A Really Stupid Rally

Posted On Jul 8, 2016 By Dave Gonigam

  • Stocks rally on one stupid number…
  • …while several accompanying numbers are cause for concern
  • Delayed reaction: Is the real Brexit crisis more than a year away?
  • Hopping off the dollar-gold seesaw: A powerful gold indicator
  • What the “28 pages” might really be about
  • Toyota’s peculiar attempts at “staying lean”
  • Pathbreaking technologies and “vested interests”

Shorter version of the monthly jobs report: “The economy sucks less than we thought. Buy!”

The slightly longer and highly misleading version goes like this: “Wall Street was higher on Friday after data showed that the U.S. economy posted its largest job gains in eight months in June, strongly rebounding from dismal numbers in May.”

That was the lead from Reuters. Variations on the theme abound at other mainstream sources.

The wonks at the Bureau of Labor Statistics conjured a silly-good 287,000 new jobs for the month of June. On the surface, that’s a sharp reversal from May’s worst-in-nearly-six-years figure of 38,000.

As it happens, this morning, the wonks revised May’s number down — to only 11,000. Heh…

Meanwhile, April’s number was 144,000.

So let’s see. One month’s number is noise. But three months constitute a trend. The average for the last three months is 147,300 — not even the 150,000 minimum needed each month just to keep up with population growth.

That compares with the previous quarter’s average of 195,700. And in the quarter before that, an average of 282,000. In other words, nine months of steady decline.

But none of that matters. A big fat “headline number” of 287,000 and it’s risk-on, baby!

As we write… the major U.S. stock indexes are all up at least 1%. The Dow rests at 18,078 and the S&P 500 at 2,120 — only 10 points away from its record close in May of last year.

But as has been the case ever since the post-Brexit recovery in stocks began last week, the safe havens are hanging tough. The yield on a 10-year Treasury stands at 1.39%. The bid on gold is $1,354. (More about gold shortly.)

The rest of the job numbers, if you must know, are unremarkable.

The percentage of the working-age population either working or looking for work still languishes near lows last seen during the Carter administration — although it did perk up a bit last month, a few “discouraged workers” here and there deciding to check the help-wanted ads again.

As a result, the “U-3” unemployment rate bumped up from 4.7% to 4.9%.

The real-world unemployment rate, the one maintained by John Williams at Shadow Government Statistics — he runs the numbers the way the government did during the Carter administration — clocks in at 22.9%. The number has hovered around 23% since mid-2012.

“It’s too early to say Brexit is over,” says Jim Rickards.

Sorry. You might be tired of hearing about it — and we’re tiring of writing about it — but it does still matter, in a way that one month’s job numbers don’t.

The thing is, the ultimate market impact of Britain’s looming departure from the European Union might not be evident for another year. That’s how it went with the two big market crises of the last 20 years.

“The 2008 crisis,” Jim reminds us, “actually started in July 2007 when two Bear Stearns hedge funds collapsed. That crisis then took a year to spread to Bear Stearns itself, and then Fannie Mae and Freddie Mac, before hitting Lehman, AIG and the rest of Wall Street.

“The 1998 crisis actually started in July 1997 when Thailand devalued its currency, the baht. The crisis took a year to spread from Thailand to Indonesia to Korea and Russia before hitting Long Term Capital Management” — the hedge fund that nearly took down the global financial system in the fall of ’98.

“We may be at the beginning of something that does not reach the critical stage until late 2017,” Jim goes on.

“And the impact of Brexit may emerge far from the U.K., in China, Japan or the United States. The lesson is that it’s too soon to breathe a sigh of relief over Brexit. Already, we are seeing severe aftershocks.”

And nowhere are those shocks more evident than in the gold market.

“For a few weeks,” says Jim, “gold prices have danced to a Brexit beat. On June 2, when Brexit odds favored ‘Remain,’ gold sank as low as $1,210 per ounce, which took a lot of the gloss off the April rally.”

Fast-forward to the aftermath of the vote on June 23 and gold soared to a new plateau of $1,320. “Then a funny thing happened,” says Jim. “Instead of staying at that $1,320 plateau (the vote was over, after all), gold staged another rally.”

As the week winds down, the $1,350 level looks safe.

Even more remarkable is gold’s march upward in the face of dollar strength. Typically, gold and the dollar move in opposite directions.

The greenback, as measured by the U.S. dollar index, has rallied 4% in two months. But despite some Brexit-fueled volatility, gold is up even stronger…

What gives? “The Fed has thrown in the towel on rate hikes for the rest of 2016,” Jim explains. “This has been revealed in speeches, minutes and leaks to favored reporters. Simply put, the dollar is too strong and needs to come down in order for the Fed to have any chance of meeting its inflation targets in the next year. Raising rates makes the dollar stronger at a time when the U.S. cannot afford a strong dollar. So rate hikes are off the table.

“The Fed is now out to trash the dollar with forward guidance, if not yet outright rate cuts. This is unequivocally bullish for gold, and even more bullish for gold miners. A weak dollar means a higher dollar price for gold. It’s that simple. This ride is just beginning. Fasten your seat belts.”

Best of all, Jim is doubling up his free-gold offer — a token of esteem he’s extending to people who want to check out his “Penny Gold” stock picks. The next recommendation will be issued next Thursday. To make sure you’ll receive it on time — and collect double the gold, to boot — you’ll want to check this out right away. (No long video to watch, we promise.)

Are the feds protecting people in Saudi Arabia or themselves by refusing to release the “28 pages”?

Long before 60 Minutes glommed onto the classified 28 pages from a joint congressional inquiry into the Sept. 11 attacks, The 5 was tracking the controversy: Did those pages reveal funding for the attacks, or some other involvement, by prominent people in Saudi Arabia?

That’s what members of Congress who’ve seen the unredacted document have hinted at — although, by law, they have to be extremely vague about what they say.

Now comes a new and tantalizing hint from Rep. Stephen Lynch (D-Massachusetts) — who’s urging his colleagues in Congress to bypass the White House and release the document on their own. “There may be some very embarrassing facts, some very embarrassing moments, and some criticisms on our own intelligence service because of what happened, if all the facts come out…

“They don’t want the facts to come out, because it may reveal terrible, terrible errors on their part and they may bear part of the blame” for failing to prevent the attack.

To be continued…

Collateral damage from the currency wars: Toyota is shutting down two of the eight elevators at its headquarters in Tokyo. And the thermostat controlling the air conditioning’s been turned up.

Toyota’s profits are taking a hit from the rising yen — a phenomenon we documented most recently on Wednesday. The vehicles it sells are more expensive for overseas buyers, and profits are lower when converted back to yen.

So workers will have to endure a bit more inconvenience and discomfort. The company isn’t saying how much money it expects to save.

“The key objective for the stoppage of elevators specifically,” a company spokesperson tells the BBC “is to raise awareness amongst employees, and to remind them of the commitment that Toyota has toward the idea of increasing competitiveness through staying lean and reducing wastage.”

Let’s hope for the workers’ sake the suits don’t start locking up bathrooms, too…

“I considered the same premise that government revenues may suffer in a world of driverless cars,” one of our regulars chimes in on a surprisingly hot topic — “but only briefly.

“I actually think the revenues could increase and the ‘profit margins’ could be multiples higher.

“I can’t imagine, unfortunately, a scenario where our government becomes less obtrusive in our lives.

“Autonomous vehicles will require all manner of certificates of compliance for operating during certain times (bright sunlight?), locations and purposes, etc.

“And since AVs will be, and already are, linked to the cloud for such things as active learning of various objects and scenarios, it will be easy for governments to review certificates of compliance by scanners on poles where red light cameras used to be.

“They won’t even need cops, just email us our violations, which will be automatically deducted from our digital currencies wallet, which will be required for each AV on the road.

“I highly recommend reading the book The Second Machine Age for a competing view into where we are headed. We truly are entering the second half of the chessboard, as the authors describe. Chilling, indeed.

“I need a break from it before reading Juan Enriquez’s Evolving Ourselves. The premise is very similar to a talk I attended by Stephen Hawking in the late ’90s.

“It seemed so fantastical at the time that I just couldn’t get my head around it. Much of it has already come true.

“We’re not even in the same galaxy as Kansas anymore, and we’re speeding up!”

“Every new technology in our society promises much, and in its infancy seems to deliver,” a reader wrote with a long, thoughtful email that we sadly must truncate to stay within our 5 Mins.

“But no sooner does it spread than it is taken over by powerful interests who revise it to their needs, not ours. The internet, which seemed to promise a revolution in communications and information sharing two decades ago, is now controlled by vested interests. Trying to get factual information from the internet is becoming almost impossible, because it has spawned a gigantic worldwide gossip, propaganda and consumer shopping network that will not allow the original purpose of free exchange of information.

“I still have to pay for computers, tablets, cellphones and service, but my use of them is governed by software that puts the desires of advertisers and communications companies ahead of my own utility. Each new software revision expands the control over my device and limits my use of it. This seems to happen with all technology — users pay the expense of developing it as yet another tool to control our behavior by Big Businesses and Big Government. I expect the same of VR.

“As for the autonomous car, I would be even more wary. In 1996, OBD II (On-Board Diagnostics, Gen 2) provided every car owner with the ability to read the output from its computer LAN to see what was going on within the drivetrain. This was a good thing, but was soon followed by OBD III, not so good. Not many people know it, but under OBD III, your car’s computer must report to the EPA. It is now configured with a disabler so that any police or government agency can disable it, should they choose.

“The EPA demanded this ability so that any car not in compliance with emissions could be disabled. That it is not used yet in this manner should not give us much cause to relax. Most such rules are not put into play until long after their initial implementation. In the event of an insurrection among the citizenry, cellphones, banking, automobiles and the internet get shut down immediately. Kind of hard to conduct a revolution when people on the other side of town, let alone in the next town, won’t be aware of it.”

The 5: Thanks for the food for thought.

We’re reminded of a passage from The Fourth Turning, the 1997 book by demographers William Strauss and Neil Howe that anticipates a crisis era in the 21st century on a scale with the Great Depression and World War II.

One of the chilling passages describes the late ’90s infatuation with the internet’s capacity to free us all from the shackles of centralized control… and how that could easily transform into a top-down surveillance state. Edward Snowden would have been all of 14 years old when the book came out.

Then again, maybe a more decentralized future is still at hand, judging by the provocative writings this week of colleague Chris Campbell at Laissez Faire Today. For everyone’s sake, let’s hope Chris is right…

Have a good weekend,

Dave Gonigam
The 5 Min. Forecast

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