The Beginning of the End

Posted On Oct 5, 2018 By Dave Gonigam

  • Unemployment lowest since December 1969 (uh-oh)
  • What’s really behind yesterday’s minor market freakout
  • The final blowoff phase of the bull market — and how to take advantage
  • So how confident should you be in Fed Chair Jerome Powell?
  • Crude stabilizes… Musk isn’t the only one renaming the SEC… what Obama and Trump have in common… and more!

The unemployment rate is now its lowest since Paul Newman and Robert Redford were tops at the box office in Butch Cassidy and the Sundance Kid.

It being the first Friday of the month, the Labor Department is regaling us with the job numbers. At 3.7%, the official unemployment rate hasn’t been this low since December 1969.

As it happens, December 1969 marked the start of the first recession in nearly a decade.

No, we are not saying that history is repeating.

But… as we pointed out over the summer, a recession typically sets in only four months after the unemployment rate hits bottom. The rate spent much of late 1968 and early 1969 at 3.4%… and started creeping up after May 1969. That works out to a seven-month lag.

To be clear, we’re not even saying the unemployment rate has bottomed yet.

But we have been saying all year that we’re in the late boom phase of the boom-bust cycle. The stock market bottomed in March 2009. The “Great Recession” ended in June 2009.

We don’t think the bull market is over yet — despite yesterday’s big sell-off, about which more shortly.

But we suspect the present moment signals what might be your final window of opportunity to bag big gains from this bull market. Act accordingly.

By the way… the unemployment rate fell largely because the “NILF” number rose. That’s not good.

Whenever we bring up this number, we’re compelled to point out it stands for people “not in the labor force” and should not be confused with — umm, a similar acronym made popular by the movie American Pie.

The number of Americans 16 and older who are not participating in the labor force rose to a record 96.4 million. Some of that increase is a result of baby boomers retiring. But there’s also a not-insignificant number of working-age people who’ve decided for one reason or another to give up looking for work. (It’s easier to collect Social Security Disability?)

Thus the labor force participation rate — the percentage of working-age people that are either working or looking for work — remains mired near lows last seen during the Carter administration. Unlike the unemployment rate, this is a number that’s harder for the bureaucrats to manipulate…

chart

It’s those working-age people departing the labor force that drove up the real-world unemployment rate from John Williams at Shadow Government Statistics. Williams runs the job numbers the way the government did 40 years ago. Using that methodology, the unemployment rate actually ticked up a bit in September to 21.3%.

Stock and commodity traders are nonplussed by the job numbers.

After yesterday’s big losses, the Dow is down imperceptibly, the S&P 500 up imperceptibly. Crude is up a few cents at $74.50. Gold continues to hover around $1,200.

But interest rates? Oh, my…

The bond market is in its third day of selling off, hard.

As a reminder… when bond prices fall, interest rates rise. On Tuesday, a 10-year U.S. Treasury note yielded 3.05%. This morning, it’s up to 3.22% — another seven-year high. That’s a huge move for such a short time frame.

On Wednesday when the jump in rates began, the mainstream narrative was that recent economic numbers were good and the risk of a worldwide trade war was easing. A robust economy and rising rates often go hand in hand. Optimism abounded and the Dow notched a record-high close.

But yesterday as rates continued rising, the narrative shifted. As this morning’s Wall Street Journal channels the sentiment, “The Federal Reserve may have to raise interest rates more quickly than anticipated to keep the economy from overheating. The Fed also could tip the economy into recession if it moves too quickly.” The S&P 500 notched its biggest one-day loss since June.

The job numbers today did nothing to shift the outlook for Fed policy: Traders are pricing in an 83% likelihood the Fed will bump up the fed funds rate again in December. Bond rates are rising again, but stocks are treading water.

Weeks like these will probably become more common as the boom phase of the boom-bust cycle approaches its end stage.

Optimism about the economy will give way to fear that the economy is getting “too hot” and the Fed will wind up killing the boom. A steady rise in the stock market will be punctuated by sharp one-day sell-offs now and then. That’s how it went in late 1999 as the Alan Greenspan Fed was raising interest rates. Eventually the market topped in early 2000 and it was a long and ugly grind downward into the autumn of 2002.

As we said earlier, the bull market isn’t over. But now’s likely your last chance to snag the big money before the inevitable downturn.

We have a strategy designed specifically to help you maximize those gains here in the final stages of the bull market.

If you feel as if you’ve missed out on what’s been an epic bull run these last nine and a half years… we encourage you to click here and learn how you could make up for lost time.

And another thing: It doesn’t seem as if Fed Chair Jerome Powell has a lot of confidence he can avoid steering the economy into another recession. And a two-letter word is the tell.

We pause briefly for a 5 Min. flashback: When Powell’s predecessor Janet Yellen was up for Senate confirmation in late 2013, the economics blogger Robert Wenzel noticed a verbal tic of Yellen’s: “Whenever she faced a hostile question, she started her reply with ‘so.’ The ‘so’ makes no grammatical or logical sense. But she did put it at the start of every hostile question.”

That wasn’t a one-off, either. At her first news conference as Fed chair in March 2014, Wenzel kept a running tally of the questions and answers. Fifteen questions, seven answers starting with “so.” By and large, those were the answers to the most challenging questions.

As Hunter Thurman once wrote for Fast Company, “Beginning your sentence with ‘so’ orients your message and subconsciously alerts your audience that what you’re about to say is different than what you’ve been talking about up until this point… ‘So’ demonstrates that you’re not 100% comfortable with what you’re saying.”

Fast-forward to Powell’s news conference a week ago Wednesday.

Powell delivers his prepared opening statement and then opens the floor to questions.

Please keep in mind the context of everything we’ve said so far about where we are in the business cycle and the risk that continued interest rate increases by the Fed could tip the economy into recession. Also keep in mind that by some calculations, 11 of the last 12 recessions have been preceded by a Fed rate-raising cycle.

The question from The Wall Street Journal’s Nick Timiraos: “Chair Powell, given the lags of monetary policy, I want to know what you think about ending the tightening cycle. How will you know when to stop? And do you need to keep going until something in the economy breaks?”

Betcha cant guess whats coming next

Powell’s answer in full: “So, the tightening cycle, as you know, is a reflection of the strength of the economy. And it’s almost three years now that we’ve been gradually raising rates. And I think the fact that we have moved quite gradually, in a way, allows us to carefully watch incoming data in the real economy and in the financial markets to see how the economy is processing higher interest rates.

“And the fact that we’re moving so gradually, I think it limits the long and variable lags problem because, you know, we’re being able to raise rates and then wait and see how the economy absorbs these rate increases. And so far, the economy has performed very well and very much in keeping with our expectations.”

Confidence-inspiring, huh?

Examining the transcript we find 29 questions. Seventeen of the answers were preceded by “so” or a slight variation thereof, such as “OK, so…” or “It’s a good question. So…”

powell

Powells looking haggard after only eight months on the job. What happened
to those aging-movie-heartthrob good looks?

“Don’t ever think for a minute that the central bankers know what they’re doing,” our Jim Rickards told me during one of our earliest conversations in 2014. “They don’t.”

If you haven’t clicked on that link to maximize your opportunity for the biggest gains during this final stage of the bull market… heres one more chance.

We don’t have much to say about Tesla CEO Elon Musk’s latest tweet…

tweet

The financial media are tut-tutting that Musk is taking a huge risk by dissing the Securities and Exchange Commission only days after reaching a settlement with the SEC over his earlier tweet about securing the funding to take TSLA private.

Us? All we could do is chuckle and recall that for years newsletter legend Doug Casey has labeled the SEC the “Swindlers Encouragement Commission.”

“The perception that Main Street is getting screwed helped Trump win?” a reader writes.

We’re fairly sure he’s responding to our take on Wednesday recalling the “Bernank” viral video from eight years ago — and how Wall Street benefited more than anyone else from the Fed’s post-2008 policies.

“Yeah, and how about Obama?” the reader says.

“Go back and look at some of his campaign speeches just before the election when the financial crisis was taking place! The message was clear: Washington was rigged for the people who had friends in high places, not the little guy. We were all getting screwed, and of course he would fix it!

“Trump just used the same tried-and-proven strategy Obama used. And QE took place on Obama’s watch. And Main Street lost a lot more than just houses and jobs! Their marriages failed, and children suddenly were being raised in broken homes. Their health failed from stress and the drugs they took for depression. And tens of thousands even lost their lives due to cancer from the stress, drugs and even suicide.

“That tragedy took place on Obama’s watch. And the liberals think Trump is doing a bad job?”

The 5: Well, you bring up an interesting point.

Over my lifetime I’ve lived in several places that were carried by both Obama in 2008 and Trump in 2016 — such as Brown County, Wisconsin (Green Bay), and Vigo County, Indiana (Terre Haute). Ditto for the rural Midwestern county where I spent a goodly portion of my childhood.

At the risk of generalizing, people in those places have been down and out for so long they’re willing to turn to anyone who looks like (1) a savior or (2) a repudiation of the Establishment. Or both.

It’s easy to forget a decade after the fact… but as you suggest, for many people Obama represented a decisive break from what threatened to become a rotating dynasty of Bushes and Clintons. When he turned out to be more of the same, well, Trump looked like the next best opportunity to throw the bums out.

Around here we have zero faith in politicians of any stripe. As we said after Trump’s election, we don’t expect the swampy-drainy stuff to work out any better than the hopey-changey stuff. Nothing has happened since to alter that view.

Don’t look to politicians to secure your financial future. That’s up to you. It’s why we do what we do — publish an extensive suite of newsletters and trading services. They might differ in strategy and approach… but every one of them aims to help you take your power back.

Have a good weekend,

David Gonigam

Dave Gonigam
The 5 Min. Forecast

P.S. As the day wears on, traders have chewed further on the unemployment numbers and what they imply for interest rates and the risk of the Fed sending the economy into recession… and now the Dow is down more than 250 points.

Again, we don’t think the top is in. But it’s close. The final blow-off phase of this bull market is upon us. And that’s when the most money can be made.

If you feel as if you need to make up for lost time… here’s the best strategy we know of. For best results, you’ll want to act in the next week.


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