EXECUTIVE SUMMARY
Fed Tightening? What Tightening?
The stock market is soaring to new highs, and it is doing so against the backdrop of what can be best described as disappointing economic data. The latest retail sales for July disappointed, coming in flat, but after removing the volatile auto component, they were down 0.3%.
The disappointing retail sales continues what has been essentially a declining trend since 2010. Labour productivity fell for the third consecutive quarter. This is against ongoing declines in real median household income that actually topped way back in 1999.
Given all the monetary stimulus over the past few years, one would expect inflation. Not judging by the latest Producer Price Index (PPI) that showed a decline for July of 0.4%, while the core PPI was down 0.3%.
Solace can be taken with the CPI that was flat, and year over year is up 0.9%. But the Fed watches the core CPI and it rose 0.2% in July, and is up now over 2% on the year. July industrial production jumped 0.7%, but that is against a backdrop of a 0.5% decline year over year.
Odds of a September rate hike are dwindling quickly, but the market is keeping alive thoughts for the December FOMC.
August 15
August 15 marked the 45th anniversary of former US President Richard Nixon unilaterally cancelling the direct convertibility of the US dollar to gold. President Nixon marked it with the statement that “your dollar will be worth just as tomorrow as it is today…”. Well maybe that worked for August 15, 1971, but over the ensuing 45 years, the US dollar has lost upwards of 95% of its purchasing power. So have a host of other currencies.
The world has never been the same since, as debt and money supply exploded to the upside and currencies, commodities and, yes, even stock markets have become more volatile. The US$ was no longer money. It was now just a currency – a fiat one.
But gold has held its purchasing power even as currencies slowly become worthless, a reminder that all fiat currencies eventually become worthless. And the US dollar is the world’s reserve currency. A reminder as well that all reserve currencies eventually fade into history.
Weekly Market Review
Stocks
It was a week of the perfect trifecta. The Dow Jones Industrials, the S&P 500 and the NASDAQ, for the first time since 1999, all made new all-time highs, on the same day, together. Ironically it was on August 15, 2016—the anniversary of the end of the gold standard.
The new all-time highs are being made against the backdrop of declining participation by the public. It is institutions that are driving the market higher.
Bonds
The TED spread (3-month US Treasury Bills – 3-month Eurodollars) is at its widest level since the Greek/EU debt crisis of 2011. The TED spread is sensitive to credit issues in the market, and as a crisis develops, it widens. In 2008, at the height of the financial crisis, it leaped to over 4%. Yet supposedly there is no current debt crisis. Or is something lurking that the market doesn’t know about?
Currencies
The US$ Index and the euro continue their dance. The US$ would strengthen if it believed that an interest rate hike were on the agenda for September. Instead the US$ has fallen to its lowest level in weeks. The US$ didn’t even respond to Fed Director Dudley’s musings that a rate hike could be on the agenda for September. An interest-rate hike would likely pitch the US economy into recession.
So why is the euro rising when it should be falling? Maybe the perception of the ECB’s QE and the Brexit is not as bad as it is made out to be. Or, as some muse, was there an accord to bring down the value of the US$ back at the March G20 in Shanghai?
After all, a rising US$ hurts China as well, given its tie to the US$. But October brings the Chinese yuan joining in the IMF’s Special Drawing Rights (SDRs). Things could get interesting in currency land.
Gold and Precious Metals
For the second week in a row, gold and silver fell. Platinum, palladium and the gold stocks were also down this past week. Is a bigger correction looming for the metals? After all, the bullish sentiment indicators remain quite high, and gold has hit a stiff resistance level at $1,380 to $1,400. A breakthrough above that level could take gold to $1,500 and higher.
But gold may have formed a double top, and the breakdown is at $1,310/$1,320. It could then fall to $1,240/$1,260. Corrections are healthy, especially if the bull market is to have longer, lasting legs. The fundamentals for gold have never been better, and investment demand is high. The market awaits direction.