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Recovery Fantasy Persists Despite Recession Evidence – Ep. 138

  • So far the month of February is just 4 trading days old, and already the U.S. dollar index is down just over 3 percent
  • We closed January at 99.6 and we closed at 96.5
  • Gold, going the other way, now up about $13 today, closing above $1,155; the price of gold is up almost 3.5% in the first 4 days of February
  • That shows you that most of the move in gold is the result of the dollar going down
  • This move is just getting started
  • The markets are just beginning to price in the fact that the Fed is not going to raise rates in March
  • They are pricing 3, rather than 4 rate hikes this year, and that’s the only thing that is not driving the markets
  • A more realistic look what the Fed is likely to do is to not raise rates, but cut them below zero
  • Despite that we’re seing all this momentum in the dollar and in gold
  • Gold stocks are just soaring, many of these names have been up 5-10% each day in February
  • None of this is attracting the attention of Wall Street
  • A guest on CNBC today alluded to short covering as the reason for gold going up
  • He commented on how lousy the fundamentals are for these stocks
  • The fundamentals have never been lousy
  • They have appeared lousy because there was so much belief that the dollar would continue to rise because the U.S. is having a genuine recovery and the Fed will continue to raise rates
  • The media and Wall Street are still very biased; I was on CNBC Asia last night debating an American guest who touted the strength of the economy based on the strong jobs market, how household balance sheets are better than ever and real incomes are rising
  • The only reason homeowners have better balance sheets is because they no longer have a house; home ownership is at a 50 year low
  • While gas prices are lower, rents, healthcare and most other costs are going up
  • It was an example of how the public ignores all the bad economic news and assumes that the economy is great
  • Another writer for CNBC.com attributes gold’s rise to low inflation
  • He actually said that my explanation about the economy slowing with inflation did not make sense, because in his mind, high inflation is a result of a strong economy
  • This is exactly backwards. Strong, productive economies keep prices low
  • Weak economies that lack production end up having higher prices, and those weak economies produce budget deficits and the central banks have to print money, causing inflation
  • The actual definition of inflation is an expansion of the money supply; higher prices are a result of the fact that the currency then buys less
  • The government wants people to be confused about inflation and where it comes from because they are the source of the problem
  • By blurring the meaning of inflation, it is easier to shift the blame for economic problems on everything else but monetary policy
  • CNBC highlighted my call on gold, but omitted all the correct calls I have made, especially 3 recent market predictions:
  • One: if the Fed raises rates, the stock market is going to tank
    • Why did I say that the market was going to tank? The conventional wisdom that if the Fed is raising rates, the economy must be stronger – I said if the Fed raises rates it will be doing it into a weak economy. In fact, it probably happened in a recession
  • Two: I said that there is no historical precedence for this monetary policy because we have been at zero interest rates for 7 years, so the effect of higher rates on the economy appears to have more effect because they have been talking about tightening for years
    • I also said that if the Fed raised rates, gold prices would rise; it was unanimous that gold would collapse.  Gold is up more than $100 since the initial knee-jerk sellof
      Remember that I recorded a video blog where I specifically said, if the Fed raises rates, and there’s a knee-jerk reaction sending gold lower, that will be a great buying opportunity and that was the exact low
  • My third prediction is that the dollar would go down, and up until a couple of days ago, that was not the case, but now the dollar is at a 4-month low
  • Why did I say that the dollar was going to fall when the Fed raised rates? The dollar rose for 3 years on the rumor of higher rates: I said, buy the rumor, sell the fact
  • I also said that the fact wouldn’t live up to the rumor: I did not believe we would get as many rate hikes as the market was counting on
  • That is also happening right now – the market is dialing back their expectations
  • I said that the minute the Fed starts raising rates, the market will start discounting the next easing cycle
  • What they are not counting on is the next easing cycle is going to happen much sooner that the market thinks, and the dollar will be much weaker and gold will be much stronger
  • Today’s economic news also verifies my recent comments: I was made fun of because I said we’d have a horrible Christmas – I was referring to the retailers, of course, and in fact we had the worst Christmas selling season since 2009
  • It wasn’t just the brick and mortar stores – Amazon reported weaker that expected holiday sales
  • I also said there would be a lot of layoffs in January, and today’s Challenger Job Cuts reported 75,000 layoffs – triple the previous month
  • This is the biggest layoff report since January 2009 – again another economic data point that only happens when we are in recession
  • We also got the weekly jobless claims, they moved up to 285,000 from 277,000 the previous week.  The consensus was 280,000
  • Weekly unemployment, while still low, are at an 11-month high
  • Clearly the economic data is heading in the wrong direction
  • More bad news: Productivity and Costs for the 4th quarter was expected to come in at a pessimistic -1.8%, came in at -3%
  • Q3 Productivity was +2.1%, so this is a huge decline, and unit labor costs spiked up 4.5%
  • Higher labor costs do not necessarily indicate higher wages – higher costs such as insurance are a factor
  • Factory Orders is a big number affecting Q4 GDP: We got -2.9, which was close to the expected -2.8
  • The prior month had been revised down to -.7 from -.2, making the miss for December much bigger
  • All this is going to further bring down Q4 GDP
  • All of today’s economic was bad, yet no one cares, because theoretically the job market is still strong
  • The jobs numbers have been coming in good, but only superficially because we are creating more part time jobs to replace the good jobs that have been lost
  • One of these days, however, we will get a bad jobs number, if not tomorrow, then soon
  • We are also going to get the Trade Deficit number tomorrow which will also factor into Q4 GDP
  • If Q4 does end up negative, will the Fed admit that they are wrong? They will never admit that they were wrong. They’ve never done that throughout the entire recession to now
  • They will say that unforeseen factors occurred after the rate hike just like the Financial Crisis of 2008-2009 was unforeseen, although many people, including myself, saw it coming
  • The “data-dependent” Fed, will react to this data that is catching everybody by surprise by saving the day with more of the same policy that they say worked so well last time
  • This time, they don’t have much to work with so they will have to go negative to have any impact
  • Hopefully the markets will figure out that the their “secret sauce” isn’t working
  • More additional bad news out of the retailers today: Ralph Lauren and Kohl’s got decimated during trading because they reported lower than expected earnings
  • Ralph Lauren down 22%, down to a new multi-year low, Kohl’s down about 19%
  • After the close, Linkedin came out with bad news and the stock plunged 28%
  • How does Linkedin make money? They make money from corporate customers who are hiring, and corporations are not spending as much money hiring. What does that indicate?
  • All the data we are getting is consistent with recession except for the one lone outlier – the jobs data and Wall Street is dismissing everything else
  • One day, we are going to get a bad jobs number, maybe tomorrow, and the bubble is going to prick
  • It should have happened gradually, as the market digested all the mounting evidence, but they have just focused on the so-called good jobs number
  • Nobody wants to believe we’re in a recession – it’s so easy to figure this out – it’s got to be that the market doesn’t want to see the evidence
  • It’s like the pill in the Matrix that reveals that all the people were actually human batteries and just living in a complex fantasy world
  • I think what’s already happening in the dollar and the gold market is an acknowledgement that the days of make believe are coming to an end