Wednesday, April 03, 2013 - Traps Set

Mark your Calendar, April 5 & 6 and make your reservations for the 2013 Wealth Protection Conference in Tempe, AZ. For conference information visit www.buysilvernow.com or click here or call 480-820-5877. This year's conference features Roger Weigand, Nathan Liles, David Smith, Mark Liebovit, Arch Crawford, Ian McAvity, Bill Tatro, and I will speak on Friday. There is an expanded Q&A session with all speakers on Saturday. I hope you can attend.

Traps Set

by Sinclair Noe

DOW – 111 = 14,550
SPX – 16 = 1553
NAS – 36 = 3218
10 YR YLD - .05 = 1.81%
OIL – 2.72 = 94.47
GOLD – 18.30 = 1558.90
SILV - .28 = 27.08

We have a day like today and we are reminded of the fleeting nature of a bull run. The Russell 2000 cracked this week. It tried to get up yesterday, but small-caps couldn’t hold their ground. Transports followed with a thud. Both the transports and the Russell registered slightly lower highs to kick off the second quarter. Commodities have moved lower as of late; gold, silver, platinum, copper all sneaking back to support. Physical demand for the metals remains very strong and there appears to be a disconnect between the paper market and the physical market. It feels like someone is trying to set a trap for a greater fool.

I don't know whether this is a technical move, or if there is a fundamental reason. The news doesn't always help. The big news story of the day is that the Rutgers basketball coach yelled at the players and the school fired the coach. Yeah that's it. North Korea is purportedly ready to nuke the world, Syria continues to crumble under the brutality of a sick dictator, Egypt is arresting comedians, Italy elected comedian and he doesn't want a government, Europe is borderline in a Depression, depending on which line of which border, Eurozone unemployment reached a record 12pc in February and looks certain to ratchet higher as fiscal cuts deepen and manufacturing continues to struggle, raising the spectre of social explosion across southern Europe, the US is supposed to have a great recovery except we all know it isn't great, and the stock market seems wildly disconnected from reality.

So, I'm not really sure what the fundamentals are telling us, and the technicals aren't quite conclusive, and it really doesn't matter. Selling is selling. In the market, the final word, the ultimate arbiter of any dispute, is always price. There is no guarantee we will see a major sell-off this month, or even in May, or even a summer swoon. We've weathered the fiscal cliff, the sequester, and the Cyprus Bank Heist; which simply means that anything bigger than a nice orderly pullback would be unexpected; not out of the question, just unexpected.

The stock market is propped up to the tune of $85 billion a month in Federal Reserve Treasury and mortgage backed securities purchases. Today, John Williams, the president of the Federal Reserve Bank of San Francisco, floated a trial balloon, and it didn't float very well. When the Fed might begin tapering off quantitative easing has been a key question for markets since the Fed’s policy meeting in March. The Fed has said it would continue the purchase program until it sees “substantial” improvement in the labor market.

In a speech today, Williams said: “Assuming my economic forecast holds true, I expect we will meet the test for substantial improvement in the outlook for the labor market by this summer. If that happens we could start tapering our purchases then. If all goes as hoped, we could end the purchase program sometime late this year.”

Williams compared Fed policy to driving a car up a long, steep hill. The Fed is pushing down hard on the gas pedal but once the road gets flatter- the Fed “will have to lighten up on the accelerator a bit.” It sounds like a good analogy, but it's not accurate. A better analogy is that the Fed has been throwing money out of a helicopter hovering directly over Wall Street, and this has made Wall Street a ton of money while having a very minimal impact on the rest of the country. And if the Fed lightens up on the money dump, Wall Street will throw a tantrum.

Williams said that ending the bond purchases is not a tightening of policy and the Fed’s $3 trillion balance sheet will add stimulus and put downward pressure on rates. Wall Street responded like a baby that just had his candy stolen.

Today, the ADP jobs report for March was the fifth economic indicator in the past week to disappoint investors with a lower-than-expected reading.  ADP said the private sector generated 158,000 jobs in March.  The pace of hiring was revised up sharply in February, but that tells us little about where the economy is headed in the second quarter of the year. The ADP report is not great at forecasting the government's monthly jobs numbers due Friday morning; estimates are calling for about 190,000 new jobs, so although not a predictor, today's report was disappointing.

Last month, the Department of Labor released new job market numbers, which suggests that the economic recovery is perpetuating the trend of college graduates turning to minimum wage jobs. Though there has been significant employment gains, many recent college graduates have been forced to resort to low-wage, low-skilled jobs. There are now 13.4 million college graduates working for hourly pay, up 19 percent since the start of the recession.

According to the Department of Labor, there are about 284,000 graduates with at least a bachelor’s degree that were working minimum wage jobs in 2012.

In a recent study released by NELP, the National Employment Law Project, the low-wage occupational sector is the fastest growing sector in the economy, even though this sector only lost about one-fifth of its jobs. Meanwhile, the middle-wage job sector—which usually serves as the pathway into the workforce for many recent graduates—was hardest hit, and has been the slowest to recover.

According to the NELP study: Lower-wage occupations were 21 percent of recession losses, but 58 percent of recovery growth; Mid-wage occupations were 60 percent of recession losses, but only 22 percent of recovery growth.

I'm guessing student loan debt is part of the problem here.

There are jobs, they're just lousy jobs. The Bureau of Labor Stats reports Workers in seven of the 10 largest occupations typically earn less than $30,000 a year, a far cry from the nation's average annual pay of $45,790. Food prep workers are the third most-common job in the U.S., but have the lowest pay, at a mere $18,720 a year for 2012. Cashiers and waiters are also popular professions, but the average pay at these jobs tallies up to less than $21,000 annually. There are 4.3 million retail sales workers out there, making them the most common job, but the position pays only $25,310 for the year.

Among the 10 most popular professions, only the nation's 2.6 million registered nurses earn a good living, bringing home nearly $68,000 a year on average; and they work hard for every dime.

Wages have been in the spotlight this year as the debate over income inequality intensified. Middle-class Americans have been losing ground, as median household income dropped by more than $4,000 since 2000. Part of this decline stems from a disappearance of middle-class jobs and an explosion of lower-paying ones. Some 58% of the jobs created during the recovery have been low-wage positions, according to a 2012 report by the National Employment Law Project. These low-wage jobs had a median hourly wage of $13.83 or less.

The problem with inequality is the same problem a kid faces when he's playing the board game Monopoly with his parents. The kid knows that if he beats his parents, if he gets all the money and all the properties, he wins the game, but the game ends and he gets sent to bed. Somewhere we forgot that when one player, or a very small group of elite players end up with all the money, the game is over. That's a great analogy I read in a book called “Down the Up Escalator”.

After the shot across the bow in 2008, you might have expected that regulators and market participants would use the experience to change for the better, to become more prudent, and to reduce the sorts of risky behaviors that almost crashed the entire system. Instead of having been reduced, financial risks loom larger than ever. It's why the next downturn will be just as bad – if not worse – than the last one. Nothing has been learned, and nothing has been changed. The most basic of human behaviors, the tendency towards moral hazard (so well understood by the insurance industry) has been completely overlooked by the Fed. The very same Fed that could not and did not see that a housing bubble was forming is now equally complacent about corporate bond yields touching all-time record lows across the entire spectrum, right down to CCC junk that sits one skinny notch above default.  Stocks are for show, but bonds are for dough, so the saying goes;and with bonds now priced for perfection if not for something even better, there's no room for error.

I'm not ready to raise the crash flag, but I keep getting this uneasy feeling that we're walking into a trap.