Why Stocks Rise as the Dollar Falls, Gold Perspective, American Productivity and More!

by Addison Wiggin & Ian Mathias

  • Stocks rise, but not on good news… Dan Amoss explains the new driver for U.S. shares
  • American productivity soars, signals recession’s end… why Rob Parenteau isn’t celebrating yet
  • One of the most rational charts we’ve seen in a long time
  • Frank Holmes on how India’s gold buy could send the spot price up 30%
  • Plus, the debate rages on… more of your thoughts (and a solution!) on extending unemployment benefits


  Stocks rose yesterday — a lot. With a 2% jump, the Dow reached 10,226, its highest level of 2009. The S&P 500 fared even better.

As we briefly mentioned Monday, it wasn’t earnings or economic data that sent stocks to new highs. Instead traders got the nod from the G-20, whose members hinted that they will likely keep ultra-low global interest rates for the foreseeable future.

  “Rather than a rebound in jobs and household income,” writes Dan Amoss, “the stock market seems to be pinning its hopes on limitless free money from the Federal Reserve. But with an undercapitalized banking system, most of this zero-interest-rate money is not working its way out into the economy.

“Instead, this zero-interest rate policy is prompting rational investors — including foreign creditors who hold trillions in U.S. Treasuries and agency bonds — to accelerate their moves into inflation hedges like gold and commodities. The Fed may think it has ultimate control over its monetary policy, but those who already hold dollar-denominated assets play an important role. And many of them, after putting up with lots of abuse, and the promise of zero rates of interest on their savings, are voting with their feet.”

  Thus, perversely, the “American rebound” stock trade is more and more dependent on a steadily weakening dollar. As stocks soared yesterday, the dollar index found its own 2009 benchmark… a yearly low of 74.9. Looking at both together… hmmm… something is wrong with this picture.


  “There are indications that the U.S. dollar is now serving as the funding currency for carry trades,” reads an IMF report from the weekend, confirming a suspicion we shared back in September. The IMF report was meant as a warning to its clients and colleagues… the group noted that distorted dollar values here have contributed to “upward pressure on the euro and some emerging-economy currencies.”

As Nouriel Roubini has recently hinted, we suspect cheap dollars are contributing to a rise in nearly everything.

(If you are looking to profit from the dollar’s decline, you should check out Master FX Options Trader right now. Today is the last day we’re offering a hefty discount this elite currency trading service.)

  “Productivity growth is one of the keys to escaping a recession,” writes Rob Parenteau in response to last week’s productivity report from the Labor Department. If you didn’t hear, it was a doozy. Their measure of worker productivity soared at an annual rate of 9.5% in the third quarter… the product of slashing labor forces and cracking the whips on those still employed.

“As you can see from the chart below, it is usually only in the first year of recovery that year-over-year labor productivity growth breaks through 4%, as it just did in Q3. When combined with hourly labor compensation growth now screwed all the way down to a 0.5% pace, falling unit labor costs are the result.

“Unquestionably, labor productivity gains are one key driver of long-term growth. But here is the hitch we see developing: Small businesses appear to be on the ropes. Large businesses have cut to the bone. Both GDP and S&P 500 profit results indicate companies that are achieving high labor productivity and lower unit labor costs have, so far, been able to hold onto these gains through higher profit margins. However, if U.S. firms do not step up the reinvestment of these profits into the real economy, by lifting production up enough to first end the inventory contraction and begin inventory rebuilding, and then also stepping up their reinvestment of profits in more efficient technology or new products, then the nascent U.S. recovery will sputter out…

“To put it in the extreme, labor productivity gains will not get us very far if the profits generated from them do not start getting ploughed back into voluntary inventory rebuilding and reinvestment in capital equipment.”

  The British pound is one of the few global assets worse off than the U.S. dollar this week. The U.K. currency is plunging this morning on yet another threat of sovereign credit downgrade. It’s Fitch’s turn to threaten Britain’s AAA. The ratings agency said the U.K. is, of all AAA countries, the one in need of “the largest budget adjustment.” While not as bold as the “credit watch negative” outlook S&P cast on Britain in May, it’s certainly not helping matters for the ol’ pound. It’s down 2 cents from yesterday’s high, to $1.66.

Shame the U.K. doesn’t do more business with Fitch… maybe they could have bought their way out of this report.

  Gold found another record high yesterday — $1,110 an ounce. Why? Allow us to share the most fundamentally rational gold chart we’ve seen in a long time, courtesy of a perennial favorite at our annual Investment Symposium, Frank Holmes:

“Annual gold production is on a downward trend,” Mr. Holmes notes, “while the growth in money supply in both the United States and the eurozone is bent almost straight up. Economics 101 — more money competing for a declining resource tends to drive up the price of that resource…

“The presence of a big bullish buyer [India] tends to create a big bullish buzz for gold. We’re seeing it now — gold on Friday surpassing $1,100 an ounce — and history suggests it may last a while.

“Around this time in 2005, for example, Russia announced that it was doubling its gold holdings from 5% to 10% of its reserves. At that time, gold was selling for about $490 an ounce. A year later, the price was up 30%.

“Of course, Russian purchases weren’t the only thing that drove up gold — back then, the dollar was dropping, federal deficits were colossal, markets were volatile and investors faced negative real interest rates.

“We have the same conditions now, but on an even greater scale following the credit crisis, steep recession and the massive economic stimulus programs created around the world… Our consistent suggestion is that investors consider a maximum 10% allocation to gold — half of the exposure in bullion and the other half in gold equities.”

   At $79 a barrel, oil’s been sitting still so far this week. But we’re barraged with crude oil forecasts today… here’s the quick and dirty:

· Global oil demand will grow 700,000 barrels per day next year, OPEC forecast today. The group cited China and India as the main drivers behind the improved forecast

· Goldman Sachs maintained its forecast for $85 a barrel by year-end and $95 a barrel by then end of 2010

· Global oil consumption will average 86.1 million bpd in 2010, the International Energy Agency offered in a report this morning. That’s the third month in a row it’s increased their forecast.

  The U.S. Treasury easily pulled off a record huge sale of 3-year debt yesterday. Despite all the global talk of “bond vigilantes” and foreign disgust with U.S. debt issuance, these huge auctions are always a hit. The Treasury moved $40 billion in 3-year paper at a 1.4% yield yesterday — even less than the going rate, thanks to an amazing $133 billion in bids. That’s actually the highest bid to cover ratio (3.3) for 3-year notes since 1990.

   We bet some of that fresh Treasury financing will end up with the Federal Housing Administration. We’ve been over the FHA’s woes before. Today we hear that the group has suddenly delayed the release of the long-awaited results of an independent audit. Due out late last week, the new release date was bumped to an indefinite day sometime this month, with FHA officials citing the “modeling accuracy” of their auditor. Fishy…

Whenever the audit does come out, we expect to see FHA reserves have fallen below the federally mandated 2% of outstanding loans… and a Treasury handout to follow.

  Speaking of the FHA, President Obama officially extended and expanded homebuyer handouts on Friday. Due to lapse Dec. 1, the new legislation will bump the $8,000 first-time buyer tax credit back to April 30, and now existing homeowners can get a $6,500 credit toward another home (under certain conditions). Income caps on program eligibility are up too.

  Mr. Obama also put his seal on the extension of unemployment benefits. This marks the fourth such extension in the last 18 months. We’ve hit the details already. See below for more opinions on the matter.

  “It’s amazing how quickly social power erodes,” a reader writes on our blog in response to the ongoing debate we’re having over extending unemployment benefits.

“Our government has become the ‘last resort’ for so many things, the association becomes implicit. If the government is helping me, there must truly be no one else I could turn to, for why else would the ‘last resort’ intrude? With government at hand to help, there is no need for any other safety net — what, competition? There was once an idea called charity, and people whom we knew as family, but it must go by another name now, as no one seems to have heard of it.

“And lest we forget. People who are ‘in trouble’ now are not the ones who prudently saved for years. Are the spenders too proud to ask for help now? And why should I help, giving what I’ve scrupulously saved; are they now wise and thrifty?”

  “Why not give those who maxed the unemployment benefits,” a reader writes, “a government loan at the same monthly amount, and at the same interest rate the government is charging the banks? Such an arrangement can go for a long time and save people livelihood, while not being a gift.”

  “Why not provide a set number of weeks of benefits,” another suggests, “set daily based on market data of current unemployment rates and other data. After that is exhausted, provide a deferred loan up to X dollars that gets paid back automatically out of an individual’s check once they get a job. The loan must be paid back with an interest rate of CPI + 1% (where the 1% will be put back into the benefits system). Folks who don’t work (like many of my family) will pay back such loans through the loss of tax credits (e.g., child tax credit).”

The 5: Well… why not?

Ian Mathias

The 5 Min. Forecast

P.S. Last call for a big discount on our most popular currency trading service. Master FX Options Trader remains on sale until midnight tonight… get in on the cheap before it’s too late.


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