ground and say: “This this is what’s going to happen.”
I don’t do that and I don’t recommend you do either. I remain open to the possibility that three or four things that can happen.
But even if some analysts get that far, they start tagging probabilities on the potential outcomes. They might say, for example, “There’s a 30% chance of deflation”… “there’s 40% chance of inflation,” et cetera.
I don’t do that either and I recommend you follow suit.
Here’s the way I think about probabilities are: There’s a 100% chance of one outcome happening and there’s a 0% chance all the other outcomes occurring. It’s just that you don’t know in advance which one it’s going to be.
So what do you do?
Well, in intelligence work, we come up with what we call indications and warnings, or “I&W.” These are like signposts, or milestones on the path to one of those outcomes.
Say I’ve identified four possible outcomes, or four paths. If I start down a path but don’t know which one I’m on exactly… and I don’t know what the outcome will be… my best bet is seek out the indications, warnings, and signposts that will help me determine where I’m headed.
When I make out the signposts, then I can begin to know which way I’m going.
There’s a full mathematical formula behind this, but here’s a simple analogy I use to explain it to people…
I’ve lived in the New York area. It just so happens that if you drive to Boston, all the roadside restaurants are McDonald’s. If you drive the other way, to Philadelphia, all the roadside restaurants are Burger Kings.
So, if you blindfold me, put me in a car and don’t tell me which way we’re going I’ll have no way of knowing where I’ll end up.
But say we took the same trip and you blindfold me… but this time you told me “We’re stopping at Burger King, I know I’m not going to Boston. I wouldn’t have to see where I was going to know where I’ll end up.
The Burger Kings and the McDonald’s, in this example are the signposts. They’re the indications and warnings.
The art of this technique is to first map out the possible events so you can get the possible outcomes correct. Then, instead of just assigning arbitrary numbers to them, you watch for the indications and warnings to tell you which one you’re headed for at any given time.
You have to watch the data, the geopolitical developments and the strategic developments. When you see a particular signpost, you know where you’re going. Then you can alert take action in advance.
That’s why we take what I’ve learned working for the national security and intelligence community. And today, I’m inviting you to apply that learning to Wall Street and financial markets along with me. When you click here, you’ll see the brand new service where we’re applying these intelligence techniques to understanding capital markets.
One of the most powerful tools we use in the intelligence community goes by technical sounding names like “causal inference” or “inverse probability.” These are methods based on a mathematical equation that’s two centuries old.
The idea behind it is basic, though. You form a hypothesis based on experience, common sense and whatever data are available. Then you test the hypothesis not by what has happened before, but by what comes after.
Instead of reasoning from cause to effect, you reverse the process. You watch the effects to determine the cause. This will validate or invalidate the “cause” you have hypothesized.
Other times the effects contradict the hypothesis, in which case you modify or abandon it and adopt another. Often, the effects confirm the hypothesis, in which case you know you’re on the right track and keep going. In each of these cases, I’ve produced a new proprietary chart indicator to signal the best entry and exit points on a recommendation.
Right now, my favorite hypothesis is that the world is facing a $9 trillion tsunami of bad debt coming from oil drilling, emerging markets and corporate junk bonds. I’ve made this case to you before. But I have not explained how I arrived at that conclusion.
I did so using indications and warnings. This debt will not go bad until early 2016 and thereafter. Even money-losing operations can keep up debt service for a while by using working capital and cash flow — at least until the cash runs out. Banks that hold some of the debt can also cover up the losses for a while with accounting games such as fiddling with what are called their loan loss reserves. If I’m right, bank stocks may take a hit by early 2016 as these losses come home to roost.
Using the language “indications and warnings”, bad debts will be the “cause” of a decline in financial stocks. What “effects” did I look at to test the validity of my hypothesis?
There are many…
For energy junk debt, we looked at rig counts in the oil patch and layoffs among energy exploration companies. For emerging-market debt, we looked at the strong dollar and dwindling hard currency reserves in countries like Russia, Turkey, Mexico and Brazil.
In short, we worked backward from these visible causes to test the validity of the original hypothesis.
Right now, the idea that financial stocks will suffer due to write-offs over the next year looks like a good one. The inverse probability methods we use at the CIA are doing a good job of spotting this actionable financial play.
These are national security, intelligence community techniques that we’ve brought over to capital markets. Believe me, they work. I have years of experience using them, and I believe they’re very accurate.
I urge you to put them to work with your own investments. Please click here now to see the new video demonstration I’ve recorded for you.
Editor, Intelligence Triggers