Saturday, November 6, 2010

Government Misstatements About Billionaires and Other Gold-Friendly Actions

To me, the most important news of the week may well have been the following:

‘Invalid’ Forms by Supposed Billionaires Skew U.S. Wage Figures:

Nov. 2 (Bloomberg) -- The Social Security Administration asked its inspector general to investigate how a $32.3 billion mistake skewed its statistics on 2009 wages in the U.S.

Two people were found to have filed multiple W-2 forms that made them into multibillionaires, an agency official said yesterday. Those reports threw statistical wage tables out of whack and, in figures released Oct. 15, made it appear that top U.S. earners had seen their pay quintuple in 2009 to an average of $519 million.

The agency yesterday released corrected tables that showed the average incomes of the top earners, in fact, declined 7.7 percent to $84 million each.

This was brought to EBR's attention by Zero Hedge. The New York Post added a bit of detail:

The erroneous information inflated total earnings for people who made over $50 million to a total of $38 billion, compared to a mere $12 billion in 2008.

When the data first emerged, it set off a firestorm and created the impression that rich folks lined their pockets at record levels in the midst of the Great Recession.

In other words, did the Obama administration invent, or ask the IRS or Social Security to invent, the numbers for political reasons?

In a similar but less egregious vein. the monthly employment report headlines were of about 150,000 private sector job gains. Ignored by the mainstream press was the Household Survey report showing about 330,000 jobs losses. In fact, the economic analyst Greg Weldon has reported a graph suggesting that the pace of job losses over the past several months as per the Household Survey is now at recessionary (double-dip) levels.

In any case, per the lead-in news above, why bother with government data anyway?

If you look at, there is a minimal trend toward improvement in the hiring/not hiring survey of workers. In the winter and spring of 2008, when the unemployment rate was rising, the difference was about +30 (this has dropped off the screen on the Gallup site). The level was about zero when there were hundreds of thousands of job losses per month at the worst of the recession. Thus average working people are seeing continued job losses, most likely. Certainly the Establishment data is likely skewed, I would hope inadvertently due to "survivor bias" and other factors.

Finally, the 5-year T-note dropped to all-time lows this week and remains there at the Friday close. Given that the 7-year note is around a pitiful 1.7% and the 30-year over 4.1%, we have a record upward-sloping yield curve in percentage terms (30-year yield divided by the 2-year or 5-year yield) and perhaps the 10-30 year absolute difference is at a record as well. Yet think how much can happen in 7 years. Think 1926-33; 2001-2008; 1967-1974; 1915-22. What happens beyond 7 years and definitely beyond 10 years is utter speculation.

What is definitely, definitely not in the bond market is that the yield curve over the past couple of years has followed the Japanese example to a 'T' to the best of my (imperfect) knowledge. First, very short term rates go near zero. Then the 6-month bill, then the 1-year note, then the 2-year note succumb and drop to progressively lower lows. Then the 5-year note succumbs. Eventually the 10-year and then the 30-year follow.

Remember that Gentle Ben can say whatever meaningless things he wants about the stock market and expectations. It's all verbiage. As John Mitchell said, watch what he does. That's all that counts. And he happened to announce a monetization quantity about equal to the projected Federal deficit. Thus no foreigners or even American citizens need to add to their Federal debt holdings. I assume that just as Paul Volcker is reported by Martin Mayer in "The Fed" to have promised the Reagan team that he would play ball with a pro-growth agenda in return for renomination as chairman, Dr. Bernanke agreed with Team Obama to monetize as much debt as needed in return for his full term.

The public will now likely add to its already large stock positions, believing the nonsense that more money-printing will stimulate anything except price increases as well as the Bernanke overt statement that the Fed is now targeting higher stock prices. One would think that stocks related to oil and precious metals will now have a new tailwind. I mentioned HP (no, not Hewlett-Packard), the oil driller Helmerich & Payne, several weeks ago. It is a high-quality outfit with technologically very advanced land drilling rigs ("Flexrigs") that is way off its 2008 stock price highs. With oil prices on the rise but historically a bit undervalued vs. gold, we could see much higher prices for this stock and its peers in the months ahead.

Oh- and the Republicrat/Demopublicans shifted some D's for R's. The good news is that tax rates look to be staying down. The bad news is that there is no sign that government spending will be cut to fund the tax cuts. If it plays out that way, that's a lot more $$ of debt for the Fed to monetize and thus gold prices will be goosed yet higher/faster. Further bad news is that the incoming head of a relevant House committee, Spencer Bacchus, wants Big Finance to keep its proprietary trading divisions and thus wants Dodd-Frank ("Finreg") to have a Big Finance-friendly regulatory interpretation. As if Tim Geithner will object to anything for his friends in Manhattan.

With immense uncertainty and relatively limited dollars at risk, I continue to believe that by hook or by crook, the Feds will continue the 29-year downtrend in long-term interest through a captive financial industry as intermediary. In the meantime, stagflation remains my base case and therefore I continue to believe that despite the massive run that gold has had since its summer low, the trend remains upward. This is to say that I believe that the trend of the value of a dollar remains down. As I have said over and over, gold as a store of wealth is boring. It just sits there. The Fed can invent all the excuses it wants to do the opposite of what the Volcker Fed did for almost 3 years (Oct. 1979-August 1982) and keep short-term interest rates inappropriately low. My guess is that unless and until actual declines in consumer prices occur in a sustained manner while the Fed uses its command and control power along with its influence as conductor of the global financial orchestra to be way too easy in its monetary policy, the precious metals market and probably the oil market will remain in meaningful uptrends.

The Dow is up about 12% in the almost 6 1/2 years since the FOMC raised the Fed funds rate in June 2004. Add dividends and perhaps you have 5% per year appreciation with a lot better buy-in points than 2004. Gold meanwhile is up from about $400 to about $1400/ounce. The Fed quelled the price rise of gold in May 2006 when it increased the Fed funds rate to 5.0%. At that time the CPI was peaking around 4% but soon dropped to under 2%. With monetary stimulus on overdrive, bailouts everywhere, politicians pandering to most interest groups except savers, I anticipate negative interest rates on the short end to get even more negative. One of these days, I expect pension funds and the public at large to get gold. Most people just don't "get" how with "inflation" reported as "low" gold can go up so much for so long. But, as Galileo might have whispered under his breath, the correlation of rising gold prices with too much Fed ease just keeps on working.

We are nowhere near a bubble in gold prices. We are however looking at a U. S. government that may have invented tax numbers for political reasons. But it can't invent physical gold.

Copyright (C) Long Lake LLC 2010

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