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June 10, 2004

So, Numbers Dont Lie, Hmmm?
by Alex Wallenwein

Think again.

Unfortunately, large hedge funds that are able to move gazillions of ounces of gold on paper - and thereby are able to severely affect gold's paper-price, take these numbers as 'gospel.'

Let's look at them in turn and see what happened this time BLS Payroll Numbers Report for May 2004, reported Friday June 5, 2004)

a. Payroll Numbers

Remember the last two times these magical numbers were revealed for the months of March and April? Remember the effect these revelations had on the markets? Both had the exact same effect, although the first one for March was far stronger since it was such a "surprise": The dollar shot up, bonds, the euro, and US stock markets tanked, and gold got hammered.

What happened this time?

Last Friday the numbers were slightly lower but still darn close to President Bush's promised figures. (Question: How could the president promise or even predict such numbers when there was not one economist or "expert" to be found by financial news reporters who could agree with any other on what the numbers would be, let alone predict the actual outcome?)

But, what was the effect?

The dollar tanked, and stocks, the euro, and gold shot up in perfect unison while bonds took somewhat of a hit, although well within recent trading ranges.

Explanations, anyone?

The press dutifully stepped up to the plate and offered the following:

Reuters noted that the jobs data, although good, "failed to inspire" currency traders because an expected June increase in the Fed's short-term interest rate is already priced into the market. Hence, the dollar did not rise this time. That's a good explanation for its failure to rise - but why did it actually fall?

The problem is that it did in fact rise early on after the DOL news release. What caused it to reverse itself and head back down? Terrorism fears? Nothing happened on Friday during the time frame in question that would justify such a move. An oil price shock? Nope. Oil prices dropped into the $38 range in the aftermath of OPEC's decision on Thursday to cut output. Did the euro get an independent boost? Wrong again. No news on that front.

The bottom line is that the dollar bear-rally has fizzled out. The greenback is due for another down leg unless the Fed unexpectedly tightens by a half-point on June 30 - but that isn't going to happen.

b. Inflation Numbers

Inflationary expectations - and actually rising prices - are being downplayed for all its worth, because the truth of the matter remains that the Fed really can't afford to raise rates at all, much less aggressively so. Inflation remains, and is increasingly becoming an even bigger factor in everyone's spending decisions, but the lies continue to pour in. Long term rates are already in a sharp uptrend. If short term rates are perceived as destined to join them, business borrowing will come to a halt, given the fact that it has been so weak all along despite an unprecedented full year of absolute emergency-level rates.

(This was written on June 8, 2004. On June 9th, Al "The Jet" Greenspan as uttered some of his trademark supercharged hot-air statements - and the dollar shot up, driving gold and the euro down, way down. Today, June 10th, the dollar is already on its way back south and gold rose $2.50 by mid-morning. Events are now moving so breathtakingly fast that it's almost impossible to write a timely article anymore.)

Even if a sharper than anticipated rate hike should materialize - and there is no chance for that, given all the careful news-massaging you have observed during the last three months - the dollar will merely jump to a new short-term plateau. To sustain further rises, it will have to be followed by additional half-point hikes, and there is no way the economy will survive such an attack on liquidity.

Liquidity is the key point here, by the way. M3 is now rising at an annualized rate in excess of 20 percent. The last time this happened was in 1999 as a precaution during the run-up to the expected Y2K calamity. What calamity do they expect this time around?

Joel Skousen, editor of the World Affairs newsletter thinks it may be an expected terrorist attack of which the fedgov has advance knowledge, a planned attack on Taiwan by China, or a Russian attack on the US.

Although he makes a credible case for these possibilities, it seems more plausible that the Fed expects a serious drop in short term borrowing as a result of these coming rate hikes. Remember that the "multiplier effect" does not occur when - despite near 50-year low rates, nobody feels inclined to borrow money. That means the money supply does not grow and threatens to fall over time which then will cause serious deflationary pressures.

The point is that despite these low rates for more than a year now, borrowing by businesses has only recently begun to pick up again. With only barely an up-tick, the fed is already forced to tighten because actual inflation is beginning to run away from us - government numbers notwithstanding, of course.

There is a great article in the Dallas Morning News of May 24th by Scott Burns on why the government was able to keep the reported figures so low. It all boils down to rents and used car sales.

Rents make up a whopping 30 percent of the core CPI numbers. The same goes for used cars. Rents decreased because the Fed's emergency rates have lured everybody and their brother into buying homes, many of them people who could normally never afford one when rates were higher. At the same time there was an apartment building boom which led to a glut in residential rental space - and a concomitant price drop. Post-911 car financing options of zero-percent have caused a lot of people who would normally not have considered doing so to sell their old clunker and buy a brand new boy toy, leading to a glut in the used-car market.

Together, these two categories are responsible for two-thirds of the entire CPI! Add in lower electronics and power tool prices due to cheap imports form China and Asia in general, and you end up with a virtual "god-sent" for government numbers-crunchers under pressure to assure everyone that at least inflation was nothing to worry about.

Now, imagine what will happen to the CPI when rates rise again, pushing especially low-income ARM borrowers back out into the rental market when they can no longer hang on to their mushrooming mortgage payments! Likewise, what will happen to the used car market when these same people, who no longer have full time jobs and must do with less disposable income as a result of rising debt-service costs, have to sell their new fancy cars in order to reduce debt payments?

These developments alone - not even considering rising energy, gas, and raw materials costs due to the oil spike - will lift the CPI dramatically, forcing the Fed's hand in raising rates even further - and all that in an economic climate that can ill afford higher rates at all. Either the Fed will comply, raise rates, and squash whatever recovery we are now enjoying, or it will stand pat forcing the dollar to drop even faster.

This much-hailed "recovery" is nothing but a dead-cat bounce. This cat was dead long before it hit the ground. The only reason it bounced was that it hit "soft ground" - the soft perceptive acuities of mainstream borrowers and investors.

So much for my rant on CPI numbers.

c. ... and back to Payroll Numbers:

A very interesting observation was made by a reporter for the New York Times:

"The accelerating job growth, if it continues at or near the pace of the past three months, would save Bush from becoming the first chief executive since Herbert Hoover to preside over a decline in jobs during a four-year term. At the present pace, all of the 2.6 million jobs that were lost in the first 44 months of the Bush presidency would be recovered by August or September, barely in time for the election." DailyNews.com

Guess why the President has picked that 300,000 jobs per month figure - and guess why the figures turn out to reflect exactly that?

Can you expect this trend to continue until the election? Yep - because it's not a "trend" at all. It's a conscious decision to deceive, and as such can be carried on until both of the following happen: (a) somebody notices the lies, and (b) the press reports on it.

Now here comes the really big enigma - and the proof that these figures are in fact lies:

The same article reports fed governor Kohn as observing that the unemployment rate "has remained stable at 5.6% during the past six months."

Hang on a second!

How does that jibe with the claim that almost a million new jobs were created in the last three months alone?? I was never real strong in math, but my gut tells me there's something fishy here. If a total of 2.6 million workers lost their jobs during Bush's reign, and 1.4 million jobs were regained during that time, with 1.2 of those 1.4 million created this year alone, then why did that not visibly impact the unemployment rate during the last six months?

As you can see in the chart below, at its lowest point in recent history the unemployment rate bottomed out at 4% in late 2000. It has been in a confirmed uptrend ever since (although the chart covers only 2003).

By BLS statistics, in May 2003, the number of unemployed workers was 8.96 million and we had a jobless rate of 6.1 percent. In May of 2004 the BLS reports the number of unemployed at 8.2 million and the jobless rate at 5.6. We know that the unemployment rate hovered near 5.6 percent since December 2003 (six months including May, or half of the total period),

In summary, it looks like this:

P1 (5/03 to 5/04): 800,000 new jobs;
Unemployment drops from 6.1% to 5.6%

P2 (1/04 to 5/04): 1,200,000 new jobs;
Unemployment stays the same!

Keep in mind that P2 is only the latter half of P1, not a separate time period.

We are told that today we have supposedly 1.2 million fewer jobless people than we had in January this year - so the jobless rate certainly should have declined, shouldn't it?

A smaller decrease in jobless workers between May last year and this year was less than a million (about 800,000) and that caused the unemployment rate to drop from 6.1 to 5.6 percent during the year. But yet, we are told that a 50% higher gain in jobs (1.2 million) during a shorter period (the latter half of the year) resulted in absolutely no change in the unemployment rate, whatsoever???

Let's allow for the fact that, theoretically speaking, there could have been an increase in the working population during P2 (the latter half of P1) that wiped out the percentage reduction in unemployment the 1.2 million additional jobs normally would have wrought.

But if that was true, then in order for P1 (the full year) to have witnessed such a reduction in the unemployment rate (from 6.1 to 5.6 percent) there must have been tremendous losses in the working-age population during the first half of P1.

Did the working-age population of the US shrink that much between May 2003 and December 2003? Highly unlikely. If there are such figures, I'd like to see them.

There reportedly are 8.2 million unemployed persons (have no job but were looking for one in the past 4 months) today. Since we supposedly gained 1.2 million jobs this year, as of January 1, 2004, there must have been 9.4 million unemployed. That's more unemployed than there were in May of 2003 (8.96 million). But we know that since December 2003, the unemployment rate remained at or near 5.6 percent.

So, we are asked to believe then that the unemployment rate (the percentage rate) dropped from 6.1 percent to 5.6 percent during a time while the total number of unemployed actually increased? How does that work?

Uhh ... excuse me, Mr. BLS economist: those numbers just don't add up!

We are given no explanation. Reporters don't report about this. Analysts don't analyze it. All manner of government and media types just shut up - and leave you hanging there, believing in a "Bush recovery" - just in time for an important election. How conveeeeeenient!

What's the effect of these lies on the price of gold?

Well, considering that the price of gold - since determined at an almost purely paper-based exchange - itself is a lie, technically speaking the effect is not big. But psychologically, of course, many a hedge fund manager will feel a lot of pressure to sell gold when he thinks he "realizes" the resulting upward pressure on US interest rates and therefore the dollar from the "stellar economic performance." (Maybe those who read this who are hedge-fund investors should send their fund manager a copy of this article!)

Lies upon lies, to achieve nothing but a psychological effect - on a false presumption. That's the current state of the world's financial markets. No wonder gold investors - seeking to invest in truth - get discouraged sometimes. But the trend is your friend, now. Even the lies only serve to dampen the irrepressible upward momentum - and that only for a time.

Keep hanging on to your gold - lest you play into the hands of those who want to buy it from you - dirt cheap!

Got gold?

Alex Wallenwein
Editor, Publisher
The Euro vs Dollar Monitor

Just like driving your car, investing only makes sense if you can see where you are going. The Euro vs Dollar Monitor is your golden windshield wiper that removes the media's greasy film of financial misinformation from your investment outlook. Don't drive your investment vehicle without it!

Copyright © 2003-2008 Alex Wallenwein

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