The following is an excerpt from Richard Russell's Dow Theory Letters
Guest post by Jon Strebler
The unemployment rate dropped to 7.4% last week, the lowest since 2008; yet the report was “a disappointment.” Why? Well first of all, it was hardly all bad news – both the Dow Industrials and S&P 500 once again scored new all-time highs after its release on Friday. And more people continue to find work; we’re now closing in on the 116 million workers mark that will finally surpass the 2008 pre-recession peak.
But after five years of recession/recovery and ungodly gobs of money thrown at the economy, you’d expect a bit better. 7.4% unemployment is still pretty high, considering that 4-6% unemployment is thought to be “ideal.” It seems especially high given that we were lower than 7.4 % every year from 1984 to 2008, with only one exception (7.5% in 1992), and 6% or lower every year from 1995 until 2008. Meanwhile, as we close in on the old record number of workers, the nation’s population has grown by some 8 million souls since 2008. About 38% of Americans were considered “employed” in 2008; to match that old ratio would require 119 million employed now, not just 116 million. So we have a ways to go…
Another problem with the report is that many of the newly-created jobs are in the temp services and leisure/hospitality sectors. The first are, by definition, not dependable sources of long-term employment, while the latter tend to be low-paying jobs. So are retail jobs, which are coming back slowly – a sign of Americans’ reluctance to spend. And finally, construction jobs lag more than most other areas, perhaps a sign of just how far ahead of itself the housing market had gotten by 2007.
Meanwhile, the unemployment rate itself can be misleading, as it ignores the underemployed and discouraged workers. How many millions of Americans are working, but for only 25 or 30 hours a week instead of 40, or in a lower-paying position than they should be (think of someone with a master’s degree, working at McDonalds)? They’re “underemployed.” Or the guy who after 6 or 12 or 20 months of looking for a job just gives up; he’d love a job, keeps hoping to find one, but he’s no longer “actively” searching for one as the government defines that. So he’s not officially unemployed. He’s a “discouraged worker,” and we can only guess how many millions of those are out there. Were these issues as big 5 or 6 years ago as they are now; are we comparing apples to apples with that 7.4% figure? I don’t think so.
But again – talk is cheap, and it’s always easy to find fault if that’s what you’re looking for. The stock market, smarter than all of us, understands everything I’ve just written – plus much more. It says the glass is more than half-full, there are more positives in the economy than negatives today and in the foreseeable future, and that’s pretty much what counts. All the major averages are making new highs, while tech stocks are holding their own, so DIA, SPY, XLK, and especially QQQ (which mostly tracks large cap stocks, heavy on the tech issues) still look good.
“Economic medicine that was previously meted out by the cupful has recently been dispensed by the barrel. These once unthinkable dosages will almost certainly bring on unwelcome after-effects. Their precise nature is anyone's guess, though one likely consequence is an onslaught of inflation.”
That sentiment, by Warren Buffett, echoes the concerns that many of us have about the unprecedented amount of fiscal stimulus and nearly unimaginable amount of monetary stimulus applied to the economy since 2007. Bush got a $700 billion stimulus package through Congress in 2008 and was demonized by the Democrats for doing so. The next year, Obama got another $700 billion stimulus package approved for the exact same reasons, and was scathingly criticized by the Republicans for being fiscally irresponsible. (Why does ANYONE want to be President)? The Fed, not wanting to be left out, embarked on its historic “helicopter drops” of cash - and so we did indeed avoid financial Armageddon but, as Buffett asks: At what cost?
Gold responded by adding onto its existing bull market, anticipating “an onslaught of inflation.” But it didn’t happen, or at least hasn’t happened yet. Timing– once again it boils down to that. Don’t tell me what’s going to happen; tell me when it’s going to happen. As always, that’s the key. The stock market is over-valued and over-bought – so what? It’s been that way for years – by the old standards, since the mid-1980s - and yet it keeps going higher.
Are gold and the rest of the precious metals complex now turning into the flip side of that? Under-priced, way below their pendulum best-fit lines as shown a few weeks ago, but apparently in no hurry to remedy that - could this go on for years there as well? Don’t bet your life that it won’t. The old concepts of over-valued, under-valued are no longer as helpful as they used to be. If “values will win out” in the long-run as sage advisers have told us in the past, then it’s equally true that “in the long-run we’re all dead." Prudent investing has gotten tougher as a result, and that’s an important message Mr. Russell has been trying to communicate in his comments of recent months.
But cutting to the chase: The precious metals complex probably put in a bottom last month, and will probably trend higher for the rest of the year. Probably. Last week’s action was disappointing, with Monday no better. But I’m still optimistic. It is still the middle of summer, the time of year when historically the metals tend to bottom. So a bit of indecisive wandering at this time isn’t too surprising. Gold and the mining shares may be in the process of forming modified head-and-shoulders bottom formations, which would be quite bullish. But it’s much too early to tell. Meanwhile, let’s give the metals the benefit of the doubt, betting that they will strengthen in the coming weeks.
To recap, nothing much has changed. We’re in a rip-roaring stock bull market where more and more positive news is answering the question people had a year or two ago: What in the world justifies this market going higher? Stay with your modest positions in the stock market as advised in past weeks and months.
Similarly, hold your long-term, core positions in gold – as always. If you did buy more of the precious metals complex a few weeks ago, either to add to your core holdings or as a speculative trade – stay with those purchases as well. If you still want to “take a flyer” on GDX, GDXJ or similar mining shares, you haven’t missed much yet so it’s not too late for that. It’s unlikely that the metals and miners will fall apart here and make new yearly lows, but stranger things have happened. Hope that they don’t.
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