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  • The Truth Behind Today's Dismal U.S. Jobs Report

    Michael Lombardi wrote - The Bureau of Labor Statistics reported this morning that the U.S. economy created 157,000 jobs during January. The U.S. unemployment rate went up to 7.9% in January from 7.8% in December of 2012.

    Now, this is very important and I want all my readers to know about it…

    The Bureau reported that the underemployment rate (which includes people who have given up looking for work and people who want full-time jobs but who can only get part-time jobs) was at 14.4% in January-the same rate it was way back in November 2012 (seasonally adjusted). To me, this shows absolutely no improvement in the unemployment situation in this country!

    And jobs created in the U.S. economy continue to be in the low-paying retail and service industries. Job growth in the low-paying sectors! In February of 2010, the unemployment rate for the wholesale and retail trade sector was 10%. By December of 2012, it declined to seven percent-that's where the jobs are being created. (Source: Federal Reserve Bank of St. Louis, last accessed February 1, 2013.)

    The jobs market in the U.S. economy is tormented. For the year of 2012, the average monthly jobs growth was 181,000. But, as most economists will tell you, the U.S. economy needs jobs growth of 250,000 per month for the economy to see any improvement. (Source: Reuters, February 1, 2013.)

    It's obvious there are still many troubled spots in the jobs market of the U.S. economy. If they are not fixed soon, they will drive the U.S. economy into further deterioration. It is startling to know that 38.1% of all those unemployed in the U.S. economy have been without work for 27 weeks or more.

    If this goes on for much longer, the U.S. economy will go through another set of troubles. A couple of days ago we learned that the U.S. economy actually contracted in the fourth quarter of 2012 for the first time in three and half years. As I write below, consumer confidence is breaking down to 2011 levels! But let's not fear; the stock market is rising (I'm being sarcastic, of course).

    Michael's Personal Notes:

    Consumer confidence should be followed closely, as it gives investors an idea about consumer spending and where the U.S. economy might be heading. When consumer confidence rises, it means U.S. citizens feel good about spending. Consumer spending accounts for about 70% of U.S. gross domestic product (GDP).

    Unfortunately, consumer confidence in the U.S. economy is plummeting-the last thing you want to see when you are looking for economic growth.

    U.S. consumer confidence fell drastically in January. The Conference Board, which tracks the Consumer Confidence Index by conducting a monthly survey, reported that the index declined to a level of 58.6 in January from 66.7 in December of 2012-a drop of 12% over a one-month period. (Source: The Conference Board, January 29, 2013). The Consumer Confidence Index is at its lowest level since November of 2011!

    Examining the report even further, it shows that 22.9% of the respondents to the survey expect their incomes to decline. That number was 19.1% in December. In addition, the number of people claiming that it's difficult to get a job has increased to 37.7% from 36.1% in December.

    This shouldn't be a surprise to my Profit Confidential readers. Consumer confidence fell for the very reasons and concerns I have been writing about in these pages for months.

    Since the financial crisis began, so-called economic growth in the U.S. economy has been insignificant at best. While some politicians (and even analysts) might continue to speak about jobs creation in the U.S. economy, the fact of the matter is that jobs growth is hardly keeping up with new people entering the workforce.

    On top of the bleak employment picture, consumers are worried about their finances, as they simply don't have a lot to spend. For example, from 2011 to 2012, weekly inflation-adjusted earnings for full-time wage and salary workers in the U.S. economy actually declined $1.00-from $336.00 in 2011 to $335.00 in 2012. (Source: Bureau of Labor Statistics, last accessed January 29, 2013.) One year later, things cost more, but are you making the same amount of money?

    For economic growth to really happen in the U.S. economy, consumer confidence has to increase so consumer spending can rise. This just isn't happening right now.

    Where the Market Stands; Where it's Headed:

    It's up, up and away for the stock market. This morning Exxon Mobile Corporation (NYSE/XOM) reported earnings above expectations and the U.S. jobs number report for January is being taken positively by investors. I have been waiting for the final speculative blow-off for the stock market rally that started in March of 2009-we're living through it right now.

    What He Said:

    The year "2000 was a turning point of consumer confidence in high tech stocks. 2006 will be remembered as the turning point of consumer confidence in the housing market. That means more for-sale signs going up, longer time periods to sell homes, bloated for-sale inventory and eventually lower prices for homes. But this time, the turnaround in consumer confidence will have a bigger impact on the economy. Hold onto your seats, this is going to be a nail biter." Michael Lombardi in Profit Confidential, August 24, 2006. Michael started talking about and predicting the financial catastrophe we began experiencing in 2008 long before anyone else.

    Feb 21 9:57 AM | Link | Comment!
  • Why Aren't We Looking At The Japanese Economic “Lesson?”

    Quantitative easing hasn't done much for the "small guy" in the U.S. economy other than create jobs in low-wage-paying sectors, while the "big guys" have enjoyed the propping up of stock prices. Why aren't we looking at the Japanese economy as a lesson? After all, what happened there could very well become the fate of the U.S. economy.

    Our Federal Reserve unleashed multiple rounds of quantitative easing and so did the Japanese central bank when the country's crisis hit back in the 1990s. But after eight rounds of money printing, the Japanese economy is back in recession.

    What happened in the Japanese economy as it printed money? Its currency, instead of going down in value against other world currencies, went up in value. But all that is changing now. Just look at this chart:

    (click to enlarge)

    Chart courtesy of StockCharts.com

    The Japanese yen has been rising in value since July of 2007. But starting in 2012, the yen collapsed as the Japanese decided to go "no holds barred" on quantitative easing. The Japanese yen declined in value significantly compared to other major currencies from a high of 130 in October 2011 to 110 today.

    Since the Federal Reserve announced its first round of quantitative easing, the U.S. dollar has only declined about 11% against a basket of other major world currencies. But, as we see from the chart above (the Japanese "lesson" as I call it), it does not take much for the market to lose faith in a country's currency. The yen has fallen 15% in just over a year.

    My skepticism about what the Federal Reserve is doing grows as I see the Japanese economy continue to suffer even after multiple rounds of quantitative easing and almost two decades of artificially low interest rates. Quantitative easing hasn't worked for the Japanese economy; the chances of it working for the U.S. economy are bleak in my opinion.

    Actually, by increasing its balance to almost $3.0 trillion, the Federal Reserve may have caused a bubble in the stock market.

    On the other hand, the Federal Reserve may have no other option but to continue creating money, as the U.S. government needs the money to pay its bills-the government issues bonds, and the Federal Reserve buys the bonds and gives money to the government.

    If quantitative easing can bring economic growth to the U.S. economy, then where is it? Why is the jobs market still tormented? Why are businesses stockpiling cash instead of reinvesting it? Why are real incomes declining? Why has the housing market become a playground for big financial institutions instead of homeowners? And why did the U.S. economy unexpectedly contract in the fourth quarter of 2012? Sounds more and more like Japan's "lost decade" to me.

    Where the Market Stands; Where it's Headed:

    Was Tuesday the top for the stock market? We'll soon find out. On Wednesday, the Dow Jones Industrial Average hit a new post-credit crisis high of 13,969. Since then, the market has come down as companies earnings have disappointed and reality has set in: the U.S. economy contracted in the fourth quarter of 2012.

    We'll see where the market goes from here. But, as I have been writing, we are either at the top or close to it.

    What He Said:

    The year "2000 was a turning point of consumer confidence in high tech stocks. 2006 will be remembered as the turning point of consumer confidence in the housing market. That means more for-sale signs going up, longer time periods to sell homes, bloated for-sale inventory and eventually lower prices for homes. But this time, the turnaround in consumer confidence will have a bigger impact on the economy. Hold onto your seats, this is going to be a nail biter." Michael Lombardi in Profit Confidential, August 24, 2006. Michael started talking about and predicting the financial catastrophe we began experiencing in 2008 long before anyone else.

    Feb 20 9:24 AM | Link | Comment!
  • What's With Russia Buying All This Gold?

    As currency devaluation is becoming a new goal for countries, central banks in the global economy are losing trust in each other.

    The notion followed by central banks is that if they devalue their currencies, the prices of their goods become competitive in the global economy. Unfortunately, this may work in some situations, but right now this strategy is questionable. Why? Because to achieve their objectives of devaluating their currencies, central banks are printing money like never before.

    Now with all this, think about what happens when central banks increase the circulation of their own currency while the value of their reserves starts to go down as well.

    Let me explain…

    Most central banks have the U.S. dollar as their main reserve currency. But, as the greenback is also depreciating in value, central banks need to replenish their reserves. And central banks are starting to look elsewhere to top up their reserves. For many central banks, gold bullion is the only option for sound reserves.

    The activity of the central banks in the gold bullion market has increased since 2009 when they collectively became net buyers of gold. As I have mentioned in these pages before, central banks will not say when they are going to buy gold bullion or how much they are going to purchase, as they often want to keep their purchases under the radar.

    At the World Economic Forum that is going on in Davos, Switzerland, right now, the First Deputy Chairman of Russia's central bank, Alexei Ulyukayev, said, "We are buying metal and will continue to pursue this course." He also added, "This is a course of asset diversification in a situation when investing in securities or deposits remains risky." (Source: Reuters, "Update 3-Russia central bank to keep buying gold - Ulyukayev," January 24, 2013.)

    According to the International Monetary Fund (IMF), Russia's gold bullion holdings increased by 8.5% in 2012.

    Russia is not the only country buying gold bullion; other central banks are doing the same. For example, the Kazakhstan central bank's gold bullion holdings increased 41% in 2012 over 2011.

    Now consider this: Russia, Turkey, Kazakhstan, South Korea, and Brazil are only few of the central banks making headlines about their recent forays into gold bullion buying. What happens if other countries jump in and buy gold bullion?

    Just look at the Bank of Canada, the central bank of Canada. Its reserves consist of only $184 million worth of gold bullion versus U.S. dollar holdings of $35.75 billion and other currency holdings of $19.43 billion! Imagine what would happen if a country like Canada (one of many countries whose holdings of gold bullion are minuscule compared to their U.S. dollar holdings) decided it needed to diversify into metals?

    The stock market is near a high. The prices of senior and junior gold mining companies are near a low. I know where the best opportunity exists when comparing the two.

    Michael's Personal Notes:

    Mark my words: the U.S. budget deficit will continue to increase and it won't be too long before the national debt soars to $20.0 trillion.

    And if the federal government's deficit isn't a big enough problem unto itself, my concerns grow when I hear stories about cities and sates struggling with their deficits.

    Take the City of Detroit for example. Detroit has run out of money, as the city continues to post an annual deficit, because spending outweighs revenue. The city council has been working to make spending cuts so that the city's finances won't be taken over by the state.

    During a public hearing, the Detroit City Council President, Gary Brown said, "We're in a crisis, and if we do nothing to save $90 million, the state's going to come in and do it and it's going to be a lot worse with respect to our employees." (Source: Reuters, "Detroit council approves cost cuts to stave off state takeover," January 16, 2013.)

    Similarly, Illinois has troubles of its own. The Standard & Poor's credit rating agency just slashed Illinois's credit rating one notch lower to a credit rating of A-. The main reason for the credit rating cut: the unfunded public pension of its cities. (Source: Reuters, January 25, 2013.)

    Minnesota's government employee public pension is unfunded by $16.7 billion, $4.0 billion more than its shortfall in 2010. Out of 12 state public pension funds that are open for new members, 11 of them have deficits, meaning they don't have enough money to pay for what they have promised. (Source: St. Cloud Times, January 24, 2013.) The pension funds with the largest gaps include those of state troopers, local police and firefighters, and public safety workers.

    If states and cities continue to suffer at this rate, at one point down the line, they will not be able to cope with their deficits and they will need bailouts from the federal government. Will they get their desperately needed bailouts? That's another question. (I still remember the 1970s and President Ford telling troubled New York citizens that they couldn't count on Washington for a bailout and that they needed to figure things out on their own.)

    The federal government bailing out states and cities will result in our national debt rising significantly, because our government will have to borrow more as it increases its own budget deficit. We have already seen one credit rating downgrade for the U.S. economy; if Washington starts bailing out cities and states, get ready for another credit rating downgrade.

    Where the Market Stands; Where it's Headed:

    It's quite remarkable. The stock market goes up almost daily, while revenue growth at the S&P 500 companies comes crashing down to the low single digits after years of double-digit growth. I have to give credit to the Federal Reserve; it has certainly created another bubble within the stock market. We are inching closer and closer to a top for the market. And when it comes down, it won't be a pretty sight.

    What He Said:

    "I see the coming recession being deep and difficult because U.S. consumers do not have the savings to spend their way out of the recession. The same thing happened in Japan. The Japan example proved that when consumer confidence is shattered, even zero percent interest won't spur consumer spending. The same thing could happen here." Michael Lombardi, Profit Confidential, August 23, 2006. Michael began talking about and predicting the financial catastrophe we started experiencing in 2008 long before anyone else.

    Feb 19 9:04 AM | Link | Comment!
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