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Weak Jobs Report Not Weak Enough For Stocks – Schiff Report

  • It really was a brutal week on Wall Street, led by the tech-heavy NASDAQ, which is down about 5-1/2% on the week; 3% of that alone came today, now down about 17% from its high
  • Not officially in a bear market yet, but getting there
  • The vast majority of NASDAQ stocks are in bear markets, in fact, many of those stocks are down 40 or 50% or more – a number of those stocks down 40 or 50% today alone
  • The Russell 2000 is already in a bear market; it’s down 24%
  • Dow Transports also down 25%, and transports were actually up this week
  • The S&P and the Dow are only down about 12% – in correction but not quite a bear market, but remember, all bear markets begin as corrections, and I think this is just the early stage of a bear market
  • You can contrast that with what’s going on with gold; gold was up 5% on the week.  It added $18 today alone to close above 1170, in fact the price of gold has risen by $120/ounce since the Federal Reserve raised interest rates in December
  • The dollar also had a bad week, despite rising somewhat today on the jobs numbers, the dollar index had its worst weekly decline since 2009
  • So now, the opposite of what everybody expected has happened
  • Everybody thought the stock market would go up, because the rate hike was proof that the economy was stronger; instead the stock market has tanked, in fact the beginning of January was Wall Street’s  worst start to the year in history
  • In contrast, the expectation was that rising interest rates would help the dollar; instead the dollar has actually declined
  • Higher interest rates were expected to be bearish for gold; instead it was the catalyst for a huge rally in the price of gold
  • The weaker than expected jobs report was assumed to be the reason for today’s stock market carnage, because we only created 151,000 non-farm payroll jobs and the Street was looking for 188,000 jobs
  • The reality is not that the report was weak, it is that it was not weak enough
  • The only thing that could have saved this market would have been a horrible jobs report – a jobs report so bad that an interest rate hike would be clearly off the table
  • Instead, this jobs report could indicate that the Fed is more likely to raise rates as a result of the numbers
  • That is why the market went down
  • No one wants to admit that the only thing holding up this market is the Fed, so they pretend that the market is disappointed by the weakness of the report
  • Jobs have nothing to do with it – this market has always been about one thing – the Fed and cheap money
  • Now it hangs on weather the Fed will raise rates again
  • I believe the next thing the Fed is going to do is to cut interest rates
  • I think they might even go negative and they going to launch QE4
  • The markets have not figured this out yet
  • Even the Atlanta Fed, whose first estimate of Q1 GDP at just 1.2% (I think this is an over-estimation; I think the Q4 .7% will be downwardly revised) saw this apparently strong jobs report they increased their Q1 GDP estimate by a full percentage point to 2.2%
  • If the Atlanta Fed thought the jobs report was so strong, why are the reporters assigning blame to the jobs report for the sell-off
  • If you look beneath the headline number of the miss, on the number of non-farm payrolls, you’ll find out what the markets were so worried about:
  • 1) The official unemployment rate moved down to 4.9% – that’s the first time we’ve had a 4 handle on the unemployment rate since Obama has been President
  • In fact, he did not waste much time calling a press conference proclaiming the success of his administration and declaring that the U.S. economy is the strongest in the world; quite ironic because I thin we are already in recession
  • The President also took credit for the fact that average hourly earnings rose
  • This was the nail in the stock market’s coffin today: Wages were expected to rise by .3% and instead they rose by .5% – Two tenths was enough to clobber the stock market
  • The gold market sold off on that number, but it rallied back because I believe gold is back in a bull market and people bought the dip
  • Let’s actually discuss this strong Jobs report:
  • First about 75% of the 151,000 jobs were minimum wage jobs in the service sector, and I think many of them are part time
  • That is the reason we create so many jobs: you have to hire more people to work part time to get the same amount of work done
  • The secret to this job creation is to destroy full time jobs and force workers to work multiple part-time jobs
  • Let’s look at the increase in average hourly earnings: .5%! On January 1, 12 states significantly increased their minimum wage.
  • Since so many people work for the minimum wage, including heads of households, a significant increase in that wage will have a large one-time effect on average wages during the month the mandated wage increase took effect
  • That’s nothing to celebrate – in fact some people will eventually lose their jobs as a result of the increase
  • Challenger reported that the announced layoffs in January spiked higher than any January since 2009
  • That January we were right in the middle of the Financial Crisis and the Great Recession
  • Now we’ve had almost as many layoffs this January
  • There’s actually more to this “higher wages” story, but no one bothers to look beneath the headlines
  • If you look at the job categories – the greatest increase by far in wages came to the category of  mining and logging
  • Also, it happens that mining and logging lost 7,000 jobs, so the sectors that had the biggest increase in wages lost 7,000 jobs
  • If mining and logging industries are laying people off, why are they giving people raises?
  •  They’re not.  Here’s how it works.  When you fire people seniority is important, so the 7,000 who lost their jobs on average earned less than the more senior people who were retained
  • So the average wage of the remaining workers is now higher
  • This does not mean that the economy is better off, of course it’s not
  • The Atlanta Fed increased its estimate based on the increase in average hourly earnings, expecting more consumer spending
  • Considering all the anxiety about job security, people are going to spend less
  • This is just January – the first quarter still has February and March to go – who knows what the average wages will look like during those months?
  • What about the wealth effect? Does the Atlanta Fed consider the collapsing stock market?
  • The Federal Reserve’s Bill Dudley expressed concern over the tightening conditions in the financial markets and if the situation didn’t improve by March it will be taken into consideration at the next FOMC meeting
  • He may have been motivated to make that statement to help the stock market
  • Not only is the situation not stabilizing – it’s getting worse.
  • I’ve been saying all along, the only central banker who can help the markets is the one wearing a skirt
  • Janet has to acknowledge the underlying weakness in the economy
  • I was on CNBC Asia recently debating the economy with a guest who argued that the U.S. economy is in great shape – the same thing is going on in Wall Street
  • They feel there’s no reason to be concerned – slow growth in China is the main culprit
  • The weakest stocks have nothing to do with China – the Russell 2000 is much weaker than the Dow
  • The stocks that are having trouble have the greatest exposure to the U.S. economy
  • The Fed has a credibility problem because they just raised interest rates touting the strong economy
  • How are they going to lower rates now, even though we are in a recession
  • This is very similar to Bush’s last months and John McCain ran – we were in a recession
  • The more Obama touts our great economy to the voters, the more he will be resented – the voters know things are not great
  • Obama can’t blame the current job market on Bush and the Financial Crisis
  • How does the Federal Reserve now save the market with a rate cut without acknowledging that raising interest rates was a mistake
  • The Fed has to wait long enough to create some distance between the decision to raise rates and come up with an excuse to save face
  • I believe the Fed will say that the economy was in good shape when they raised rates, but then, something unforeseen happened in the global market, so we cannot be held responsible for not anticipating the current financial situation
  • They have to be able to say that they saved the economy, and the proof was that we raised interest rates
  • Now they are going to use the same measures on this recession they used on the last one, because it worked so well
  • I mentioned Janet Yellen said in an earlier press conference that she would buy assets again if necessary, since it worked so well in the past
  • The longer they wait to find an excuse, the more downward pressure there will be in the markets
  • The gold market has already turned, now, so it really doesn’t matter how long the Fed waits to acknowledge the truth of the economy; the gold market senses that it has already discounted any tightening cycle we might have already experienced and is looking toward the next easing cycle
  • The same thing is happening with the dollar – as markets digest the reality of the U.S. economy the dollar will resume its decline
  • Once the Fed is forced to admit that we are in a recession and announces further stimulation, it’s a whole new ball game
  • But the markets might figure it out on their own, without waiting for the Fed to formally announce the weakness
  • Either way, reality will replace fantasy that the U.S. economy is in such good shape that the Fed will be able to raise interest rates
  • People have been putting money in U.S. assets as a safe haven, buying the dollar – that narrative is completely false: the U.S economy is in worse shape than it was in 2009
  • All those problems were exacerbated by the Federal Reserve, who created them in the first place
  • If you remember the Federal Reserve was (at least publicly) oblivious to those problems right up until we were knee-deep in the crisis
  • They’re just as oblivious now.  Either they are honest, and incompetent, or they are lying, just as they did then
  • Ben Bernanke admitted that his statement had to be filtered, as a spokesman for the Administration
  • Certainly, Yellen considers herself a member of the Obama administration; she wants to be a member of the Clinton administration, so the last thing she wants to do is to admit that the economy is in a recession
  • Bankers in Europe or Japan want to admit that the U.S. is in a recession either, because the U.S. is supposed to be proof that QE and negative interest rates works.
  • What’s the point of following our roadmap when it leads right back to recession?
  • The recession that we are already in, and the government will eventually admit this after the fact, is going to be a greater recession, deeper and longer lasting than the last one, and I don’t think the government is going to be able to save us with a stimulus. That ship has long sailed.
  • When the dollar starts to talk, consumer prices in the U.S. dollar will go up a lot more
  • Right now, the yuan appears to be the only currency in trouble, but I believe the dollar will tank
  • The belief in a strong dollar is predicated on a U.S. recovery with the Fed raising rates
  • If instead, we’re in a recession, and the Fed is cutting rates and doing more QE, the dollar will tank and the yuan will normalize against a bast of currencies
  • This time we will see big increases in prices similar to the stagflation the 70’s, but this time we will see higher inflation and we’re out of tools
  • The only thing keeping us afloat is artificially low interest rates
  • And the more debt we have the more important those low interest rates are to service that debt
  • Rising inflation will cause a flight from  the dollar
  • Not only will the dollar surrender all of its ill-gotten gains, based on the false expectation of rate hikes, but the dollar will fall substantially further than before it rose because the U.S. economy is in much worse shape than it was because of all the years that have gone by