Jobs Bombshell, Fed Balance Sheet Crisis, Obama and Carbon Credits, A Gold Forecast, and More!

by Addison Wiggin & Ian Mathias

  • Jobs report smacks the Street… way worse than expected, unemployment at 14-year high
  • So why is the market rallying?
  • Fed reveals another peak at its balance sheet… can you say, “$2 trillion”?
  • Byron King with a probable Obama energy policy… and how it will likely fail
  • Ed Bugos with 5 reasons why gold should be outperforming, but isn’t

The American economy lost 240,000 jobs last month. 6.5% of the American work force is now unemployed, a 14-year high, says the government this morning. 61% of grown adults are working, the lowest level in 15 years. Interestingly, adult men with jobs is at its lowest level since the BLS started keeping track in 1948.

For the whole year, we’ve lost over 1.18 million American jobs. If all those people were to create a city of their own, a new age Hooverville, it’d be the 10th biggest city in the U.S. And we add, as always, these are government numbers…

“September’s employment report — the last before the election,” comments John Williams , “showed a less-severe-than-expected drop in employment and an unchanged unemployment rate. Now with October’s reporting (the first since the election), September’s payroll data underwent extreme negative revisions, and October showed a much-larger-than-expected surge in unemployment.

“History would suggest this pattern is more a function of catch-up following political manipulation of the data than it is of normal variation in monthly reporting. Also, as suggested by the ongoing seasonal bias, misreporting of the data continues.”

  For their part, quants on the Street expected 200,000 lost jobs… and 6.3% unemployment. Even so, the market took the news in stride this morning. The Dow opened up 115 points, just about 100 points lower than it was heading before the BLS report.

  Mr. Market must have purged most of the employment grief yesterday. Most indexes fell 5%. Factor in Wednesday’s post-election rout and you’ve just lived through worst two-day stretch since Black Monday 1987.

The S&P 500 has fallen over 10% since Wednesday morning.

  Like a transvestite dressed up as Marilyn Monroe for Halloween skipping over an exhaust outlet on the sidewalk, the Fed gave us another sneak peak at its balance sheet this morning.

Can you say, $2,000,000,000,000.00?

Ben Bernanke’s balance sheet expanded to a record $2 trillion this week — $2.058 trillion, if those billions even matter any more. That’s more than twice its size at this time last year.

The Fed’s loan portfolio is so bloated, we hardly know where to begin: Average DAILY bank borrowing from the Fed exceeded $359 billion last week… the Fed’s Commercial Paper Funding Facility has nearly doubled, and now holds $243 billion in “no one else will buy it” cooperate debt… primary dealers and brokers are running a $71 billion tab… AIG still owes $81 billion… it just keeps going and going. Over a third of the balance sheet is made up of some sort of bank loan or toxic asset.

Who’s paying for it? The U.S. Treasury has set up a supplementary funding account with the Fed, which is fueled by T-bill sales. That fund now exceeds $558 billion.

  "I would not be surprised” said Dallas Fed President Richard Fisher, “to see [the Fed’s balance sheet] aggregate to $3 trillion…by the time we get to the new year." That would be by January… or another trillion bucks in the next two months.

  Finance industry employees — the ones that still have jobs — can expect significantly lower bonuses this year, says a study by the consulting firm Johnson Associates. Bonuses are expected to drop 20-35% across the industry. Executives are expected to get hit the hardest, with 70% average declines. The firm suggested that 2009 might be even worse, as the combination of a slow economy and increased banking regulation might squeeze financial revenues even tighter.

The dollar rallied yesterday as stocks sold off, but gave back most of its gains after this morning’s jobs report. The dollar index is now hovering around its weekly average of 85.3. Most of the world’s currencies are at yesterday’s levels.

  Oil, on the other hand, got shelled yesterday. The price of the front-month contract dipped as low as $59, its first trip below $60 since March 2007. With all the signs of severe consumer retrenchment surfacing this week, the “demand destruction” argument is back in the limelight. We saw reports from the IMF and Deutsche Bank both lowering their demand forecasts for 2009. Plus, yesterday’s bout of dollar strength only seemed to make matters worse.

Oil has since rebounded a bit, but barely. It goes for $62 a barrel as we write.

  The national average for a gallon of gas reached $2.31 overnight, marking the 50th straight daily decline. Gas is down a remarkable 44% from its July 17 high and at its lowest level since February 2006.

  Jet fuel prices have fallen quite a bit too. In fact, they are even cheaper than they were this time last year, by about 22%.

Heh… but we’re yet to see a single airline take back any of the industry’s recently added surcharges. In fact, Delta added a “first bag fee” of $15 Wednesday.

“The new Obama administration will probably focus on controlling carbon emissions,” says Byron King, just back from his energy and resource scouting adventure in South Africa. “That was part of the campaign. That, plus the fact that there are many serious carbon controllers in the U.S. Congress.

“Carbon control is the whole basis for confronting the global warming issue. It’s a growing trend within the developed world — although certainly not within the developing world. This is a critical distinction. Just remember that in our world when you control carbon, you also control people. Ultimately, carbon control is people control. By controlling carbon, you control behavior in a way that George Orwell’s Big Brother never imagined (or maybe he did).

“When you control carbon, you are constraining life and mobility to a so-called ‘renewable’ level of technology. Yet renewable energy technology is neither fully developed, nor built out to supply more than 3% (at most) of current world energy demand. A world of carbon control is a world that will limit your options in many respects — maybe in every respect. It’s certainly not all sunshine (literally) and happiness.

“Let’s put it in perspective. If the next U.S. administration controls too much carbon — with carbon taxes, cap-and-trade regulations, sequestration efforts and the like — the U.S. economy could soon suffer the same kinds of brownouts and blackouts that I experienced in South Africa.

“Sure, we can build a lot of windmills and solar installations. More geothermal would be great, too. But the U.S. and world industrial base is limited in what it can turn out, and at what rates. There are constraints in manufacturing, in materials, in systems integration, in the grid, in the labor force and in the regulatory system. And we are going to overcome this in 10 years? By comparison, putting Neil Armstrong on the moon in the 1960s was a piece of cake.

“So will the U.S. — let alone the world — abandon carbon sources of energy in the next 10 years? You just gotta be kidding me. That ain’t going to happen. If it does happen, your world will turn upside-down. Count on it.”

Byron’s got his Energy & Scarcity portfolio adjusted accordingly… do you? Get his best energy investing advice, here.

  Gold fell hand in hand with oil yesterday, plummeting $30, to $730 an ounce. The spot price has stabilized since, to around $740 as we write.

  “I don’t think the bull market in gold is over,” insists Ed Bugos, “and history says that as it matures, it increasingly outperforms other asset classes and commodities.” Ed sent along another of his lists arguing on behalf of gold investors… this time on why gold is still performing below expectations. Without further ado:

1. I think the markets are too bullish on the deflation hype and fail to appreciate the extent to which central bankers can determine that outcome, or how the Fed’s policy itself has changed in the past two months.
2. The amount of liquidity central banks are injecting is unprecedented.
3. Neither the politicians nor the public seem willing to stop the printing presses now or anytime in the near future.
4. The dollar is teetering on the edge of disaster that the current rally continues to obscure.
5. It’s hard to rationalize buying any asset, even in this environment, given the amount of damage to the economy at present and in future from the new regulatory climate.

  Even the pope is tightening up his belt, says a recent Bloomberg report. The Vatican is now requiring its staff to clock in for work. The Vatican abandoned the punch clock 50 years ago, but his holiness’ servants haven’t been working full days and reintroducing the clock will reduce costs. Even the world’s smallest state can’t survive on faith alone.

“‘We can’t afford any waste,’ Bishop Renato Boccardo, secretary of the Governatorate of Vatican City State, told La Stampa newspaper. ‘There is a lot of work that needs doing, and the financial situation doesn’t allow us to hire more staff.’”

Do you suppose the good lord pays time and a half?

  “I believe your RNC leanings are showing,” writes a reader. “Your chart of post-Election Day results makes it appear that the greatest losses occurred under the Democrats, when exactly the opposite is true.

“The stock market and the standard of living have all increased far more under Democrats than Republications. 1932 is a good example. FDR’s election happened as the country was slipping into the Great Depression, thanks to Mr. Hoover. Within a year, that bottomed and the stock market along with the standard of living both began to improve, and did so throughout the FDR administrations.

“As a matter of fact, the greatest increase in the standard of living in the United States continued to rise from the 1930s throughout a period of Democratic domination. That tremendous increase basically ended with the election of Ronald Reagan. Those are the facts.”

The 5: Hey, Einstein, the chart compared the biggest one-day losses in the stock market for the day after the election versus historic one-day gains. Two of the historic gains were following election of Democrats. The chart doesn’t say anything about “standard of living.”

On Wednesday, we ran a chart showing the economy growing by an average 1% faster under Democratic administrations… does that reveal our DNC leanings too? If you’re going to jump to conclusions, you might want to actually read the letter first.

  “Your comments about the future of robotics ,” writes another, “leaves out the unintended-consequence elephant in the room… the end of employment opportunities for low-skilled workers.

“I’ve long expected fast-food restaurants to become automated, and it amazes me that they are still so labor-intensive. But if you’re right (and I suspect you are, though you may be optimistic about the timing), not just restaurant work, but pretty much every job that immigrants and unskilled Americans perform will be gone, along with a lot of repetitive skilled work.

“They won’t all end up as robot installers. What do you think will happen to them? I don’t have any idea, but I suspect it won’t be pretty.”


Addison Wiggin
The 5 Min. Forecast

P.S. Hmmmn… at times, it seems like the gods are arrayed against our getting the film out to the general public. We got this e-mail this morning:

“Hi. We just got back from seeing the movie in Concord. Really liked how it has turned out. Can’t say the choice of theaters was great, however. I know you have nothing to do with this, but thought you might like to hear about it.

“To start with, the I.O.U.S.A. Web site said Merrimack Cinema 1-6 in Concord. The place it was shown at is called Concord Entertainment. So the newspaper ad touted Merrimack 1-6, which nobody would be able to find — and then no one would think to look at the Concord Entertainment shows, etc., because you wouldn’t know that that was where the movie was showing. And if you did figure it out, the times listed weren’t the actual times or were subject to change at the whim of the management.

“We went to the 4:45 show, but were told that it really wouldn’t be shown until 7:20. When the attendant said that he had heard it was a good documentary, but it hadn’t done well at that theater, it was no wonder. Only a mother intent on seeing her son’s movie would persevere enough to wait three hours to see the film. Especially as the theater looked like it would be ready for the wrecking ball at any time. The sign by the street that announced which movies were playing was only half lit up and you couldn’t even see the letters I.O.U.S.A., as they were in the shadows. The parking lot wasn’t lit, so the place looked closed, and there weren’t but a few cars in the parking lot. I’d say that none of the movies shown there did well, at least not on this rainy Thursday afternoon/evening.”

Thanks for trying, Mom.

P.P.S. Also, after hitting No. 1 on Amazon Election Eve, we’ve been informed that many of the orders for the book are sitting in a queue waiting to be processed. We’re working with the staff at Amazon diligently… but uh, if the orders don’t get processed, the books are not getting shipped. Hmnn…

You can still order your copy of the book or DVD here. After our systems blew earlier this week, we’ve repaired them and everything appears to be working fine. Oy.


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