The Q4 2011 GDP reading of +2.8% produced what may appear to be a respectable headline number, a full percentage point above Q3 GDP growth of 1.8%. On the surface, the Q4 report also compared favorably to an increase in real GDP of 1.7% for all of 2011. But 2.8%, even at first look, is still softer than the 3.0% gain in real GDP logged for 2010, repeating a pattern that we’ve seen over the past few years: GDP rises, only to drop off again.
Although it may be tempting to look at the economy as a glass that’s half full, I’m afraid it’s far emptier than it looks. Diving into the Q4 GDP report, we see that two-thirds of the amount of growth reported (1.9%) was due to private inventory build-up. (According to standard accounting practice, growth in inventory increases GDP, while sales of inventory reduces it.) Drilling further, the stat that is most meaningful is the real final sales of domestic product -- GDP minus the change in private inventories. This data point eked out only a 0.8% increase in Q4 2011, compared with an increase of 3.2% in Q3 2011. That is very telling.
Although one could conceivably spin the inventory growth number as businesses being optimistic about future sales and building inventories, that scenario is doubtful given weaker retail sales of late. Thus, it seems likely that inventories will be drawn down over the next few quarters, which will be a drag on future GDP numbers.
Retail sales growth has not been strong, and a slow pace is anticipated for 2012. The National Retail Federation (NRF) is projecting 3.4% sales growth for the year, down from 4.7% in 2011. The NRF told Bloomberg News that expansion in 2012 will be “incremental, modest,” citing the housing slump as the “biggest drag” on the U.S.
Indeed, the S&P/Case-Shiller Home Price Index continues to show decreases in the housing market. The 20-city composite for November, just released, showed a 1.3% decline for the month. Year over year, prices are down 3.7%. Nationally, home prices remain below year-ago levels, once again sparking questions about when and where the housing market will finally bottom.
Another weakness in consumer spending was reported by the Commerce Department: Personal income grew by 0.5% in December, up from a 0.1% rise in November. Spending was flat, however. The personal saving rate, meanwhile, was 4.0% in December, compared to 3.5% in November. Saving instead of spending may be good for consumers’ personal balances sheets, but it doesn’t do much good for an economy that needs to gain traction. Additionally, sales increases still appear to be driven by increases in debt which is not sustainable.
No wonder the Fed has been making such somber projections. Last week, its “Economic Projections of Federal Reserve Board Members and Federal Reserve Bank Presidents” pegged real GDP growth at 2.2% to 2.7% for 2012 (based on the “central tendency,” which excludes the three highest and three lowest projections). This range of projections for 2012 was softer than those given in November of 2.5% to 2.9%, and was considerably lower than the projections made in June of 3.3% to 3.7%.
GDP readings of late have been helped by inventory and inflation numbers that are not likely to be repeated. Plus, continued fiscal problems in the Euro zone will probably hamper U.S. exports, while decreases in U.S. government spending will also hit demand at home. For a long time I have maintained that the U.S. economy is in a “muddle through” target of around +2.0%. Last year when estimates were for 2011 to show economic growth of 4% to 5% I looked so bearish. Now, not so much. Even the muddle through target of +2.0% would have been better than what we got.
For 2012, I believe we will be lucky to hit the muddle through number again this year. As for stocks, expect the market to take its cue from the lukewarm GDP forecast.
All information contained herein is for informational purposes only. This is not a solicitation to offer investment advice or services in any state where to do so would be unlawful. Past results are no guarantee of future results and no representation is made that a client will or is likely to achieve results that are similar to those shown. Please refer to Astor's Form ADV, Part 2 for additional information and risks. Analysis and research are provided for informational purposes only, not for trading or investing purposes. Astor and its affiliates are not liable for the accuracy, usefulness or availability of any such information or liable for any trading or investing based on such information. There is no assurance that the Astor’s investment programs or funds will produce profitable returns, you may lose money. 500001-189
Tuesday, January 31, 2012
Tuesday, November 29, 2011
Giving Thanks for Treading Water
Reflecting back on Thanksgiving, I recall fondly how everything was just like it always was: the same turkey and dressing, the classic side dishes that no one can change, and—thankfully—the same faces that we saw last year. From the cranberry sauce to the football games, nothing had changed.
The repeat performances, however, weren’t limited to the holiday table. Once again, the S&P is trading between 1180 and 1190. (On Monday, November 28, the S&P was trading around 1185, after making about a 2.25% gain). That’s just within a few points of where it closed last Thanksgiving, with a settlement of 1189.40 on November 26, 2010. And, it’s within a few points of where we closed in 2004, with a settlement of 1181.76 on November 24 of that year.
How you interpret these numbers depends a lot on your point of view. You might be inclined to grouse that the “same ol’, same ol’” is fine for Aunt Betty’s butternut squash, but not for the performance of a key stock market benchmark. But given all the problems of the world—persistent unemployment, relatively slow growth in GDP, and concerns about debt of every flavor and variety (sovereign, public, and private)—unchanged is not bad. The alternative, as we recall from the debt debacle of 2008 and the worst recession since the Great Depression, is for a massive shift to the downside.
Often I’m asked “how did we get here; what’s going on?” This question is usually preceded by a noteworthy move in the market: the Dow gaining 400 points to trade up to 11,500—or the Dow falling 400 points to trade down to 11,500 (or whatever price point you’d like). We focus so much on these separate moves that we don’t “get” the big picture: which is whole lot of unchanged, despite the volatility in the middle.
The real answer to the question “so what’s going on” is: nothing. The market, that arbiter of perception and reality, has made its pronouncement: nothing is going on. Sure, the stock market gyrates based on there being “deal or no deal” in the Euro zone, or perceptions of the health of the U.S. economy (How are corporate earnings? What’s the outlook for the next quarter? Will the unemployment needle budge?). But if we take a step back from the day-to-day or even the month-to-month, the line is a lot flatter than you might expect.
We’re treading water, which given all the problems out there is not a bad thing. A market that was relatively unchanged from one Thanksgiving to the next is truly something to be thankful for—given all the fear, anxiety, and uncertainty in the world, economic and otherwise. Even the unemployment picture, which has been persistently pessimistic, can’t ruffle the market too much. Currently we have about 131.5 million people working, which is roughly on par with the number of people in the workforce in 2000. Of course, the population has grown, which means that the picture is worse now than a decade ago—but it’s not so bad as to upset the market.
Treading water is not something we can do for the long term. The problems are there and, if not addressed, they will get worse, as you will read in our 2012 Outlook. As we enter an election year, the political debate has diverted our attention from the real problems to strengthen the economy and provide education and employment opportunities for more people. Instead, they fight: red state vs. blue; raise taxes or lower them. We need to look, instead, at systemic issues such as high consumer debt levels, which we’ll address in upcoming blogs.
For now, though, let us take a moment to pause and give thanks. Nothing going on is good news, indeed, and treading water will keep us from sinking.
All information contained herein is for informational purposes only. This is not a solicitation to offer investment advice or services in any state where to do so would be unlawful. Past results are no guarantee of future results and no representation is made that a client will or is likely to achieve results that are similar to those shown. Please refer to Astor's Form ADV, Part 2 for additional information and risks. Analysis and research are provided for informational purposes only, not for trading or investing purposes. Astor and its affiliates are not liable for the accuracy, usefulness or availability of any such information or liable for any trading or investing based on such information. There is no assurance that the Astor’s investment programs or funds will produce profitable returns, you may lose money. 500001-136
Thursday, November 10, 2011
Behind the Unemployment Numbers: Demand, Wages, and Skill Levels
As all eyes, especially political ones, remain on the jobless numbers, the Employment Situation report for October, released on Friday November 4, held no upside surprise. The needle budged a hair, with a net gain of 80,000 people who found jobs during the month. The private sector added 104,000 jobs, while the government shed 24,000 of them. Overall, the unemployment rate dropped modestly to 9.0% from 9.1% in September, but did not move out of the range between 9.0 and 9.2 that we’ve seen since April 2011.
Although employment numbers are very important—and the direction in employment trends typically points to where the economy is going—we cannot lose sight of the fact that unemployment is really a symptom of much larger problems that need to be addressed: demand, wages, and skill levels.
For argument’s sake, let’s say that 1 million people find work, dropping the number of unemployed to about 12.9 million from just under 13.9 million currently, out of a total civilian workforce of some 154.2 million. Would the resulting unemployment rate of about 8.4% be the cure for all that ails us? What makes unemployment in the eights instead of the nines so significant? There have been periods in history when the American economy experienced strong growth with 9% unemployment. When I was in college, 6% unemployment was considered inflationary. The “good old days” when unemployment was under 5%, as we saw in the 1990s, was considered full employment—and was not sustainable.
The number isn’t as important as what drives it. In order for our hypothetical 1 million people to get hired, they need the right skills and experience to tap into the existing and future job demand. The educational attainment statistics (Table A-4) in the employment report should take no one by surprise: The lower the education level the higher the unemployment rate. In October, those who have less than a high school diploma had an unemployment rate of 13.8%; for a high school graduate, 9.6%; some college or associate’s degree, 8.3%; bachelor’s degree and higher 4.4%. As if we didn’t know it already, education and training matters—and yet the United States has a high school graduation rate of less than 70%.
Looking at unemployment by occupation (Table A-13) the rate is very low for management, professional, and related occupations at 4.4%, while farming, fishing, forestry, construction and extraction industries are all above 14% unemployment. Among the industries with the lowest unemployment rates are education and health services (5.6%), financial activities (5.8%), and information (6.6%). Construction tops the charts with a 13.7% unemployment rate. This is the real story of employment in the United States, one that we can’t ignore any longer. The continued development of a skilled workforce will position Americans to take advantage of the jobs that are created here. The evolution in our economy, with basic manufacturing outsourced to countries with a comparative advantage in labor costs, has resulted in displacement of jobs (the textile industry in the U.S., for one). Nonetheless, it’s an economic scenario that cannot be reversed, even in the name of “saving” or “creating” jobs in the U.S. The economics simply don’t justify manufacturing here what makes more sense to produce over there. At the same time, landing a well-paying job in the U.S. requires workers to have the requisite education, training, and skills.
Two other factors that we cannot overlook are demand and wages. With productivity at high levels, having risen by 3.1% in Q3 2011, employers are able to realize more output per worker, which is a good thing. Increases in worker productivity means companies are more efficient; they are able to do more with less, which is one of the benefits of having gone through an economic contraction. (If you’re going to endure the pain, you better have a gain, right?) At some point, productivity will max out, and if demand continues to grow companies will increase hiring. So where is the demand?
We can’t blame “the economy,” which has become a blanket excuse, without being more precise. Consumers are still cleaning up their balance sheets. Before the recession, people consumed 10 years’ worth of stuff in five years. The problem wasn’t just overconsumption, but an inefficient use of capital--selling appreciating assets to buy depreciating ones.
Demand is not the only variable, however; the cost of labor is also a factor. During the recession, while the value of assets (stocks, real estate) declined, wages did not. The price of labor, while somewhat improved, remains high, which makes investing to hire new people a risky proposition for employers who are not certain about future demand.
Making a dent in the unemployment rate is everyone’s goal these days, from politicians to picketers, but it’s not simply a matter of getting companies to hire someone--anyone--as if there is this big unfilled pool of jobs that is being kept under wraps. Demand for goods and services must increase to levels that give employers the confidence that they can hire, particularly as the cost of labor remains relatively high. And the people who are seeking those jobs must have the skills and experience to assume them.
All information contained herein is for informational purposes only. This is not a solicitation to offer investment advice or services in any state where to do so would be unlawful. Past results are no guarantee of future results and no representation is made that a client will or is likely to achieve results that are similar to those shown. Please refer to Astor's Form ADV, Part 2 for additional information and risks. Analysis and research are provided for informational purposes only, not for trading or investing purposes. Astor and its affiliates are not liable for the accuracy, usefulness or availability of any such information or liable for any trading or investing based on such information. There is no assurance that the Astor’s investment programs or funds will produce profitable returns, you may lose money. 500001-123
Thursday, October 13, 2011
Gold Speaks--And the Story Is Compelling
Gold, as expected, has lost some of its luster, with prices falling by about $300 an ounce from around $1,900 an ounce in early September to just below $1,600 a few weeks later. (Keep in mind that as recently as early 2002, gold was trading below $300 an ounce, which means bullion lost more in one month than it was worth about nine years ago.) Although gold has recovered somewhat since then--currently trading around $1,681 an ounce --the recent selloff hardly came as a surprise. Previously we stated that gold is a “buy the rumor, sell the fact” commodity, which in the absence of any fears of a new crisis (old ones that resurface tend to get shrugged off) just doesn’t have any reasons to keep rising.
Beyond the price movements, however, gold seems to be telling a compelling story that’s worth listening to--or at least taking into consideration. First of all, gold is signaling that the world is not coming to an end. Yes Euro zone default concerns persist and fears of a double-dip recession are looking more likely to come to fruition. But these are not new fears, which is what gold would need to continue its climb. As far as gold is concerned, the current outlook is for no new cataclysms.
As I put the pieces of the story together, it seems clear to me that gold is also looking farther down the road than most of us, and what it sees isn’t all that bad. It might even be pretty good.
Gold seems to be giving a nod to the Fed’s monetary policies, including its latest move to buy longer-term bonds, instead of launching another round of quantitative easing (QE3). Thus, while the Fed is keeping interest rates low, it has not lowered them any further, which is why stock prices and gold got hammered in September. But that’s not all gold seems to be saying.
Gold appears to be indicating a scenario that will reverse the Fed’s practice of paying interest on reserves that banks have on deposit. Without a return on that money, it will flow out into the economy in the form of increased lending by banks, which will help fuel growth in response to demand. Gold won’t benefit from that at all and, as a result, its price has fallen.
And there’s more to this story as well. Gold’s price drop indicates that we probably will emerge from the economic contraction/recession without hyperinflation. This is where the Fed’s policies really shine. The Fed expanded the monetary base, but not money supply. (Think of the monetary base as cookie dough and the money supply as cookies that get baked. We’ve got a lot of dough in the system, but the number of cookies coming out of the oven hasn’t changed.) In financial terms, the Fed’s actions, including extremely low, accommodative interest rates, increased the monetary base (dough), but banks have not been lending money in a way that increases the amount of money (cookies) out there. The banks would rather keep their dough (pardon the pun) with the Fed to earn interest.
By constraining money supply while increasing the monetary supply the Fed was able to contain inflation. As we’ve written before, although some people complain that the Fed’s actions equate to “just printing more money,” the truth is the money supply has actually stayed at the banks.
Until now, gold has been a beneficiary of the Fed’s actions to keep interest rates low. Unless you were an institution, you had to do something with your cash other than keep it on the sidelines. You had to take a shot, which pushed the price of many assets including gold higher. If you bought gold over the past one or two years, then good for you--you made money. But now the premise for investing in gold has passed its prime.
Gold has a tale to tell these days for those who care to listen. The price is down and that’s basically good news for what could very well develop in the economy: the probability of an ordinary contraction/recession with no downside surprises, the likelihood of no hyperinflation, and an expected change in Fed policies sometime in the future to help increase the amount of money to finance new economic growth.
With gold off its highs, events may prove to be pretty uneventful (barring any sudden, unforeseen crises, that is)--and that’s a story worth listening to.
Beyond the price movements, however, gold seems to be telling a compelling story that’s worth listening to--or at least taking into consideration. First of all, gold is signaling that the world is not coming to an end. Yes Euro zone default concerns persist and fears of a double-dip recession are looking more likely to come to fruition. But these are not new fears, which is what gold would need to continue its climb. As far as gold is concerned, the current outlook is for no new cataclysms.
As I put the pieces of the story together, it seems clear to me that gold is also looking farther down the road than most of us, and what it sees isn’t all that bad. It might even be pretty good.
Gold seems to be giving a nod to the Fed’s monetary policies, including its latest move to buy longer-term bonds, instead of launching another round of quantitative easing (QE3). Thus, while the Fed is keeping interest rates low, it has not lowered them any further, which is why stock prices and gold got hammered in September. But that’s not all gold seems to be saying.
Gold appears to be indicating a scenario that will reverse the Fed’s practice of paying interest on reserves that banks have on deposit. Without a return on that money, it will flow out into the economy in the form of increased lending by banks, which will help fuel growth in response to demand. Gold won’t benefit from that at all and, as a result, its price has fallen.
And there’s more to this story as well. Gold’s price drop indicates that we probably will emerge from the economic contraction/recession without hyperinflation. This is where the Fed’s policies really shine. The Fed expanded the monetary base, but not money supply. (Think of the monetary base as cookie dough and the money supply as cookies that get baked. We’ve got a lot of dough in the system, but the number of cookies coming out of the oven hasn’t changed.) In financial terms, the Fed’s actions, including extremely low, accommodative interest rates, increased the monetary base (dough), but banks have not been lending money in a way that increases the amount of money (cookies) out there. The banks would rather keep their dough (pardon the pun) with the Fed to earn interest.
By constraining money supply while increasing the monetary supply the Fed was able to contain inflation. As we’ve written before, although some people complain that the Fed’s actions equate to “just printing more money,” the truth is the money supply has actually stayed at the banks.
Until now, gold has been a beneficiary of the Fed’s actions to keep interest rates low. Unless you were an institution, you had to do something with your cash other than keep it on the sidelines. You had to take a shot, which pushed the price of many assets including gold higher. If you bought gold over the past one or two years, then good for you--you made money. But now the premise for investing in gold has passed its prime.
Gold has a tale to tell these days for those who care to listen. The price is down and that’s basically good news for what could very well develop in the economy: the probability of an ordinary contraction/recession with no downside surprises, the likelihood of no hyperinflation, and an expected change in Fed policies sometime in the future to help increase the amount of money to finance new economic growth.
With gold off its highs, events may prove to be pretty uneventful (barring any sudden, unforeseen crises, that is)--and that’s a story worth listening to.
Friday, September 23, 2011
The Recession is Coming, The Recession is Coming
Fears of a double-dip recession have been swirling since the recovery began back in 2009. Economists, advisors, and investors have predicted, forecasted, rationalized and, in some cases, even hoped that a double-dip was imminent. The reality is they have been wrong. The economy actually thrived over the past two years, producing record levels of aggregate GDP at about $15 trillion, record levels of personal income at $13 trillion, and record low interest rates and inflation, along with high levels of productivity. The stock market produced double-digit returns in both 2009 and 2010. Even as the worst quarter for stock market performance since Q4 2008 nears a close, the market is still up from where it was a year ago.
Admittedly, unemployment has remained stubbornly high, and housing has yet to recover. While GDP hit record levels, the pace of growth has been below historic average growth rates. As a result, the last two years have felt less like an expansion than the statistics would support.
Looking back, to have flinched at the headlines about a weak economy at any point along the way (and believe me, there were compelling reasons to flinch) would have been a mistake. Market timing is challenging at best, and one wrong move can erase the profits of the last ten good moves. The portfolio management team and I have navigated away from market timing in our philosophy, always focusing on long-term verifiable economic trends. To that end, the data is suggesting that the next recession is here. Although it appears a recession is upon us, there’s no reason to panic.
As we sit here today, with the portfolio down on the year (albeit less than major market averages have suffered) we anticipate becoming more defensive, with possible inverse/negative exposure in the future. We believe this repositioning should reduce the overall risk and volatility of the portfolio further.
Based on the current economic climate, it appears the decline will be much more typical of garden-variety recessions/contractions, characterized by a slowing economy and declining financial markets, but within ranges that do not destroy investor wealth beyond levels that should be recouped during the next expansion. I compare it to a gloomy April day in Chicago with the temperatures at 41 degrees and a mix of rain and snow. It’s either a bad spring day or a mild winter day for Chicago. This contraction/recession could resemble that kind of day: either a slow growth period or a mild contraction.
The global economy is awash with liquidity, corporate balances sheets are healthy, and worker productivity is high. When expansion resumes and demand resurfaces (by that we mean real, sustainable demand) the labor market will be ready and willing to get back to work at fair wages. Then, the economy is going to light up like you would not believe. We cannot say what will spark demand, but the ingredients are there, and will create an expansion that will surprise even the most optimistic economist on the upside. It’s coming at some point. Unfortunately, it’s not going to happen in early 2012. Outside headwinds still exist that currently do not support necessary growth rates. When it does arrive though, we will identify it and ride it for all it is worth.
Analysis and research are provided for informational purposes only, not for trading or investing purposes. Astor and its affiliates are not liable for the accuracy, usefulness or availability of any such information or liable for any trading or investing based on such information. There is no assurance that the Astor’s investment programs or funds will produce profitable returns, you may lose money. 900001-69
Admittedly, unemployment has remained stubbornly high, and housing has yet to recover. While GDP hit record levels, the pace of growth has been below historic average growth rates. As a result, the last two years have felt less like an expansion than the statistics would support.
Looking back, to have flinched at the headlines about a weak economy at any point along the way (and believe me, there were compelling reasons to flinch) would have been a mistake. Market timing is challenging at best, and one wrong move can erase the profits of the last ten good moves. The portfolio management team and I have navigated away from market timing in our philosophy, always focusing on long-term verifiable economic trends. To that end, the data is suggesting that the next recession is here. Although it appears a recession is upon us, there’s no reason to panic.
As we sit here today, with the portfolio down on the year (albeit less than major market averages have suffered) we anticipate becoming more defensive, with possible inverse/negative exposure in the future. We believe this repositioning should reduce the overall risk and volatility of the portfolio further.
Based on the current economic climate, it appears the decline will be much more typical of garden-variety recessions/contractions, characterized by a slowing economy and declining financial markets, but within ranges that do not destroy investor wealth beyond levels that should be recouped during the next expansion. I compare it to a gloomy April day in Chicago with the temperatures at 41 degrees and a mix of rain and snow. It’s either a bad spring day or a mild winter day for Chicago. This contraction/recession could resemble that kind of day: either a slow growth period or a mild contraction.
The global economy is awash with liquidity, corporate balances sheets are healthy, and worker productivity is high. When expansion resumes and demand resurfaces (by that we mean real, sustainable demand) the labor market will be ready and willing to get back to work at fair wages. Then, the economy is going to light up like you would not believe. We cannot say what will spark demand, but the ingredients are there, and will create an expansion that will surprise even the most optimistic economist on the upside. It’s coming at some point. Unfortunately, it’s not going to happen in early 2012. Outside headwinds still exist that currently do not support necessary growth rates. When it does arrive though, we will identify it and ride it for all it is worth.
Analysis and research are provided for informational purposes only, not for trading or investing purposes. Astor and its affiliates are not liable for the accuracy, usefulness or availability of any such information or liable for any trading or investing based on such information. There is no assurance that the Astor’s investment programs or funds will produce profitable returns, you may lose money. 900001-69
Tuesday, September 13, 2011
When Zero Is Zero
After cruising along at a slow, but steady pace for two years, the economy seemed to stall around mid-year 2011. Q2 2011 GDP, which originally had been estimated at + 1.3%, was ratcheted back in a second estimate to a rise of 1.0%. While growth is growth, its anemic nature made one wonder if the patient would rally or sink into a relapse. The start of Q3 2011 brought with it a number that is impossible to ignore: the big goose egg, an empty basket—zero.
The Employment Situation Report released on the first Friday of September showed that no jobs– none, nada—were added in August, and the unemployment rate remained at 9.1%. The 17,000 jobs that were added were completely offset by the loss of 17,000 government jobs. Even the Bureau of Labor Statistics sounded a little disheartened when it stated, “the [unemployment] rate has shown little change since April.”
Zero job growth signals that the odds for a contraction are significantly higher than any time since the recovery began. In fact, my finger is on the trigger. At Astor, we responded to the latest data by adjusting our portfolio to protect against the possibility of a shock to the economy. We have not become maximum defensive, yet, but we did reduce equity exposure even further, and also added some non-correlating defensive positions. It’s possible that we could become more defensive and even establish an inverse position in the third quarter, but only time will tell.
As of this writing, the data are indicating GDP growth for the year of around 1%. While hardly robust, it is far better than the -6.3% economic contraction experienced in Q4 2008 and job losses of 500,000 per month. Given how far we’ve come up from the bottom, flat is okay. Not great—but okay.
The markets are taking a breather as stock returns and the economic growth of the past few years are not sustainable. Even if we stay right here for the year, the three-year economic performance will look pretty good in the rearview mirror, especially when we consider how tough the road was in 2008.
Despite some investor fears to the contrary, this is not 2008 all over again. I’ve said it before, but it bears repeating: in 2008 we had a recession on top of a financial crisis. This time around, if the economy does slip from low growth into recession it will be a garden-variety contraction.
Meanwhile, the government keeps trying to jumpstart the economic engine by focusing on jobs. Against the backdrop of an unemployment rate that persists over 9% (and with an election year approaching) President Obama unveiled a $447 billion job-creation program, which includes tax cuts and a spending plan. After the job program was announced last week, economists were all over the map with their assessments.
As for this economist, I expect job growth to be more in line with demand. Even with government assistance, businesses will not hire meaningful numbers of new workers unless demand for their goods and services pick up.
I have never been a market timer, and I don’t intend to start now. I much prefer to analyze the economic data and identify the prevailing trend, which history has shown to be a far better investment strategy than guessing which way the wind will blow next. As for now, the numbers spell out a weakening economy and a greater chance of a recession occurring. After all, it’s hard to argue with a zero in the employment report. But we need to remember we have come a long way baby, even if it doesn’t feel like it. So if we do pause or even contract from here it’s not a bad place to rest.
The Employment Situation Report released on the first Friday of September showed that no jobs– none, nada—were added in August, and the unemployment rate remained at 9.1%. The 17,000 jobs that were added were completely offset by the loss of 17,000 government jobs. Even the Bureau of Labor Statistics sounded a little disheartened when it stated, “the [unemployment] rate has shown little change since April.”
Zero job growth signals that the odds for a contraction are significantly higher than any time since the recovery began. In fact, my finger is on the trigger. At Astor, we responded to the latest data by adjusting our portfolio to protect against the possibility of a shock to the economy. We have not become maximum defensive, yet, but we did reduce equity exposure even further, and also added some non-correlating defensive positions. It’s possible that we could become more defensive and even establish an inverse position in the third quarter, but only time will tell.
As of this writing, the data are indicating GDP growth for the year of around 1%. While hardly robust, it is far better than the -6.3% economic contraction experienced in Q4 2008 and job losses of 500,000 per month. Given how far we’ve come up from the bottom, flat is okay. Not great—but okay.
The markets are taking a breather as stock returns and the economic growth of the past few years are not sustainable. Even if we stay right here for the year, the three-year economic performance will look pretty good in the rearview mirror, especially when we consider how tough the road was in 2008.
Despite some investor fears to the contrary, this is not 2008 all over again. I’ve said it before, but it bears repeating: in 2008 we had a recession on top of a financial crisis. This time around, if the economy does slip from low growth into recession it will be a garden-variety contraction.
Meanwhile, the government keeps trying to jumpstart the economic engine by focusing on jobs. Against the backdrop of an unemployment rate that persists over 9% (and with an election year approaching) President Obama unveiled a $447 billion job-creation program, which includes tax cuts and a spending plan. After the job program was announced last week, economists were all over the map with their assessments.
As for this economist, I expect job growth to be more in line with demand. Even with government assistance, businesses will not hire meaningful numbers of new workers unless demand for their goods and services pick up.
I have never been a market timer, and I don’t intend to start now. I much prefer to analyze the economic data and identify the prevailing trend, which history has shown to be a far better investment strategy than guessing which way the wind will blow next. As for now, the numbers spell out a weakening economy and a greater chance of a recession occurring. After all, it’s hard to argue with a zero in the employment report. But we need to remember we have come a long way baby, even if it doesn’t feel like it. So if we do pause or even contract from here it’s not a bad place to rest.
Thursday, August 25, 2011
Gold: Losing Its Luster
There’s nothing like a little fear and loathing for putting a shine on gold prices. Indeed, concern over everything from the U.S. economy heading into recession to the possibility of sovereign debt default in Europe has been cited as the force behind gold’s meteoric price rise, reaching a record $1,917.90 per ounce on August 23. Just one day later, gold experienced its biggest one-day drop in 18 months, with prices off about 5% at $1,763 at mid-day. The reason most commonly cited for the price decline is a collective sigh of relief as the aforementioned fears appear to be somewhat alleviated--at least for now along with probability of QE3 seeing less likely.
Traditionally, gold has been viewed as the “safe haven investment;” the place to (presumably) put your money because you’re quite certain that “Financial Armageddon” is just around the corner. The fact, however, is that while fear may spark gold’s rise, when financial calamity finally strikes, it’s usually a reason to sell, hence the old adage “buy the rumor sell the fact”. Additionally, when financial calamity hits, the owners of gold, like central banks around the globe as well as large fund managers need to sell assets to cover depreciating assets and pay liabilities and this drives gold prices lower.
Gold truly is a “buy the rumor, sell the fact” commodity. Consider what happened in 2008. During the first half of the year, gold rallied to more than $1,000 an ounce on fears of a pending crisis. When the crisis hit in the second half of the year, however, gold prices actually went down, trading below $720 an ounce.
Now, with gold having made a run at $2,000 an ounce, there just doesn’t seem to be a compelling reason for it to stay at such lofty levels. Even news of fighting in the Libyan capital of Tripoli, as rebels appeared to close in on Moammar Gadhafi--a significant geopolitical development--did not keep gold prices at their recent highs. This is all the more reason to expect that gold prices may have topped. As I see it, there are more reasons for gold to continue to drop than for it to reverse course and rally significantly again. First the reasons that gold will likely sell off:
The doom that everyone has feared actually hits, whether it’s another Euro-Zone debt debacle or fresh evidence that the U.S. economy is about to go into a tailspin. As I stated, fear bolsters the rally, but when the bad news comes into fruition, investors sell and gold drops.
The threat of doom subsides. Stocks begin to trend higher, interest rates raise a touch and gold eases under its own weight. Once again, investors sell.
The only reason that gold could keep rallying is a new perception of impending doom. I don’t believe this would work for the return of an old fear, because investors tend to shrug these things off as “Oh, that old worry is coming up again?” There would have to be a new fear factor in the market to create any significant upside potential for gold from here and one that was unlikely to materialize in the near term but create fear that it could.
Looking at the three scenarios--disaster strikes for real (sell), fear of disaster fades (sell), fear of a new disaster rattles the market (buy)--I think the shine is off gold.
Traditionally, gold has been viewed as the “safe haven investment;” the place to (presumably) put your money because you’re quite certain that “Financial Armageddon” is just around the corner. The fact, however, is that while fear may spark gold’s rise, when financial calamity finally strikes, it’s usually a reason to sell, hence the old adage “buy the rumor sell the fact”. Additionally, when financial calamity hits, the owners of gold, like central banks around the globe as well as large fund managers need to sell assets to cover depreciating assets and pay liabilities and this drives gold prices lower.
Gold truly is a “buy the rumor, sell the fact” commodity. Consider what happened in 2008. During the first half of the year, gold rallied to more than $1,000 an ounce on fears of a pending crisis. When the crisis hit in the second half of the year, however, gold prices actually went down, trading below $720 an ounce.
Now, with gold having made a run at $2,000 an ounce, there just doesn’t seem to be a compelling reason for it to stay at such lofty levels. Even news of fighting in the Libyan capital of Tripoli, as rebels appeared to close in on Moammar Gadhafi--a significant geopolitical development--did not keep gold prices at their recent highs. This is all the more reason to expect that gold prices may have topped. As I see it, there are more reasons for gold to continue to drop than for it to reverse course and rally significantly again. First the reasons that gold will likely sell off:
The doom that everyone has feared actually hits, whether it’s another Euro-Zone debt debacle or fresh evidence that the U.S. economy is about to go into a tailspin. As I stated, fear bolsters the rally, but when the bad news comes into fruition, investors sell and gold drops.
The threat of doom subsides. Stocks begin to trend higher, interest rates raise a touch and gold eases under its own weight. Once again, investors sell.
The only reason that gold could keep rallying is a new perception of impending doom. I don’t believe this would work for the return of an old fear, because investors tend to shrug these things off as “Oh, that old worry is coming up again?” There would have to be a new fear factor in the market to create any significant upside potential for gold from here and one that was unlikely to materialize in the near term but create fear that it could.
Looking at the three scenarios--disaster strikes for real (sell), fear of disaster fades (sell), fear of a new disaster rattles the market (buy)--I think the shine is off gold.
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