Clouds Under the Silver Lining

• Jobs spark jubilation; manufacturing index, too. The 5 finds reasons to curb your enthusiasm…
• The Federal Reserve forced to release 894 pdf files of "discount window "documents… Earth's magnetic poles fail to realign…
• Gold down ;( dollar up… how a tiny currency move delivered a 222% gain after just five days
• "Arguing over the bar tab on the Titanic"… readers gripe about taxes and government policy… Bill Bonner's new book of essays… and more…

0:00 — Wall Street is starting a new quarter with its rally cap firmly set. If you're keeping score at home, the "wealth effect" described in the Fed's playbook last November appears to be kicking in.

0:18 — The Bureau of Labor Statistics (BLS), for example, delivered a March unemployment report that beat the Street's expectations.

• The private sector added 230,000 jobs; government cut 14,000. Net gain = 216,000
• U-3 unemployment — the popular figure covered by most media outlets — fell from 8.9% to 8.8%, a two-year low
• U-6 — including part-timers who want to work full time and people who've given up looking for work — fell to 15.9%.

These headline numbers are what have traders giddy this Friday morning.

0:51 — We can't help ourselves. When we look we find these clouds under the silver lining:

• Length of the average workweek: unchanged
• Average hourly earnings: down slightly
• Percentage of the working age population in the labor force: stuck at a low last seen during the recovery from the 1981-82 recession.

Revisiting the chart maintained by the Calculated Risk blog — plotting the pace of both job losses and recovery in every postwar recession — we see this:

[Ed note. Our friend John Williams, of ShadowStats.com, calculates the real unemployment rate — U-6 plus all the people who gave up looking for work more than a year ago — at 22.0%. Mr. Williams' real-world calculation peaked last November at 22.6%.]

1:32 — The March ISM Manufacturing survey also turned in a robust number this morning: 61.2. Anything above 50 means the sector is growing… the index has been showing growth for 20 straight months now.

Still, a critical component of the index — the prices manufacturers pay for their raw materials — is up to 85, the highest reading since July 2008. And the pace of increase is accelerating.

"We're seeing cost increases starting to come through at a pretty rapid rate." Bill Simon, Wal-Mart's CEO, told USA Today earlier this morning. A reader mail from the steel industry corroborates the trend, below.

1:41 — But details like these matter not to stock traders chasing a bull market. The Dow is pushing 12,400 and the S&P is already above 1,335.

1:46 — "Their objective, obviously, is to improve the economy and to create jobs," PIMCO's Bill Gross of says of the Fed's easy money trick, "but also to put a floor under the stock market, and we know that's working."

As you know, the rising market — and now encouraging economic headlines — has spurred speculation the Fed will end QE2 sooner than the June 30 target date.

Yesterday, a regional Fed chief upped the ante and suggested the Fed might actually raise short-term interest rates by year-end from the current near-zero levels. The Federal Open Market Committee's next meeting is Wednesday, April 27.

Afterward, chairman Ben Bernanke will hold his first quarterly news conference. We can confidently forecast a barrage of pointless chatter and speculation about what the Fed will do over the next 26 days.

1:54 — Here's a development we have been waiting for. After nearly three years of litigation that ended up in the Supreme Court, the Federal Reserve has thrown open a set of books that it never has before in its 97-year history.

Under court order, the Fed has revealed who borrowed from its "discount window" during the Panic of 2008. The discount window is where a bank goes to avert a liquidity squeeze; it doesn't reflect well on a bank's reputation.

Thus, the Fed and the banking industry resisted mightily when Bloomberg News and Fox Business asked for it. The Clearing House Association, a consortium of all the major banks, said disclosing this information could cause bank runs, a worldwide depression, maybe even an asteroid strike.

The media companies pressed their case all the way to the Supreme Court, which turned away the banks last month. There were no bank runs or asteroid strikes yesterday upon the data's release, although the KBW index of banking stocks did fall a modest 0.4%.

2:12 — Goldman Sachs has shown up at the discount window at least five times since September 2008 — three times in the midst of the panic, once in 2009 and once in early 2010. The biggest loan was $50 million on Sept. 23, 2008.

That was two days after both Goldman and Morgan Stanley — the only survivors among the "Big Five" investment banks that stood before the panic — acquired the status of "bank holding companies." That was a step they took for the express purpose of getting access to the discount window.

2:28 — But it turns out foreign banks were the biggest borrowers by far as the crisis reached a crescendo. During the week in October 2008 when borrowing reached its peak, foreign banks accounted for 70% of the $110.7 billion borrowed.

The French-Belgian bank Dexia was the biggest borrower at $33.5 billion. Four of the top five borrowers were foreign, in fact. The fifth was Wachovia, which borrowed $29 billion, to no effect, since the Fed and Treasury had to arrange a shotgun marriage with Wells Fargo.

2:37 — Arab Banking Corp., a lender part-owned by the Libyan central bank, borrowed $35 billion during an 18-month period following the Panic of 2008.

2:46 — "The American people are going to be outraged when they understand what has been going on," says Rep. Ron Paul, chairman of the House subcommittee that oversees the Fed. "What in the world are we doing thinking we can pass out tens of billions of dollars to banks that are overseas?"

Reporters and Fed watchers have only begun to digest the 894 pdf files of data the Fed released yesterday. It will be the focus of the next hearing by Paul's subcommittee. We'll keep you up on their findings.

2:53 — Oil pushed past $107 a barrel this morning, another new high in the post-Panic of 2008 era.

Nothing on the ground in Libya really changed in the last 24 hours, but Defense Secretary Robert Gates told Congress, "We have considered the possibility of this being a stalemate and being a drawn-out affair."

So much for the limited time and scope promised at the outset. Not that we ever believed them in the first place, right?

3:39 — The jobs report has also goosed the greenback… conversely, gold has been knocked down to $1422 as we write. We expect it to go a bit lower before presenting yet another buying opportunity.

3:45 — The dollar index is back above 76. Indeed, the dollar is up against every major world currency — even the Swiss franc, which is becoming the "safe haven" currency play of choice.

On Monday, Abe Cofnas recommended a dollar-franc trade that's up 160%… and could be up 222% by day's end. Abe will also likely close out a dollar-yen play with a 170% gain today.

Mr. Cofnas next trade recommendation will be announced first thing Monday morning. If you want to take a look, do so here.

3:51 — Leave it to our friend David Walker, the former U.S. comptroller general, to make an apt analogy…

We're one week away from the latest and greatest deadline in which a "continuing resolution" funding the federal government is set to expire and we're faced with a "government shutdown."

Knuckleheads from both parties are digging in over roughly $30 billion of spending… in a $3.7 trillion budget. Uh… that's less than one percent of the total budget. "This is like arguing about the bar tab on the Titanic," Walker quipped this morning in a Yahoo Finance interview.

Exactly. You can see his interview here.

3:59 — "Why haven't I seen an attack in your newsletter," a reader wants to know "on whomever devised the 2% reduction of FICA withheld from employees this year to replace the Making Work Pay income tax credit taxpayers have had for the past couple of years?

"Isn't that stealing some more Social Security funds to replace lost income tax funds?

"And isn't 2% of say a $90,000 two-family wage income like $1,800 less Social Security tax collected, as opposed to a maximum $800 Making Work Pay income tax credit for a family of two?

"The purpose seems to be to reduce benefits to the retired folks in order to increase take-home pay to the working folks. Has anyone computed the amount of reduced Social Security collections that 2% of FICA taxable wages paid in the United States must be?

"What kind of 'Wise Guys' make these decisions?"

The 5: We haven't attacked anyone per se. It's just not our style (wink, wink).

We have noted, though, how incredibly shortsighted the reduction is. And how replete it is with unintended consequences. And how it's endemic of the government's effort to manage 'crises' by kicking the can down the road… just as it has for decades.

Instead of encouraging folks to save and invest, we're laboring on the assumption we can borrow, spend and consume our way to wealth.

4:31 — "Our son is a university student full time but has had his own mobile DJ business since he was 12," writes a reader who wants to weigh in on the travails of small business.

"It's mostly Friday- or Saturday-night gigs about once or twice a month. I help him with the paperwork, but it's incredible what one small part-time business can attract in the way of federal, state, county and city taxes and licenses.

"As the business grows, it gets worse. If it weren't for the fact that I take care of it, I know my 21-year old son, a budding entrepreneur, would give it all up.

"We try to keep the costs down by only using an accountant for federal taxes, but he still pays more for the accountant to sort out the mess than his tax liability actually is. And still there are more forms coming in all year round, wanting more checks for local taxes, etc.

"It's not worth it — better to go on unemployment or disability or student loans."

The 5: Hmmmn… that's what an economist would call a "disincentive."

4:48 — "I work in the steel service business," writes a third, "as a first-stage processor to industry. Our prices currently are outrageous and growing. Ahhh…. our margins are good. We are on the receiving end of increased profits due to price inflation. They will be good until they're not good. Exactly what happened in 2008 also.

"A customer suggested today that Japan is going to need steel. Demand should go up. Maybe, but my comment is the Japanese don't have any money. They could cash in those dollars they own and convert them all to yen. But…

"It's going to be interesting to see where it ends up. Printing money to buy printed money. The world can't print the money fast enough. Looking like a bonfire to me.

"Ooooh, baby, let's light the fire! Just don't know exactly where to place the winning bet."

The 5: Abe Cofnas went two for two this week following a very similar scenario. Up on the dollar… down on the yen. The trades made 222% and 170%, respectively. If you want to learn how, he can explain it here.

5:00 — "Can you explain how the1099 provision of the health care law is going to generate $22 billion in revenue? Are they assuming this provision will cause somebody who wasn't paying taxes before to suddenly start paying taxes. Makes no sense to me."

The 5: Yeah, that's the gist. The rule was intended to prevent underreporting of income and effectively deputizes small businesses to do the bidding of the IRS.

The Senate is now scheduled to vote Tuesday on the repeal measure already passed by the House. The vote, however, will likely be enshrouded by the looming debate to raise the debt ceiling. At least we have more entertainment to look forward to next week.

Have a good weekend,

Addison Wiggin
The 5 Min. Forecast

P.S. With our publisher John Wiley & Sons, we've just released a collection of essays written by Bill Bonner called Dice Have No Memory. We'll be writing more about the book next week, but if you're a fan of Bill's writing, like most of us, you may want to get your copy now.

P.P.S. Thanks, if you were one of the 800 readers who answered our call and donated to Japan earthquake relief during March. We collected a total of $16,061 and just cut a check in that amount to send to the American Red Cross, as promised.