May 16, 2013
Medium and long terms
Continuing themes (from September 2010):
- The US stock market is completing a bear market rally
- The Fed has run out of bullets - interest rates will be under upward pressure. Quantitative easing has become counterproductive, geopolitically.
- Ireland and the PIGS are under stress - the euro may incur another crisis
- China's economy is under inflationary stress
- The Republicans will be going after the Fed, for better and for worse affecting Bernanke's ability to act unilaterally
- The devastation in state and local governmental budgets is just now beginning.
- Housing will make a double dip
Themes that have played themselves out as forecasted:
Obama will likely agree to extension of the Bush tax cuts, including, probably temporarily, cuts for the 'rich.' This will prevent a certain recession if the tax cuts were not renewed, but will exacerbate the budget deficit.
Contrary to all expectations, the dollar may have bottomed, setting the stage for a multi-month rally
Deflation / debt destruction -
Inflation - hold hard assets
May 16, 2013
I will be traveling for the next few days, so updates may be summary and late. However, I will continue to monitor and communicate regarding the gold trade.
There is no evidence that the top is in.
May 8, 2013
Still going up with no new news.
May 14, 2013
I will be traveling for the next few days, so updates may be summary and late. However, I will continue to monitor and communicate regarding the gold trade.
I was looking for a new high to complete the pattern, and there it is. Of course, with subdivisions, it is never clear when the pattern is complete, but now we have a candidate for completion and we can begin to look for verification.
May 13, 2013
Not much to say until we make a new high.
May 11, 2013
Succinct summaries of the week
Education, and Employment
Bonds in a bear market?
Succinct summaries of the week
1. S&P 500 and the Dow
continue their ascent, both hitting new all-time highs.
2. U.S. weekly jobless claims come in at their lowest reading since January
2008. 323K v expectations of 335k.
3. Yen weakens to 100 v the dollar for the first time in 4 years.
4. Nikkei tops 14,000, highest level in nearly 5 years (gained 6.7% for the
5. Dow Jones Industrial Average has not had a losing streak of 3 days this year
— longest such streak since 1958.
6. The German Dax hits highest levels ever as German factory orders for March
grow 2.2% v expectations of a decline of 0.5%.
7. Bank of Korea joins the party, cuts key interest rate to 2.5% from 2.75%.
8. This was the strongest week for equity-fund inflows in 8 weeks
9. Housing remains a tailwind as MBA mortgage applications climbed 7%
week-over-week, rising for the 5th consecutive weak.
10. Over the last 6 trading days, the 10-year yield has had its biggest
positive move since March 2012 (via bespoke).
1. April retail sales gain
2.8% v expectations of +3.5%.
2. Ira Sohn conference consensus is for a melt-up means long side may be
3. Wholesale sales came in weak, falling 1.6% month-over-month v expectations
of 0.1% growth.
4. Job openings fell in March to 3.84M from 3.90M in February. This did however
beat expectations for 3.77M job openings.
5. The hiring rate declined to 3.2% from 3.3%, pretty benign.
revenue! Senate passes online
We've got that. BEA changes
calculation to include 'promises' to fund pensions
- No time
for macro tourists: S&P ignores plunge
in Macro data, soars to new highs
have zero (as in none) trading losses in Q1
Hans Mikkelsen: High Yield debt yields below
5%, or where the US 10yr was in 2007!
initial claims drop to 324k, lowest
Planning 1, South Korea 0 … South Korea cuts
rates to stop hot money flows, despite inflation headwinds
- USDJPY breaches
100 -- yay!
- US 30yr
than expected, pricing at a 2.98% yield
- Nope, no
rotation: Hans Mikkelsen's credit short gets "Crushed"
SPY instead? Home renovation spending plummets
consumer credit misses, as revolving
loans actually decline for the first time in 2013
down, down… Q1 Annual wage growth declines
10yr US auction was rather weak
- And for
our next bucket of cold water, the
dow in Gold terms…
look now, but there may be a run on physical
gold taking place
most since 2009
Volatility gets out of control again
Education, and Employment
By John Mauldin | May 11,
large shortfall of employment relative to its maximum level has imposed huge
burdens on all too many American households and represents a substantial social
cost. In addition, prolonged economic weakness could harm the economy's
productive potential for years to come. The long-term unemployed can see their
skills erode, making these workers less attractive to employers. If these
jobless workers were to become less employable, the natural rate of
unemployment might rise or, to the extent that they leave the labor force, we
could see a persistently lower rate of labor force participation."
Janet L. Yellen, Vice-Chair, US Federal Reserve, March 4, 2013
is graduation time, and this morning finds me swimming in a sea of fresh young
faces as a young friend graduates, along with a thousand classmates. But to
what? I concluded my final formal education efforts in late 1974, in the midst
of a stagflationary recession, so it was not the best of times to be looking
for work. It turned out that I had a far different future ahead of me than I
envisioned then. But I would trade places with any of those kids who graduated
today, as my vision of the next 40 years is actually very optimistic. With all
the advances in healthcare, technology, and communications that have come and
will come, they will get to embrace a world full of opportunity; and yet, this
generation is starting out with more than just a minor economic handicap.
week's letter will explore changes in the work marketplace, changes that
generated quite a lot of discussion at last week's Strategic Investment
Conference. At the end of the letter I will also provide a link for qualified
investors to listen in on a webinar conversation between Kyle Bass and me on
another of the main topics last week: Japan. This is one you'll want to tune in
to. (Warning: this letter will read fast but print long, as there are more than
the usual number of charts and graphs, though the word count is actually
shorter than usual.)
a quick note up front on Japan. As of the last two weeks, Japanese investors
are now net buyers of foreign bonds, and the yen has broken through 100 to the
dollar. I think what is happening in Japan is going to be the nexus of a global
flow of cash that will be unlike any we have ever seen. Attention MUST be paid.
It is windshield time.
David Rosenberg: A Bond Bull Turns Bearish
do we get to full employment and improved national education from the launching
point of David Rosenberg's very recent call (at the conference and elsewhere)
that we will soon see inflation and the onset of a bond bear market? I must say
that he surprised a few of us with his conversion from bond bull to bond bear.
But the reason why
he converted surprised us even more. I am not going to be able to do justice to
his impeccably reasoned, highly detailed presentation in this short space, but
let me hit some highlights.
Rosie thinks that the Fed is going to be surprised by wage-push inflation. How
could we see inflation in wages in such a soft labor market? That was the first
question in my mind, and the following charts give me some reasons for my
present unemployment rate is still higher than at any time in the last 60
years, except after recessions. The Great Recession ended four years ago, and
unemployment is still stubbornly high. Indeed, this is the slowest "jobs
recovery" we have ever experienced. The current level of unemployment has
never been seen four years after the end of a recession.
those who lose their jobs are staying unemployed longer. The fact is that the
mean duration of unemployment is still almost double what it has ever been.
Average length of unemployment is 37 weeks. When the recession ended, it stood
at 23 weeks. This is structural, not frictional, unemployment. Ninety million
American adults now subsist outside the official labor force –It could be
there's an underground economy that we need to capture. The pool of available
labor for the business sector is shrinking 2% per year.
yet, the unemployment rate is still stubbornly high in spite of an
unprecedented rise in the number of people who are no longer counted as being
in the labor force. These are people who are no longer looking for jobs.We are back
to workforce participation levels not seen since the 1970s. A good 5% of US
citizens who are able to work are no longer are looking for work. Part of this
trend is due to alternatives to employment becoming easier to pursue. Millions
have been added to the disability rolls – some 4 million since the beginning of
this century and almost 2 million since the beginning of the Great Recession
(and still rising at an alarming rate!). Others have gone back to school,
borrowing money in the form of student loans, which have topped over $1
trillion and are the only form of consumer credit that has been on the
a quick aside, we are also seeing skyrocketing rates of late payments as
student loans overwhelm the ability of borrowers to pay. This is a true crisis
brewing, as student loans are the only type of debt that cannot be discharged
in bankruptcy. Student loans can make you an indentured servant for a very long
would-be workers find that in some states they can collect more on government
assistance than they can earn by working lower-wage jobs, and thus they have no
economic incentive to look for jobs that would actually lower their income. As
I wrote in a recent letter, this is why we are seeing a large rise in
non-reported incomes and jobs. And finally, there are those who are just
discouraged. Jobs seemingly do not exist for their skill sets and in places
where they can access them.
so many people not participating in the labor market, isn't it reasonable to
assume that if jobs again ever become available, these people will rejoin the
official workforce? And wouldn't that create a shadow supply of workers that
would keep wages suppressed for a long time?
yes and maybe no. Rosie makes the case that there are numerous jobs available
and that the numbers are rising, and there is data that supports his argument.
I will reproduce here a few of his charts (out of the 59 he showed!). Job
openings are on
the rise and are back to levels last seen in the middle of the previous decade.
what about all the businesses that have jobs on offer but can't find people to
fill them? The following chart is from Rosie's and my mutual friend William
Dunkelberg, chief economist for the National Federation of Independent
Businesses. While job openings are not at all-time highs, the trend is
next chart shows the ratio of job openings to new hires. It is at a six-year
high. As Rosie stated (inexact quotes, from my notes)
for labor? Labor demand is not weak – JOLTS survey shows job openings up 10%,
employers can't find qualified applicants. Firings plunge, layoffs 10% lower than
in 2007. Number of job quitters rises – people leaving jobs to go to new ones,
the 'take this job and shove it index.' 7.5% unemployment is actually the new
are companies doing? More overtime, longer work week. Combination of rising
wages, productivity growth heading lower. We've taken a lot of inventory out of
the labor market. Keep your eye on unit labor costs. Correlation with inflation
– unit labor costs are on the rise.
are increasingly willing to leave a job and go to another one, yet productivity
has recently begun to fall.
young people are having increasing difficulty landing jobs. People aged 20-24
are still unemployed at levels not seen unless a recession is involved (see
chart below). And research keeps coming in that more than 50% of college
graduates are stuck in jobs for which a degree is not needed.
though the headline unemployment rate is falling, a large part of that drop is
due to the precipitous plunge in the participation rate, as well as a rise in
low-paying jobs. Curiously, it now seems a disproportionately high level of
temporary jobs is no longer a precursor to economic recovery but is a new
of the responsibility for that increase in temporary employment can readily be
laid at the feet of the Affordable Healthcare Act (Obamacare). Employers do not
have to pay health insurance for temporary employees; that burden falls on the
for lower-wage employees can be a huge percentage of overall labor costs. While
you may argue that employers should cover workers at all levels, the data
coming in says that is not happening – thus the rise in temporary workers. Even
an established employer like UPS is hiring new temporary employees in low-skill
jobs at low wages without health insurance for their first year and cutting
back on employees with major seniority (who cost more than double what new
employees do), not giving them enough hours to survive and forcing them into
the temporary market to meet their basic living needs.
see evidence of this happening system-wide in the data showing lower hourly
wages and a reduced number of hours in the work week. And those trends seem to
be stabilizing. We are seeing the creation of a two-tier market, an upper tier
for those with skills in demand and a lower one for those whose skills just do
not command a premium in today's marketplace.
makes the argument that there is a shortage of skilled labor and that the price
for those workers is going to rise, surprising the Federal Reserve, which still
looks at historical data from a world that no longer exists. And he says this
segment of the labor market is going to be large enough to create wage-push
is an interesting argument, and contradicting David Rosenberg is generally not
a good idea, although he did not convince Lacy Hunt or Gary Shilling, at least
not at the conference. But at any turn there is always someone who has to lead
the way. His arguments are something we must pay attention to.
the panel discussion later in the day, I agreed that there are two labor
markets, but the divide is between workers with skills that are in demand and
workers whose jobs require no special experience or education.
Skills Versus Education
am writing part of this week's letter in the rafters of a huge auditorium as I
watch 1100 liberal art graduates at a major university receive their degrees.
(I long ago made a promise to be here.) This was an expensive education, and
the graduates are smart; yet when you ask them what their plans are, all too
often you hear that they have not been able to find jobs or are opting to
continue with school, often borrowing yet more money to do so, as they see no
other viable options.
research suggests that the cost/benefit ratio for education is not as good as
it once was. See for example this
article by Jeff Selingo.
– at least in the conventional sense – is not always necessary for job success.
All too often it is the enemy
of success. Yet the fallacy persists among the unemployed that "going back
to school" will somehow solve their problems.
most cases, it will not. The unemployed do not need more school; what they need
are more skills.
Why? Because what employers need are abilities. Workers are essentially a
delivery mechanism for the ability to do whatever the employer happens to need
done. This is not to say that formal education is unimportant; it is critically
important – but not for the reason most people expect.
and diplomas are credentials. They do not, in and of themselves, guarantee that
the holder possesses the skill an employer wants. They serve as screening
tools, used to reduce a long list of applicants to a smaller number for closer
want workers with the necessary skills. Workers want an employer who values
their particular skills. When a match is made, everyone wins. Skills are the
key to every match.
can be acquired in school, of course. Indeed, it is impossible to spend
thousands of hours in classrooms during one's formative years, while the brain
is in peak learning mode, without acquiring at least some kind of skill.
Children and adolescents are highly tuned skill-acquisition machines.
schools produced the right number of students with the right sets of skills,
the economy would be much closer to full employment. Something is wrong
those with college degrees are clearly able to find jobs of some kind. The
unemployment level for college graduates is about half that of high school
grads and almost three times better than for those with no high school degree.
Education does matter.
Ellsberg gives us one reason for that seeming advantage a degree delivers
people with college degrees tend to earn more. But that could be because most
ambitious people tend to go to college; there is little evidence to suggest
that the same ambitious people would earn less without college degrees
(particularly if they mastered true business and networking grit).
while most people who end up starting businesses likely have college degrees,
those degree-bearers should be well aware (as they learned in their freshman
statistics classes) that correlation does not equal causation. Assuming that
college was responsible for their success gives higher education more credit
than it deserves. (New York Times: Will
Dropouts Save America?)
as Ellsberg describes it, has yet another way to divide today's job market into
two pieces: formal and informal. The "formal" job market is the
old-fashioned one in which employers advertise and workers send resumes. It was
never as effective as people thought. Successful professionals and business
owners have long preferred the second, informal market.
you need someone who can do X, you ask trusted friends and colleagues who they
know. You will usually find a well-qualified candidate in short order. (And now
you use LinkedIn and other social media.)
role does your wall-decorating degree play in this process? A little – and a
lot. If you can do what needs to be done, employers usually won't care where
(or if) you went to college. But, since they turn to people they know when they
search for candidates, and since our lifelong friendships are so often formed
in college, being "in the circle" increases your odds of being known
to the right people at the right time.
old saying is then somewhat true: it isn't just what you know; it's who you know.
if you advertise for a new employee today on one of the online job boards, you
can get hundreds of resumes. Most are just people sending you a resume in hopes
of attracting attention, but you can still get an overwhelming number of
potential employees. How do you sort? One way is by education. That degree
helps you sort, even when the job really does not require a degree.
the skills advantage shows up in the next graph. Notice that the older you get,
the lower your likelihood of being unemployed. As I have shown in previous
letters, Boomers are not only working more than any other age cohort, they are
taking market share from the 20-somethings. In fact, as of less than a year
ago, 100% of the overall increase in jobs was going to those age 55 and up.
Young people were actually losing ground in what was already a slow jobs
reasons are trite but obvious. We Boomers have not saved enough to retire and
must keep working. Given our fewer remaining work years, we'll work where we
can and for what we can get. And then there are those of us who simply have no
interest in anything that looks like traditional retirement. We are living
longer and healthier lives than previous generations enjoyed, and there are simply
more of us.
the youngest Boomer probably has 35-40 years of work experience and a lot of
acquired skills. Young people may have more energy, but many jobs are not a
function of simple energy and enthusiasm. Go into a Barnes and Noble or any
number of other stores and notice the ages of those working. There are young
people, sure, but I see my age peers as well. I didn't see that 20 years ago.
And those "starter" jobs are where workers gain experience.
have policies in place that encourage young people to load up on debt to get
that degree. We need to create programs that match skills and jobs and that
give employers incentives to hire and train those younger workers.
Paul McCulley said at the conference last week,
22-27 are the years that really matter for your lifetime of financial security.
We now have a job market that is the antithesis of what you and I graduated
is a structural phenomenon, not cyclical. It will not heal itself with
platitudes about more and better education. New businesses are being formed at
the lowest rate in generations. Over the long term, the growth in the job
market comes from new businesses. Want to create jobs? Stop increasing costs
and regulations and making it harder for entrepreneurs to get started.
get the SEC to issue the rules that Congress mandated they write over a year
ago (the much-ballyhooed JOBS Act), which will make it possible for new
ventures to publicly announce their need for capital on the internet without
running afoul of the current regulations. The SEC is way behind the 90-day
deadline specified in the act. The law as written by Congress is clear. Those
groups lobbying for the status quo and standing in the way need to step aside.
You are costing young people future jobs. Those are MY kids. And everyone
for the record, I am an equal opportunity employer. I have younger and older
employees, all genders and races. Talent and a solid work ethic are the
currency I look for.)
Kyle Bass and Japan
you know, I am a firm believer that the state of the global economy is such
that we as investors need to be diversified, flexible, and opportunistic.
Consequently, I spend a great deal of time and effort looking into alternative
investment strategies and managers. The Mauldin Circle program was created
specifically to provide access to "best of breed" alternatives
managers that I believe in. That's why I am particularly pleased to announce an
upcoming Mauldin Circle webinar event featuring Kyle Bass of Hayman Capital
readers will recognize Kyle as one of the few investors who successfully
predicted and profited from the subprime mortgage crisis in 2008, making
significant gains for his investors. He has since continued to make
well-defined predictions on the European sovereign-debt crisis and is a leading
provocateur on the unsustainability of Japan's debt.
join my partners at Altegris Investments for this special webinar on May 29th and
learn more about how Kyle is globally positioned to leverage his investment
thesis. This may be the most compelling discussion that you hear all year. I
will be in Brussels talking with thought leaders and EU politicians, and Kyle
will just be back from Asia and a deep dive into Japan, so we will be giving
you the view from both sides.
you are a qualified purchaser or a licensed investment adviser, qualified to
make private placement recommendations, please join us for this exclusive Mauldin
Circle webinar on Wednesday, May 29, at 12:00 EDT/9
PDT. Be sure to register here
for this event – it will be one of the most interesting discussions of the
qualification by my partners at Altegris, you will receive an email
invitation. I apologize for limiting this discussion to qualified
purchasers and investment advisors, but we must follow the rules and
regulations. I look forward to having you at this exclusive Mauldin Circle
event. (In this regard, I am president and a registered representative of
Millenium Wave Securities, LLC, member FINRA.)
Tulsa, Atlanta, Nashville, and Brussels
conference last week was powerful and inspiring. But before we got started, I
took time to visit with some of the team at International Stem Cell. We spent a
good deal of time going over the exciting research they are doing on stem cells
and Parkinson's disease. Even though I have not written about biotech in a long
time, I still follow the industry closely. There is just so much promise of
real breakthroughs everywhere I look.
ISCO is the company that launched the Lifeline Skin Care product that I have
written about. Almost a dozen people at the conference came up and thanked me
for recommending they try it. The skin crème is a follow-on of research they
were doing on growing skin for burn victims. It is not a miracle, but it has
made a difference to many, and the product helps support their far more
important research on diseases such as Parkinson's. You can learn about
Lifeline at http://bit.ly/0504md.
believe we will see cures for many of the conditions that afflict us and have
so far eluded treatment. I will be writing on my latest biotech findings in
leave for Tulsa next weekend to "give away" my daughter Abbi to her
fiancé, Stephen. Just Abbi, Stephen, and 200 of their closest friends.
"Dad, we just can't cut the list any more!"
following Wednesday I head for Atlanta for a board meeting of Galectin
Therapeutics (another biotech I follow) and then move on the next day to
Nashville for a presentation for my partners at Altegris Investments. Then it's
back home for a day or so before I fly for Brussels for a speech. I might stop
over in London before heading back, but one way or another I'll be spending
extensive time with Jonathan Tepper, my Endgame
is time to hit the send button and race to the airport. Dallas has a newly
built terminal to replace the old one at Love Field. It is very nice and a true
upgrade, but there the same old TSA drill and long lines await me. I know there
is better technology available than what we are forced to endure. We pay for
all this, and those workers are not cheap. Where is the new technology to make
airport security faster and more efficient? But kudos to the head of the FCC
telling the FAA to allow us to use our iPads as we take off. The FAA is so
behind in so many small ways that add up to a bad overall customer experience.
a great week. And figure out how to hire an able young person!
started to work at the tender age of 10 analyst,
Copyright 2013 John
Mauldin. All Rights Reserved.
Bonds in a bear market?
The stock market did little to help figure out where we are this week, so I will turn to the bear market in bonds.
Gross' call for a bear market in bonds is intriguing. I like his rationale, but want to look at the technical side for a moment.
To set the stage, bonds (and interest rates, which are the inverse of bond prices) have a well-established 60-year cycle, which last bottomed in 1981. While it is not required for a cycle to peak in the middle, and is the exception rather than the rule when it does, 1981 + 30 = 2011. Some time in the next few years, interest rates will begin a multi-decade increase and bonds a multi-decade decline. What
do technicals tell us about where we are?
The chart, above, is an Elliott nightmare. However, there is one, five-wave pattern, which could be, and probably is, a terminator. The question is, is that pattern over?
From point C, we have completed 5 waves up, and from point (1) or a, we may be completing a retracement. The way to bet is that the medium term trend is still up, and a new high is a distict possibility.
So, is Gross wrong?
Probably not. His goal is not to precisely time markets, but to get turns generally correct.
If the bond market has not topped, already, look for the next top, which should be THE top, during the summer.
(First written in September 2009; updated with EPA bullet point in December 2009; China and Europe points added in May 2010)
The primary, fundamental issues with the economy are as follows, in no particular order:
Click here to get this Commentary in printable form
To receive email updates when there are new postings, send me an email here.