She’s Breaking Up, Capt’n!



Dear Reader,

As readers of any duration longer than a day already know, here at Casey Research we are considerably less optimistic about the economic outlook than members of the government or their close companions down on Wall Street.

Are we bearish by temperament? And so our radar picks up only bearish-shaped blips?

Perhaps, though I hope that’s not the case.

How, then, should we view today’s improved unemployment numbers?

Mr. Market went gaga for that latest green shoot, rushing to throw large sums at the U.S. equities and sending the DJIA up over 150 points in a hurry.

But then something happened. Like a doomed space shuttle, the market’s trajectory peaked, struggled, and is now, at this writing, in negative territory, but the day is still young.

Meanwhile, the dollar has spiked – almost a full percentage point – sending gold tumbling $34. And the gold stocks, which have treated us so well, are all off across the board with even big shares coming off by big amounts. Barrick Gold, the world’s largest producer, is off almost 10% as I write.

Perhaps it is because I just watched the latest Star Trek movie on DVD, but I feel much like Captain Kirk of the Starship Enterprise, hurtling through space as the ship is buffeted violently.

From the intercom, a distinctly Scottish voice shouts, “Engineering to the helm! She’s breaking up, Capt’n, and can’t take much more!”

Calmly, I scan the ship’s computer for data, yelling back at Scotty as I do,

“You’ve got to buy us time, I don’t care how you do it!”

“Aye, I’ll do my best, but it won’t be easy,” mutters the ever-stressed engineer, flipping off the intercom as he turns his attention back to the falling pipes and sparking electronics that surround him.

“Chekov!” I snap. “Report. What’s happening?”

“Traders are rushing out of ze dollar carry trade. Zey seem to tink the unemployment numbers are indicating an actual recovery.”

“Well, is it? Is it really a recovery?” I shout. “Sulu, I need the information!

What’s the econotron indicating?”

“Look for yourself, Captain,” he responds, projecting the data onto the large screen.


(Click to enlarge)

“Spock, what does it mean?”

“Simply, Jim, that the problems that have brought us to this place in the first place – starting with record levels of debt – have actually worsened. Just look at household debt. Sure, it’s flattened and come off slightly, but look at federal debt – it looks like a rocket leaving the Argonian atmosphere.”

“And interest rates?”

“Very interesting. All logic dictates that historic levels of debt should send interest rates higher, not lower. But until recently, that hasn’t been the case. I can’t explain it. Unless…”

“Yes, man, don’t hold back!”

“Engineering to the Capt’n, she’s breaki…”
“Not now, Scotty! I get it! Spock, continue!”

“Well,” Spock continues, “it could be the result of passing through a cloud of Bernankium.”

“Bernankium?”

“Yes, it’s a noxious gas that causes mass delusions, creating something akin to an alternate universe where everything is turned upside down. For example, instead of heavily indebted consumers being urged to spend less and save more, they are urged to borrow more in order to consume more. Instead of rising to reduce the demand for money, interest rates fall, actually reducing any incentive to save. Meanwhile, the government tries to solve the debt problem by going further into debt. The pressure on the economy, instead of easing, only grows.”

“But how will it end?”

“Impossible to say, but history tells us that, in time, interest rates have to go up. In fact, if you look at the screen, you can see that that may be beginning to happen now. If it does, then, well, the universe as we know it could implode as rising rates crush what’s left of the economy.”

“What about unemployment? Couldn’t the latest numbers be indicating a turnaround? You know, where people will begin earning money again, paying taxes, buying houses and flat screens and all that? And, maybe even reducing their debt before interest rates go sky high? Give me some hope, damn it!”

“Sorry Jim, it’s not as good as the latest data might suggest. Uhura, show the Captain the Chart of the Day.”

(Click to enlarge)

“As you can see,” Spock continues, “unemployment is still way off by historic norms.”

“But today’s numbers?”

“Uhura, next slide.”

(Click to enlarge)
“What am I looking at?”

“It’s a chart of the Bureau of Labor Statistics data showing the number of people now working only part-time because they can’t find full-time work. As you can see, there is a pretty strong correlation between a turnaround in those numbers and the end of recessions. That’s because in an economic downturn, businesses favor hiring part-time workers over full time. Only when they are sure that it’s safe to go back in the water, so to speak, they will then reduce temporary workers in favor of full timers. In the latest unemployment data, there were only three sectors of the economy that actually saw gains: government, health care – we’re getting older, Jim – and temporary help services. The rest? All down.“

“But why the latest upswing in part-timers?”

“Well, November is just ahead of the Earth’s holidays, and so some businesses feel they need additional staff. But they can’t bear the cost of hiring full-time employees – taxes, insurance, etc., etc. So, temp workers it is.”

“The dollar? Gold? Gold stocks?”

“Well, here’s the good news. You see, Bernankium acts like a mass hallucinogen. You know, like those mushrooms you and Bones experimented with last year on Alpha-Beta when you took off all your clothes and started chasing after Uh…”

“Yes, I remember, but cut to the chase, damn it!”

“Well, the thing is that the Bernankium has made almost everyone lose touch with reality. If you want to see reality, just look back at the first chart. Debt is still at historic highs, and there is no end to it in sight. In other words, nothing has really changed.”

“So, you’re saying that… most people are delusional, and they think it has?”

“Correct.”

“And so, all we have to do is to stay the course?”

“Exactly.”

“So, gold and gold stocks are falling only due to mass hallucinations, and the smart move would be to go to warp speed and…”

“Yes, Jim, buy more.”

“Engine room, this is the captain.”

“Yes, Captain!”

“Stop yer whining and go to warp speed, Scotty!”

Unemployment in America

A glimmer

Dec 4th 2009 WASHINGTON, DC
From Economist.com

The unemployment rate falls slightly in America

AP

THE American economy has been shedding jobs for nearly two years, but now comes a sign that the gloom could eventually lift. The Bureau of Labour Statistics released new data on payroll employment on Friday December 4th, and across the board the numbers came in better than had been expected.

Some 11,000 jobs were lost in November, the smallest total since the recession began late in 2007. And despite the continued job losses, the overall unemployment rate fell from 10.2% to 10.0%. So, too, did broader measures of unemployment which include marginally attached workers and those who work only part time (for economic reasons). The total number of hours worked ticked up, as did earnings. The statisticians also sharply revised down previously reported job losses for the months of September and October.

The payroll report will leave markets and policymakers happy, for a day at least. Most forecasters had expected that 100,000 jobs, or more, would have been lost, and most thought that the unemployment rate would hold steady or rise. A private employment report for November, which is published just before the official payroll report, showed that nearly 170,000 workers lost their jobs.

None of this means that the troubles are all over, however. The unemployment rate had once before declined in 2009, from June to July, before proceeding to rise for the next three months. A steady decline now will be hard to achieve: one estimate suggests that the American economy needs to add around 150,000 jobs each month just to keep up with population growth.

Employment growth in the economy remains concentrated in just a few sectors. There are encouraging signs in professional and business services; a 52,000 job increase in temporary help services in this category indicates that employers may soon begin creating more permanent positions. (Although by one measure non-manufacturing businesses are losing confidence, according to an index produced by the Institute for Supply Management this week.) Education, health services, and government are the only other sources of employment growth; the manufacturing, construction, and retail sectors continued to cut jobs in November.

That is particularly disappointing given that manufacturing activity has expanded for four consecutive months. More troubling still, the rate of manufacturing expansion declined in November. Increasing activity to date had largely been because of the replenishment of depleted inventories. If this brief spurt of expansion has exhausted itself without creating new jobs, then that bodes ill for recovery in other sources of demand, including consumer spending.

And then there are the ugliest statistics of all. Just over 15m Americans are unemployed, an increase of 8m from the start of the recession. Nearly 6m of those are considered long-term unemployed. Almost 40% of jobless workers have been out of work for 27 weeks or more. Bringing most of these workers back into the labour force will require strong economic growth, of the sort that is unlikely to prevail for at least the next year or so.

This unexpectedly sharp decline in lost jobs is a silver lining on an extremely dark cloud. The White House convened a jobs summit this week, but President Barack Obama was forced to acknowledge that "our resources are limited". The government may find itself sitting around inactive, unable to do much about the situation in which it finds itself. Today's good news aside, it's a feeling with which American workers are very familiar.

Copyright © 2009 The Economist Newspaper and The Economist Group. All rights reserved.

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Banking on Gold



Dear Reader,


Having just wrapped up many long hours on this month’s edition of The Casey Report – which looks like it will again top 50 pages – I must confess to a certain sense of post-exertion lethargy.


Not that I’m complaining, mind you. While I enjoy being crazy busy, more than is probably healthy, a day such as this, with no big pressure hanging overhead, is a rare and welcomed change of pace.


And so, leisurely, I turn to what’s what in the attempt to separate that which is important from that which is mere hype and news filling.

Here’s one item – it has to do with our favorite metal, gold. As many and maybe even most of you now count precious metals among your most important assets, keeping an extra close eye on the metals just now seems worthwhile.

Central Banks Banking on Gold

That’s the title of a just released report by Raymond James, which is far more commodity savvy than many of its competitors. Following are some excerpts you might find of interest…

The major paradigm shift we have seen evolve recently is the transition of central banks from net sellers of gold to net buyers. Given the inelasticity of mine supply, this shift has significant implications for gold’s supply/demand equation over the medium term. Furthermore, the symbolic implications of central banks buying gold (i.e., indicating a lack of confidence in the U.S. dollar) should underpin healthy retail investment demand as well. We believe this lack of confidence may not be restored for several years given the extent money supply has increased in the U.S. and the extravagant levels of U.S. public debt that will be further encumbered by the building burden of an aging population and health care inflation.


We continue to believe the equities are roughly 30% undervalued versus the gold price, and as a result we recommend investors add to their precious metal equities positions. We also suggest, based on historic valuation metrics, that the Junior/Mid‐tier producers offer better upside at current levels.


And…


EXPECT GOLD & SILVER PRICES TO REMAIN STRONG


Since the end of the third quarter gold and silver prices are up 16% and 9%, respectively. In absolute terms gold is up $163/oz, an impressive result; however, we would argue this is just the beginning of a longer‐term period of strong precious metal prices based on:


1. Investment demand continues to be extraordinarily strong (and we see no reason for this to change) given the loss of confidence in both the financial system and policy makers and as investors prioritize capital preservation over capital appreciation, increasing portfolio allocation to more creditworthy or “safe haven” investments, i.e., precious metals. Regaining this loss of confidence in the financial system and policy makers, in our view, will take a considerable amount of time, earning precious metals a permanent place in any prudent portfolio and underpinning prices over the longer term.

2. The specter of future inflation is building. Recall it is the fear of inflation that tends to drive the metal prices higher.

3. Declining supply – central banks have moved from net sellers to net buyers. This is a significant structural change in the gold market as central banks have been net sellers for two decades. Central banks looking to diversify their reserves in light of the rampant currency debasement have very few options available, and we would argue gold is the most attractive. It is also important to note new mine supply has essentially just been replacing aging mines. Given the long lead time between finding a deposit and actually moving it through to production is on average around 10 years, new mine supply remains largely inelastic. Adding further pressure on the supply side of the equation is the dearth of new discoveries and the increasingly challenging mine development environment.

4. All‐in costs remain high – aging mines are experiencing declining grades, and new projects tend to be of lower quality, requiring higher and higher metal prices in economic studies, which are still returning IRRs in the mid to high teens.


5. Very low/negative real rates – lowers the opportunity cost of holding hard assets. Most major countries (including the U.S.) continue to support a low interest rate environment; we suspect this will be the case for some time to come as increasing rates may derail recoveries.

On point #3, Doug Casey points out in his article The Greater Depression Is Here in this month’s edition of The Casey Report (more here), since peaking in 2001 at 83.7 million ounces, annual gold production steadily fell throughout most of the period and has only recently shown an upswing. When you take out the impact of dehedging, gold from new mine supply in the third quarter came in at about 73 million ounces on an annualized basis.


That is not to say that the world is running out of gold, but anyone in the industry will tell you that it’s not an easy business to be in under the best of circumstances.

Now more than ever, finding a new deposit of any potential size, then raising the capital to evaluate its potential as a mine, then raising the additional capital to turn it into a mine – all the while fighting a rear guard battle against NGOs, environmentalists, greedy politicians, and, depending on where you operate, armed rebels – requires a Herculean effort. There’s an old adage in the business that only one in a hundred discoveries becomes a mine, and I suspect that the success rate could be even lower than that.

Simply, building a mine is very much not like building a new box store or fast food outlet on a conveniently accessible corner.


Meanwhile, against new supply, the demand for gold is currently running at an annualized pace of over 100 million ounces.

Of course, as demand increases, so, typically, does the number of people willing to ship their treasured family heirlooms off to the nearest smelter. That makes up a lot of the shortfall between new mine supply and demand: recycled gold is the second largest source of supply after new mine production.

Interestingly, even with gold’s more or less steady rise in price, the supply of recycled gold has been steeply falling throughout 2009 – from 18.2 million ounces in the first quarter, down to just 9.02 million ounces in the third quarter.

Even more eye opening is the shift in supplies to the market from central bank selling, which has gone from 1.9 million ounces being sold into the market in the first quarter of 2009, to a net purchase of almost half a million ounces in the third, reflecting a year-on-year fall of 83%.

So, what’s important in all of this?

I would contend that, no matter what else comes out of the current crisis, the true nature of the fiat currencies has been revealed for all to see. And gold has been once again found to be the only reliable form of money.


The long-term consequences of these revelations (which are not revelations at all to most of you, dear readers) are that anyone who’s been paying attention – individual and institutional investors – will never again dismiss gold as having no role to play in modern finance.

Further, the idea that central banks should divest themselves of their only tangible asset – gold – has been relegated to the trash heap of history. It is thus that we are now hearing influential voices in China calling for an increase in its reserves of another 159 million troy ounces of gold, roughly twice annual global gold production. At $1,200 gold, that means they’d have to spend $190.8 billion, which, while a lot, is really not all that much compared to the size of their reserves of U.S. dollars.

Of course, were they to try and aggressively meet those sorts of targets – competing as they are with other central banks that have now seen the golden light – the price of gold would head much, much higher. That argues for them trying to do off-market transactions – buying whatever gold the IMF wants to sell before it hits the market, for example. And it argues for them rebuilding their gold reserves at a more measured pace.

But most of all, it says that there is a new and very solid floor under the price of gold. Can it correct 5 or 10% in the event of a broader market sell-off? Sure. But more than that? I doubt it.