The capital markets continued to respond to hints from Federal Reserve governors relative to future interest rates. All the equity averages were down in August, and gold bullion was down 1.3%. The gold mining stocks were down about 5% for the month, now virtually flat for the year. It is some consolation that gold bullion, and the gold mining stocks as well, have acquitted themselves reasonably well this year, considering the unprecedented speed and magnitude of the rise in rates. More on this below.
The mantra at the Fed continues to be a “data dependency”, with the large rate increases behind us. As we have said before, the Fed seems to focus on the rear view mirror, perhaps because they have such a dismal forecasting record. They consider our economy still strong, weighing heavily the still low unemployment rate (though dropouts have been a major contributing factor). The problem has become that the “leading” indicators of 6-12 months ago are now becoming reality. The Fed does not seem to realize that the economic effect of raising interest rates by 5.5 full points within eighteen months will be very serious, but it will happen with a lag, and it is just beginning to show up. Just last week, at the Jackson Hole conference, Powell reiterated the previous restrictive stance, trying to cool further an economy that needs no help in that regard.
To that point, on Tuesday of this week, the widely followed JOLTS reported (Job Openings and Labor Turnover Statistics) was released, showing a much weaker job situation than had previously been assumed. The number of available jobs in the United States shrank for the third consecutive month, dropping below 9 million for the first time since early 2021. In addition, a smaller number of workers quit their jobs, businesses hired fewer workers and layoffs nudged higher. Job openings fell to a seasonally adjusted 8.827 million in July (versus (9.465 million estimated), from 9.165 million in June. There are now 1.5 available jobs for every unemployed person. July JOLTS data also showed that the number of new hires dropped to 5.773 million from 5.94 million, quits landed near pre-pandemic totals by falling to 3.549 million from 3.802 million, and layoffs inched up to 1.555 million from 1.551 million. Away from the US the European Central Bank (ECB) has followed the Fed’s lead with its own tightening program, sending its economy reeling toward recession. It’s basically the same situation in the U.K. and Germany (the largest country in the European Union is already in recession. For all practical purposes, China’s economy is also in recession, though their official government numbers don’t show and its obvious long running real estate bubble continues to deflate.
It is no wonder, therefore, that over 60 BRIC countries (led by Brazil, Russia, India & China) met last week to discuss how they can reduce their trade (and exchange reserve) dependence on the US Dollar. Whatever the result of their ongoing exploration, the direction points clearly to a weaker dollar which will be especially inflationary for us.
The long-term trends that we discuss every four weeks or so (for over ten years now) have only accelerated over the years. When the markets finally adjust to the inevitable, and gold related assets assume their traditional role as the safest of havens in hard times, the revaluation will be just that much larger.
Roger Lipton