Saturday, September 5, 2009

Unemployment, the Fed, and the Markets

On August 24, following comments from Fed officials, I blogged in The Fed Is Blowing It Again:

My take from what the Fed is saying is: buy gold; buy gold; also don't forget oil, silver, copper, etc., et al., ad infinitum.

In the two weeks through the close of trading Fri. Sept. 4, gold is up over 5% in price. Treasuries sold off Friday despite a truly dismal household survey of (un)employment. How dismal? See Mish's quote from Dave Rosenberg's Friday note. Another analysis of the data can be found at Dr. Ed Harrison's Credit Writedowns.

The index of average weekly hours worked for most workers dropped from 99.2 to 98.9 from July to August, where 2002 represents 100. This is despite an approximate 7% increase in population. Adjusted for population growth, this is about an 8% decrease. Here is a link to the BLS report itself; click HERE.

In the meantime, the Economic Cycle Research Institute is more and more bullish:

A weekly measure of future U.S. economic growth rose in the latest week, while its yearly growth rate surged to a 38-year high that suggests the recovery is on track. . .

The index's annualized growth rate rose to 20.8 percent from 19.6 percent a week earlier. The latest reading was the index's highest yearly growth rate since the week to May 21, 1971, when it stood at 21.3 percent.

Perhaps as part of the dispute between ECRI and Drs. Rosenberg and Roubini, the Reuters report on the ECRI data also included the following:

"With WLI growth rising to a new 38-year high, U.S. economic growth is poised for a stronger snap-back than most expect," said ECRI Managing Director Lakshman Achuthan.

Last week, Achuthan said a double-dip recession in the fourth quarter is "out of the question."

I went back to the data. Six6 months after the above-mentioned date of May 21, 1971, the Dow Jones Industrial Average had fallen about 10%, and the ten-year Treasury had fallen about half a point in yield despite the Viet Nam War and the secular bear market in Treasuries that began around 1965 and continued until 1982. Past may be prologue.

The DoctoRx thinking is that since the government is borrowing at minimal interest cost for now and has been financing immense amounts of transfer payments to people and businesses, there has to be a technical recovery. Yet I have no reason to doubt Dr. Rosenberg's analysis that the Q2 GDP would have been down at an annualized rate of 6% without stimulus, and that Q3 would be down at a mild 1% annual rate without stimulus.

So from an economic basis, it would appear that the bears who were bearish last December and this past January were correct. Now, if government were doing innovative things such as Eisenhower's new system of interstate highways, or the successful handoff from the Dept. of Defense to the private sector of the Internet, I would say that taxpayer funds were being well used.

As in Japan in its post-bubble phase, there were two trends.

One was debasement of the currency vs. the dollar. Recently, of course, as the U. S. has led the Western world in economic mismanagement, of course the yen has been forced to strengthen against the dollar. Thus, the parallel here is that the dollar has fallen against gold every year since, and including, 2001. This year is looking like no exception. How high could gold go if the stock market and financial markets stayed stable? Based on average ratios of the price of gold following
its manic run-up of the late 1970s that led to aggressive high-interest rate policies of the Fed, gold could very easily go to 2-3X the S&P price, or let us say 2500/ounce. The future is of course wildly unpredictable, but the Fed and stock market appear to be following the 2001-3 and beyond pattern, so why should not gold continue to go from strength to strength? After all, a $700 gold price in 1980 would translate in buying power to over $2000/ounce today.

The other trend, unpopular though it is to say, is toward lower long-term Treasury rates.

It is felt here that so long as one is willing to buy and hold a certain number of Treasuries, they can play a valuable role both for income and possible capital gains as part of a diversified portfolio. Tactically, it is easy to see that the Fed would want sustained low market rates a la Japan for it to make money off of its purchases of Treasuries and mortgage-backed securities. Remember that the economic recovery that is either beginning or will come at some point (if for no other reason than the law of averages and random fluctuations) and that may be a "fake" recovery could well be followed by the totally surprising events of 2008, meaning yet lower lows in Treasury rates. Similar things happened after the economic recovery of FDR's first term, after which long-term Treasury rates did not bottom till at least 1940.

Stocks are churning, in general offer insufficient income to be an attractive asset class and are manipulated or greatly affected in price by Big Finance according to self-serving metrics. Stocks that are liked here are some individual names, including Teva, McDonald's, Bristol-Myers, and National Presto (which is primarily a defense company now, though it is best known for crock pots and the like).

Currently the most interesting momentum and "fundamental" plays appear to include gold either via "GLD" or "GTU" or bullion; and TEVA and NPK in the stock market. Even if ECRI is correct about a very strong period of growth, as occurred in 1972, the general stock market could well be due for a rest.

Copyright (C) Long Lake LLC 2009

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