Friday, February 4, 2011

February Jobs Report

I watch CNBC every morning at 8:30 AM with the mute "off" because that is when the economic data for the day is released.  Taking the television off mutes also provides me with a nice dose of comedy for the day because the talking bubble heads they bring on to provide market commentary are beyond ridiculous.

This morning they were in rare form.  About 5 minutes before the monthly jobs number was released they brought on a panel of 3 "distinguished" economists to discuss their expectation for the number and its importance for the economy.

All 3 saw the number easily surpassing the market's consensus for 148,000 jobs created in the month of January.  All 3 said that 200,000 plus was very likely and that this continued job growth was a very important indicator for the economic recovery.

The number was then released..........36,000 jobs.  Here's where it gets funny.  After looking clearly ridiculous across the board the same analysts now had to discuss the actual number.  The consensus:

The number has very little meaning, and was only low because of the snow!!

What I would have asked, but was not invited on the show to discuss, is how it was possible that 425,000 Americans managed to get through the snow and register for unemployment insurance last week? 

Anyway, enough with the fun, let's break down the actual number.....

The official U3 unemployment rate fell to 9%, which is the headline you'll read all over the news.  The reason for this, as I cover just about every month now, is because Americans have been out of work for so long that they have given up looking for jobs.  They understand that there are no jobs available, and there are no coming under Obama's communist regime.

The real unemployment rate that the government releases monthly is called the U6, which measures the unemployed AND the people that have given up.  This number rocketed up to 17.3%.

The following chart shows you the people "not in labor force" (given up) who want a job.  This month it was the highest in history:

The following chart shows the people that have taken part time jobs due to economic reasons.  The majority of these jobs are very low pay:

Then you have the unemployed for over 26 weeks.  This is usually about the point people begin giving up:

And finally you have our current depression laid against the previous recessions of the last century.  It shows how far we have to go to get back to full employment.

Fortunately the Federal Reserve stands ready to print an endless amount of money and pump it into the economy.  This does nothing for employment but provides a tremendous benefit for the 1% of Americans who own 90% of the shares in the American stock market.

It also helps the Americans who do not need to eat or put gasoline in their cars because those prices are set to hyper inflate in the coming years.

Thursday, February 3, 2011

How The Fed Raises Stock Prices: Part 1

I would like to talk a little bit about what is taking place both in the bond market and the stock market, then show how it ties into the Federal Reserve's activities.  I want to try and provide a simple example to show how money is flooding into both markets through the use of what the Fed terms the "Permanent Open Market Operation" (POMO).

Because our government is bankrupt, they need to borrow money from the market in order to pay their bills and postpone the coming formal bankruptcy or default.  They do this by holding auctions every month where investors bid on how much they will pay for an I.O.U. from the government.  The government promises to pay back the I.O.U. in full plus interest every month for a set number of years.  These are called treasury bonds.

The investors that come to the auctions are called Primary Dealers, which are composed of the largest investment banks such as Goldman Sacs and JP Morgan.

Let's talk about how this process works with a simple example:

Goldman Sacs shows up to a treasury bond auction on Wednesday and purchases $10 billion in government treasury debt (bonds). 

The government now has $10 billion in fresh cash available to pay  $150,000 in salary and benefits to a federal worker who is probably about $120,000 a year overpaid.  This money is then spent by that federal worker into the economy providing a stimulating boost to restaurants, clothing stores, and car dealerships.

For years this process has been paid for by the Chinese, but it essentially came to an end 2 years ago when they stopped purchasing our debt.  (Their total treasury accumulations are about where they were during 2008.)

To fill the void, the Federal Reserve has stepped in with a printing press. (I'll get to how in a second)

This allows our government to overpay their workers and never cut entitlement spending such as social security, medicare, food stamps (14% of population), and unemployment benefits. (17% of population)

It allows the government to provide or guarantee 100% of the new mortgage loans for every American in the country. It allows our military to be large enough to not only protect our home country (which is what a military designed for), but to be large enough to guard every city, town, and hut around the world while simultaneously fighting endless wars.  We will most likely soon begin military expansion onto other planets.

This process creates a "miracle" economy where you enjoy can the never ending benefits of the spending today and you have to pay....never.

In addition to this wonderful boost to our sagging economy the Federal Reserve has figured out how to boost the other feel good elixir: The Stock Market.

Here's how:

When Goldman Sacs purchases the $10 billion in treasury debt at the auction the government holds, they then go back to their office and begin collecting interest on the I.O.U.'s.

The Federal Reserve then shows up to Goldman Sac's office in nice black SUV's to conduct their "Permant Open Market Operation."  They hand Goldman Sacs $10 billion in freshly printed dollars and they take the I.O.U.'s that Goldman Sacs just purchased.

Here's where it gets fun.  Goldman Sacs now has $10 billion in cold cash to go out and have fun with.  So what do they do?  They go shopping at the stock market.  They go buy oil futures.  And they go buy some something very, very fun right now: agriculture.  Also known as food.

As they bid up the prices of these goods with the fresh, printed, free money, it causes prices of all assets to rocket higher around the world.  This is how inflation is created. 

This hopefully explains in easy to understand terms how the overall magic trick is performed.  Next up I will explain some of the numbers behind the operation and the effect on stocks, commodities, and bonds.

Coming Soon:  How The Fed Raises Stock Prices: Part 2

Wednesday, February 2, 2011

Silver Shortage Vs. Currency Explosion

Scottia Moccatta, one of the world's largest precious metals bullion dealers, shows on their website as of this morning that they have run out of all silver bars available. 

Yesterday the US Mint posted their silver sales for the month of January at 6,472,000 ounces.  This was 50% higher than any recorded month in history!

Physical inventory is being purged from the system at an alarming rate.  By the time the average American realizes what is being done to their paper money, there will likely be no physical silver available to purchase.

In other news, the head of the Kansas City branch of the Federal Reserve said yesterday, "The Federal Reserve could debate extending its bond-buying program beyond June if U.S. economic data prove weaker than policymakers expect.  Another round of bond buying "may get discussed" if the numbers look "disappointing,"

Another round of bond buying = Quantitative Easing Part 3 = Money Printing

Death Of Dollar Menu

Our friends over at the National Inflation Association have created a new video to keep us updated on recent economic news.  The video is sensational as always, but McDonald's ability to keep their dollar menu in the face of rising food prices is a key indicator to watch moving forward.

Tuesday, February 1, 2011

DOW 12,000

Why worry about economic fundamentals?  The DOW just crossed back over 12,000.

Food Stamp Participation

The chart below shows the number of Americans (43.6 million) and the percentage of Americans (14%) currently receiving food stamps every month.  Data is through the month of November.

These Americans receive a card that turns on the first day of every month at midnight.  The only thing keeping these 14% of Americans from facing starvation is the price of food staying stable enough for the few hundred dollars a month to feed their family.

If food prices begin to rise at an unstable rate then these Americans will begin to starve.  The following shows the increase of food prices for certain foods for just the month of January alone:

Corn + 7.76%
Wheat + 5.63%
Rice + 10.08%
Hogs +10.16%
Sugar + 5.64%
Orange Juice + 3.33%
Cotton + 17.08%

While I believe we are a few stages away from hyperinflation (one more deflationary fall), this will be the final outcome as the starving food stamp participants are priced out of the market.  At that point you will want to lock your doors and close your eyes.

Jim Rickards Fox Business

Monday, January 31, 2011

Investment Advice

Found this question sent in to the writer of a financial site that I read weekly:

Hello Mish,

I don't know if you give advice, but I heard you on Coast-To-Coast and you seem to know what you are talking about. I am 65 years old, get $938 from Social Security, and this is all I live on every month.

I have a CD that is about $16,000 now and is providing $75 a month. In about a year that will stop because the interest has gone down so much. If you were me, what would you invest in?

I lost $2,000 in the stock market a few years ago and the way it is now it is rather scary. I don't know what else to even consider and when I ask my banker he seems to be at a loss too.

Any help you could offer would be a blessing. Thank you for your consideration and kindness.

Stephanie - Somewhere, USA

Most retired Americans find themselves at this current financial level, faced with the exact same question. 

This is the damage that Bernanke does to the economy by keeping interest rates at 0%.  It crushes savers who get no return on their investment.

It forces them out on the "risk" curve, making them put their money into riskier assets to get the return they need to live on.  This creates inefficiencies in the market, and it is why we live in a world of rolling bubbles, an extreme boom then bust environment.

Where will the flood of cash move next that cannot get a return in a savings account?  Where will the next bubble form?

I believe it will be commodities, and precious metals will be the stars of the group.