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Many people
became convinced that data releases earlier this year indicated that
"recovery" in the U.S. was imminent. But as I have been saying for
months, this evidence would ultimately be shown to be as reliable as
sightings of Bigfoot. Lots of people claim to say they have seen it, some
even produce plaster footprints, but in the end all we have is a guy in an
ape suit. The economic recovery, that has been discussed so loudly and often
in recent months, will be shown to be similarly mythical.
A torrent of
recent economic data now reveals weakness, and investors are beginning to take
notice. Today's release of the May jobs report showed a paltry 69,000 jobs
created during the month, far below consensus estimates. Not only did the
current month disappoint, but the June numbers were also revised down by
49,000. This release follows yesterday's downward revisions of first quarter
GDP growth from 2.2% to 1.9%. Also lost in the headlines was that the savings
rate dropped to 3.4% in April, the lowest rate since December 2007. This
shows that Americans may need to deplete their already meager savings just to
keep their heads above water as the U.S. economy sinks back into recession.
The bad news
sent stocks swooning. The latest sell off brings the S&P 500 down close
to 10% from its levels in early April. On the other hand, bonds have reached
record highs as investors seek safety in treasuries. However, I believe that
treasuries will turn out to be the Facebook of safe havens. Before Facebook
went public everyone wanted a piece of the action. But once the allure wore
off, and people realized they owned shares of an overhyped company with
unreliable earnings and a sky high valuation, the shares quickly lost a good
deal of their appeal. Despite the best efforts of the media to declare the
end of gold's appeal, the metal continues to shine. Today's reportalso sent gold up nearly 4 per cent. Gold is now
down just 3 per cent from May 1, a period that has been horrific for other
asset classes.
Oil prices
continue to slide as traders brace for a fall-off in global demand that will
come from the return of a global recession. What these traders fail to
understand is that the recession will likely be resisted by central banks
around the world with massive money printing. Such action will be much more
likely to push oil prices back up to levels higher than those seen before the
recent downturn. Yes recession means consumers will use a lot less oil, but
inflation created by the central banks means that they will likely pay a lot
more to purchase it.
In recent
months as turmoil bubbled across the debt markets of Europe, the United
States had beckoned as a safe haven. But in truth, the problems are as bad,
if not worse, on this side of the Atlantic. Ironically, America has not had
to deal with its day of reckoning because lesser problems surfaced first in
Europe. But when Europe comes to some modest resolution of its problems, or
when bond investors realize they have jumped from the frying pan into the
fire, there will be no hiding from the unresolved problems here.
As the
intoxicating effects of Fed stimulus wear off, the hangover is setting in. To
delay the pain, I believe that there can be little doubt that the Fed will
unleash its next round of stimulus, in the form of QE3. My guess is the Fed
has always known more QE was needed but it has been waiting for the most
politically palatable time to announce it. That "stunner" can't be
far off with the data so bad and the elections so near.
Eventually
more people will figure out just how precarious America's fiscal position
truly remains. That's when interest rates will finally rise in the U.S. There
is no way to justify record low interest rates in this country given our
atrocious fiscal position. I believe interest rates here should approach
levels comparable to the more indebted European countries. Once it becomes
obvious just how many dollars the Fed is prepared to print to stave off
recession, people running into treasuries today will likely suffer buyer's
remorse. When they rethink their assumptions, as buyers of the Facebook IPO
clearly have, the Fed will then become not just the buyer of last resort, but
the buyer of only resort. Then the Real
Crash may finally be upon us.
Peter Schiff is CEO of Euro Pacific Precious Metals, a gold and
silver dealer selling reputable, well-known bullion coins and bars at
competitive prices. To learn more, please visit www.europacmetals.com or call (888) GOLD-160.
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