Related topics: stocks, economy, Federal Reserve, gold, Bill Fleckenstein
With the release of the most recent nonfarm payroll report, which cited only 54,000 jobs created compared with expectations of 165,000 (despite help from the Bureau of Labor Statistics' birth/death model), it should be quite clear that there is no self-sustaining recovery under way.
How bad has job creation been? I will let the Liscio Report answer that: "Private employment is 2% below where it was 10 years ago. As we've been pointing out for some time, job loss over a 10-year period is unprecedented in U.S. history since reasonable job counts began in 1890. So far, we've regained just 1.8 million of the 8.7 million jobs lost in the Great Recession and its aftermath, or about 1 in 5."
After the first round of juicing demand via the bond market by the Federal Reserve (i.e., QE1) did not do the job, the baton was passed to QE2. Now it is clear -- as evidenced by relentlessly sluggish employment -- that all those programs did was push asset prices higher without solving anything.
Of course, they were never destined to be a solution, for the same reason you can't drink yourself sober.
It's time to face the music
In addition to the job market, the real-estate market has demonstrated that it won't be improved simply by money printing. It was a true bubble (as opposed to markets deemed to be bubbles by those who missed the two painfully obvious real ones in tech and housing) that burst, and home prices need to clear before the economy can regain its equilibrium. It is important to understand that markets clear at a different place (i.e., at different prices) after psychology has changed than they would have before.
Bill Fleckenstein
The economy was extremely warped as a result of both bubbles, and jobs were created (and were believed to be sound) that in fact would not have existed without the misallocation of capital caused by the bubbles. As if that weren't enough, the government is broke, as it is incapable of dealing with the massive issue of contingent-but-soon-to-be-actual liabilities (aka, the entitlements of Medicare and Social Security) that can't be fulfilled. In other words, we have a lot of work to do and a lot of pain to endure before this country will be back on anything resembling sound footing.
The easy-money track record is 'staggering'
Speaking of pain, I would like to touch on the topic of stagflation, which has been the economic outcome I have expected in this country since the giant do-over created by the government and the Fed in the winter of 2008-09. The Financial Times, which is a great paper but has a horrible editorial philosophy, penned another of its misguided-but-largely-predictable articles earlier this month headlined "Dealing With the Evils of Stagflation" (registration required). In it, the FT argued for ignoring inflationary pressures and sticking with easy-money policies. You can expect to see a variation of this line of "logic" used by everyone with a similar mindset.
The article starts off talking about the economic problems and pressures caused by "stagnation and inflation," then notes, "In recent months, both the European Central Bank and the U.S. Federal Reserve have become more vocal in their desire to raise rates. This temptation must be resisted. The west's inflation problem stems from the voracious demand from Asia's new industrial powerhouses. This must give hope that a mild dose of stagflation is simply the temporary symptom of an inevitable economic shift."
A homeo-pathetic remedy
First of all, there's a big difference between the "desire to raise rates" and actually doing it. But apart from that, the FT's thesis -- that price hikes don't matter as long as they're for reasons that don't have anything to do with the expansion of the money supply -- is completely off the mark. Easy-money proponents will always argue that tightening should be avoided because inflation takes away money from consumers, therefore it is itself already "contractionary." This circular logic would have it that rising inflation will defeat inflation and therefore should not be battled.
That sort of thinking is nothing but a rationalization by people who don't want to believe the Fed is trapped by its easy-money policies. And it now appears that stock market bulls have become trapped right along with the Fed. The late selloff June 7 following Chairman Ben Bernanke's speech, I think, indicates that the bulls were expecting a quick fix. They seem not to have realized they are in a Catch-22 of needing stock prices to go lower to get the easy money they need to take them higher.
In fact, I expect the trend for stock prices is likely to be downward for the next little while, but that does not mean it will be easy to sell stocks short. As folks try to time the arrival of QE3, an anticipated third burst of Fed bond-buying, I expect volatility to increase. So we are back to a rather uninteresting market where the short side is not really attractive, except tactically, while the long side is too dangerous (apart from money-printing beneficiaries, although those have recently been weak as well).
Gold's future may be made in USA
Precious metals stocks were abysmal performers yet again last week and may continue to be frustrating until psychology changes regarding the long-term outlook for gold -- particularly by Americans. The rest of the world realizes it needs gold, particularly the Chinese, and gold prices have responded accordingly. But in large part, Americans have not come to this realization. There has been no real move of any consequence among Americans into gold, in spite of the success of the gold ETF SPDR Gold Shares (GLD, news).
At some point I think we will see the gold ETF gobble up tons of gold, and as that happens, I think we will see people -- Americans included -- connect the dots and buy miners. I continue to believe there is going to be an enormous opportunity there, but the question now is when. We can't know in advance; we can only be alert as it starts to happen.
One of these days, gold is going to put on track shoes, and really romp. Perhaps it will take QE3. Perhaps it will start before that. When that occurs, gold stocks will be explosive. But until then, they may stay range-y. I can't guarantee that will be the case, but it certainly has been, so I thought I would share my best guess as to why these stocks in particular are so unloved and ignored at the moment.
At the time of publication, Bill Fleckenstein owned gold.
This column is a synopsis of Bill Fleckenstein's daily column on his website, FleckensteinCapital.com, which he's been writing on the Internet since 1996. Click here to find Fleckenstein's most recent articles.
