The fiscal crisis came and went and yet the Potemkin village remains. So much was made about the looming fiscal calamity and its dire consequences that the probabilities of a compromise were overwhelming. Not only did fiscal sanity fail to show, the final package was beyond my comprehension. As the nation’s focus was supposedly on Congress, these purveyors of fiscal rectitude passed a BILL that was laden with pork. NASCAR, Hollywood, alternative energy et. al. were the recipients of CONGRESSIONAL LARGESSE IN THE TIME OF FISCAL AUSTERITY. There is no shame in the payment of political favors even in the full view of the MIDDLE CLASS.
The classic definition of CHUTZPAH is a “son kills both his parents and pleads for mercy for he is an orphan.” This definition has now been replaced by Congressional posturing about fiscal austerity while shoveling monetary benefits into the pockets of political benefactors. The equity markets and other risk-on variables may have breathed a sigh of relief at the final compromise but the financial repercussions from POLITICAL PORK are going to be with us for the short-term future. The fiscal cliff drama will be deemed mere child’s play compared to what the next round of negotiations will be. This group will not reflect the wisdom of Lincoln: “Malice towards none, and charity towards all.” If the recent compromise is any indication, it will be charity toward a few and malice toward all.
***The first trading day of 2013 brought a significant rally in the EQUITY markets as investors bought stocks in response to a less cataclysmic political result. Many investors shed dividend-paying stocks as they feared a dramatic rise in tax rates on dividends and capital gains. Many analysts failed to raise the issue of dividends versus interest earnings. If tax rates rose to ordinary income levels (39%), interest income would also be taxed at the same rate. The outcome is that a 10-year note with an effective yield of 1.7% would get taxed at the same rate as Verizon stock with a dividend of 5.5%. The end result is a higher yield but a riskier asset–although it is not clear that with an aggressive FED that Verizon is really a riskier asset. The action in the U.S. DOLLAR was interesting as early weakness gave rise to late afternoon DOLLAR STRENGTH.
The EURO saw an early price of 133.0 but sold off to close at 131.80. The selloff in the EURO came despite a huge rally in the ITALIAN/GERMAN 10-year note futures spread. The strength in peripheral debt was a good indicator of a EURO rally but we will have to watch to see if that indicator is undergoing a shift. One day does not a trend make but it is something to watch. Typically the first week of the year reflects unwinding of illiquid holiday markets so we will be cautious in announcing a sea change.
***It is unemployment tomorrow in the U.S. and Canada. The U.S. data will be badly skewed because of the effects of Superstorm Sandy. As Phillipa Dunne and Doug Henwood point out, there may be large job creation due to individuals signing up to do salvage work. The ADP data released this morning predicted a much stronger nonfarm number as private sector shows as tracked by ADP grew by 215,000 versus the projected 134,000. Consensus for NFP has been 135,000 with the rate remaining at 7.7%, while the average work week is expected to be unchanged and a 0.1% increase in hourly earnings. The data should not be a major event and the population participation may begin to take center stage.
The Bernanke FED has cited an unemployment rate of 6.5% as its focal point so the rate itself is off center stage. Nay sayers on last year’s GDP data were much more concerned about how many workers dropped out of the job force, so wait to see what the participation data shows. The Canadian UNEMPLOYMENT RATE is expected to hold at 7.2% and job creation is expected to be flat. Last month’s Canadian jobs report showed a huge gain in jobs so a fall back to zero is not a bad result (last month 59,000 jobs). The most important area will be manufacturing jobs in the Ontario auto sector. Today’s U.S. auto sales report show a continuing improvement in auto sales.
***Coupled with the improvement in auto sales, we will be watching the GOLD/PLATINUM spread as an indicator. Today the spread dipped under $100. In December the GC/PL spread made a low of roughly $65 so that should be a level to take note of as a barometer of auto strength. Let me also remind readers that the platinum had become a proxy for European economic weakness for many hedge funds so new-found strength in platinum due to Japanese stimulus and renewed Chinese growth may force hedge funds to look for other trades to reflect EUROPEAN weakness. And remember, the EUROPEAN story is not over.
Tags: 10-year note, ADP, austerity, Canadian unemployment, equity, Euro, fiscal cliff, GDP, gold/platinum spread, Italian/German spread, political pork, u.s. unemployment
January 3, 2013 at 6:32 pm |
>>> The Federal Reserve has no practical option to end QE >>> >>> >>> >>> >>> Such an announcement has been part of QE either from MSM or some Fed board member since it began. >>> >>> >>> >>> The implication of stopping QE is so dire to the economy that it is in a practical sense impossible. >>> >>> When gold was being sold by central banks during the 1970s market announcement we made constantly with the bias to depress metals. >>> >>> There is no way that the implications and consequences of what has been done up to now can be talked away or manipulated away. >>> >>> There is no practical way that QE can cease here or in Euroland without a total and final collapse of the financial system. >>> >>> Just go back to the IMF report on OTC derivatives I posted this morning. >>> >>> If QE ceases the USA bond market collapses and the Fed must debt monetize all required debt, which means if QE stops it starts up again immediately and in a crisis mode. >>> >>> I have to admit that if you have been a reader here for any length of time you should know this without asking me. >>> >>> The pressure that people unload on me during any gold reaction is down right mean. >>> >>> The statement that QE can stop is simply MOPE. >>> >>> QE cannot stop of the world ends, as you know it. >>> >>> Could you please print this out and post it on your computer because every time the long cycle guy repeats his year old bear gold price prediction or the Fed says anything about stopping QE, you all go wild. >>> >>> If you do not understand what you are in, why are you in it? >>> >>> Truman said it all when he said if you couldnt stand the heat in the kitchen, get out of the kitchen. >>> >>> >>> >>> The Federal Reserve has no practical option to ending QE without ending the economic world for decades to come. >>> >>> Should that actually occur in some a parallel universe only gold will protect those the citizens of the parallel universe from the collapse of the by default reserve currency. >>> >>> I am sure I have written this at least 200 times. >>> >>> >>> >>>> Subject: FOMC Minutes Announcement – Bond Buying to end 2013? >>>
January 3, 2013 at 7:14 pm |
Sounds like someone is long gold!
January 4, 2013 at 4:19 pm |
It’s funny all the pork spending and no money for Sandy victums until today.
January 4, 2013 at 10:42 pm |
You GO Jim!
January 5, 2013 at 6:45 pm |
That was one of the better gold rants I’ve read in a long time. Gold is down over 7% since the Fed announced QE infinity. I really don’t think the issue of whether or not the Fed can exit QE is relevant to how gold is currently trading – it continues to under-perform since early October. It is this “bullish no matter what the market tells me” attitude that is likely to lead to a large wave down in gold prices. The current price action is signalling that the next big move is likely below 1500… not above 1800 (not that a break below 1500 would necessarily invalidate the longer term uptrend). My question to Jim and gold bulls is what is the next major catalyst that is going to launch gold on the next wave higher? Please tell me what it is. The Fed has launched QE infinity – the BOJ has hinted at unlimited printing and aggressive inflation targeting, the ECB is kicking around negative interest rates, Australia is holding record low rates, Brazil has lowered rates aggressively over the past year, I keep reading article after article about how physical gold is being bought by central banks and that gold coin sales are at historical highs… and on and on and on. So yes, I understand that the fundamentals are bullish – but the market is trading poorly despite this… what is it going to take – what is the next catalyst? I’m dying to know.
January 5, 2013 at 7:08 pm |
That was one of the better gold rants I’ve read in a long time. Gold is down over 7% since the Fed announced QE infinity. I really don’t think the issue of whether or not the Fed can exit QE is relevant to how gold is currently trading – it continues to under-perform since early October. It is this “bullish no matter what the market tells me” attitude that is likely to lead to a large wave down in gold prices. The current price action is signalling that the next big move is likely below 1500… not above 1800 (not that a break below 1500 would necessarily invalidate the longer term uptrend). My question to Jim and gold bulls is what is the next major catalyst that is going to launch gold on the next wave higher? Please tell me what it is. The Fed has launched QE infinity – the BOJ has hinted at unlimited printing and aggressive inflation targeting, the ECB is kicking around negative interest rates, Australia is holding record low rates, Brazil has lowered rates aggressively over the past year, I keep reading article after article about how physical gold is being bought by central banks and that gold coin sales are at historical highs… and on and on and on. So yes, I understand that the fundamentals are bullish – but the market is trading poorly despite this… what is it going to take – what is the next catalyst? I’m dying to know.
January 6, 2013 at 1:21 pm |
If you are really “dying to know” you need to consistently read some sites (jsmineset.com is just one of many) which can help give you reliable information. But, you can’t read them for a couple of days or weeks and then quit. Are familiar with the 10,000-hour rule? It will take some people at least this long to understand what’s happeing.
January 6, 2013 at 1:38 pm
I don’t doubt that jsmineset.com contains valuable information and I also know that Jim has been one of the best gold investor’s of all time – which is why I decided to challenge him and other bullish gold investors to please give your thoughts on what you think will be the next catalyst that will launch the next wave higher in the gold bull market? Or do you believe that there does not need to be another catalyst… that there have already been plenty – and that previous catalysts have not been fully reflected or discounted in the price of the gold?
January 6, 2013 at 12:17 pm |
I will speak to this tonight.yes,all markets get tired as they rally year after year.But the main theme of NOTES has been that as long as real yields remain NEGATIVE ,gold will be a good investment.Part of GOLD’s recent problem has been the correction in the GOLD/EURO and GOLD/SWISS crosses even though the GOLD/YEN has made all time highs.Many cross-currents are at work but the question for my readers is what perspective one has—TRADER OR INVESTOR???
January 7, 2013 at 12:53 pm |
Hey Yra, I sign up for notifications on follow-up posts and comments, but I never get anything. When you get a chance could you check your Word Press settings? Muchas gracias!
January 7, 2013 at 12:50 pm |
To vstzach: the most likely catalyst, IMO, will be MUCH higher reported and obvious inflation. If you check the data published by John Williams the real inflation rate in the US is actually around 9.2% — a number which makes a lot more sense than what the government reports. With the quantity of money printing that has already occurred — and has to continue, connecting the dots for inflation above 10% is really not that difficult.