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The Dangers of Investing Based on Phony Government Statistics
The Dangers of Investing Based on Phony Government Statistics
President Donald Trump recently took to Twitter to boast, “The U.S. has an increased economic value of more than 7 Trillion Dollars since the Election. May be the best economy in the history of our country. Record Jobs numbers. Nice!”
“We ran out of words to describe how good the jobs numbers are,” reported Neil Irwin of the New York Times, amplified in a Trump retweet.
If you believe the headline numbers, joblessness is at a generational low with the economy booming.
Trillions in nominal value added to the stock market since Trump’s election. GDP up over 3% in the second quarter. 223,000 jobs added in May. Unemployment at an 18-year low of 3.8%.
On the surface, this all paints a beautiful picture for the economy and stock market. But dig a little deeper, and the numbers aren’t quite as bright they appear. All that glitters is not gold.
Headline Unemployment Number Is Fake News
Donald Trump himself put his finger on one of the main flaws with the unemployment number back when he was a private citizen.
“Unemployment rate only dropped because more people are out of labor force & have stopped looking for work. Not a real recovery, phony numbers,” he posted on September 7th, 2012.
The headline unemployment number isn’t any less phony in 2018. Though it has improved under Trump’s presidency – in large part because of his pro-growth tax cuts and deregulation – the statistic is still derived from a dubious formula.
Back in 2012, Trump rightly pointed to the large numbers of workers who had dropped out of the labor force but weren’t counted among the ranks of the unemployed.
The labor force participation rate currently comes in at just 62.7%. That means 33.7% of the population is currently not employed in the labor force. The vast majority of these jobless Americans aren’t among the 3.8% officially “unemployed.”
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5 Big Drivers of Higher Inflation Rates Ahead
5 Big Drivers of Higher Inflation Rates Ahead
Investors got lulled into a state of inflation complacency. Persistently low official inflation rates in recent years depressed bond yields along with risk premiums on all financial assets.
That’s changing in 2018. Five drivers of higher inflation rates are now starting to kick in.
Inflation Driver #1: Rising CPI
The Consumer Price Index (CPI) is a notoriously flawed measure of inflation. It tends to understate real-world price increases. Nevertheless, CPI is the most widely followed measure of inflation. When it moves up, so do inflation expectations by investors.
Insert Junk silver tile – verify the premiums displayed.
On February 13th, the Labor Department released stronger than expected CPI numbers. Prices rose a robust 0.5% in January, with headline CPI coming in at 2.1% annualized (against expectations of 1.9%).
In response to the inflationary tailwinds, precious metals and natural resource stocks rallied strongly, while the struggling U.S. bond market took another hit.
Inflation Driver #2: Rising Interest Rates
Since peaking in mid-2016, the bond market has been stair-stepping lower (meaning yields are moving higher). In February, key technical levels were breached as 30-year Treasury yields surged above 3%. Some analysts are now calling a new secular rise in interest rates to be underway after more than three decades of generally falling rates.
The last big surge in interest rates started in the mid 1970s and coincided with relentless “stagflation” and soaring precious metals prices. It wasn’t until interest rates hit double digit levels in the early 1980s that inflation was finally quelled and gold and silver markets tamed.
Rising nominal interest rates are bullish for inflationary assets such as precious metals so long as interest rates are following the lead of inflation rates. Only when interest rates get out ahead of inflation and turn positive in real terms are rising rates bearish.
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China Moves Forward with Its De-Dollarization Strategy
China Moves Forward with Its De-Dollarization Strategy
The world monetary order is changing. Slowly but steadily, global trade and currency markets are becoming less dollar-centric. Formerly marginal currencies such as the Chinese yuan now stand to become serious competitors to U.S. dollar dominance.
Could gold also begin to emerge as a leading currency in world trade? Over time, it certainly could. But the more immediate implications for gold’s monetary role center on its increasing accumulation by central banks such as China’s.
As of October 1st, the Chinese yuan has entered the International Monetary Fund’s Special Drawing Right (SDR) basket of top-tier currencies. It now shares SDR status with the U.S. dollar, euro, British pound, and Japanese yen.
Before the yuan officially becomes an SDR currency, the World Bank intends to sell $2.8 billion in SDR bonds in Chinese markets. The rollout of SDR bonds in China began August 31st. According to Reuters, China’s promotion of SDR bonds “is part of a wider push in China to… boost demand for Chinese yuan and diminish reliance on the U.S. dollar in global reserves.”
King Dollar won’t be dethroned overnight. But the place of prominence the U.S. dollar enjoys as the world’s reserve currency will indeed diminish over time.
Yuan’s Inclusion in the SDR Currency Basket: Merely a Part of China’s De-Dollarization Strategy
China and Russia have mutual geostrategic interests in helping to promote de-dollarization. Toward that end, the two powers are engaging in bilateral trade deals that bypass the dollar. Annual bilateral trade between China and Russia has surged from $16 billion in 2003 to nearly $100 billion today. When China hosted the G20 summit in September, it will make Russian President Vladimir Putin its premier guest of honor.
U.S. officials are none too pleased. They fear Putin aims to expand his global reach by forging stronger ties with China.
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