Van Eck Hotline on Money and the Economy
For: Monday, August 12, 2013
(800) 219-1333. VetHotline@aol.com. www.vanecktillman.com
Looking at the trading action in most of the markets today, it is obvious that the financial community is desperate to believe that the Federal Reserve will delay the decision to taper asset purchases. Last week, a number of Fed officials came out and told reporters and audiences that the central bank is getting ready to reduce the pace of those purchases. Investors and analysts listened to those clear and decisive warnings for a few minutes or a few hours. Eventually though, the public relations campaign regained traction and the investment world was steered back into believing that tapering will not happen until December and perhaps not until well into 2014. Most of the arguments against Fed tapering are driven by a belief that the economy is on the verge of slipping into a recession (or perhaps has already entered one but the data have yet to reveal that troubling reality). If you dig deep enough into most of the anti-tapering rhetoric these days – you will find a belief that the economy is in big trouble. I believe those skeptics are on the wrong track and they are headed for problems of their own.
You would think that after being on the wrong side of the basic trends in the economy and the stock market for more than four full years, the bears would be feeling the heat by now. Unfortunately, the fears and uncertainty about the economy are so entrenched that it has been impossible for facts to dislodge them and help that crowd to hit the reset button. Some of that is driven by political beliefs. However, much of it is just good old-fashioned human nature. A lot of people got hurt during the recession, financial crisis and the lingering impacts of those events during 2008 to 2011. Despite much of the smoke and dust having already cleared the scene, many people are unwilling to believe that the economy is doing better than expected and is likely to improve during the coming year. Instead, all I keep hearing from the bears is the same old stuff about Fed manipulation, bubbles, higher inflation, a looming collapse in the dollar, debt problems in Europe, a faltering China and of course – the problems connected with America’s Federal budget deficits and debt. All of those problems are certainly real enough, but they have been widely known for months or even years now and investors (and companies) large and small have been given plenty of opportunities to react and plan.
The fact that the U.S. economy has refused to buckle under the strain should be a major wake-up call to the bears. Just as we have all seen so many other times during the past two to four years though, most of them are simply pushing back their timetables of doom and talking about a collapse in the economy and stock market “just around the corner.” I would welcome some kind of consolidation and/or correction in the stock market. There is too much complacency loose in the financial world and a slap across the face via a normal pullback in stocks would no doubt go a long way toward solidifying the recovery to date. For the time being though, it is apparent that most market participants are willing to believe that the Federal Reserve will continue to pump $85 billion into the economy every month via direct purchases of Treasury debt and mortgage-backed securities. I believe such thinking is driven far more by self-serving analysis than by the hard facts of the matter. If the economy falters during the time ahead, the QE Forever crowd will be proven correct. This situation is nearing an important crossroads. Soon enough, events are likely to prove the argument one way or the other.
The employment report due out on Friday, September 6 is likely going to trump the rest of the data and even the comments out of Fed officials. The QE proponents have been leaning heavily on the slightly weaker than expected July employment report. This is not the first time during the ongoing economic recovery when the bears have used one or two economic reports to try and build a case for long-term problems. Back in the aftermath of the August 2011 S&P credit downgrade, a nonfarm payrolls report was skewed by striking Verizon workers. Despite the fact that the strike messed up the report – temporarily slowing the upside momentum in net job creation – millions of people talked about the report like it proved a recession was already underway. Thankfully, I urged subscribers at the time to ignore that near-term dip in job creation. Both the economy and the stock market took off to the upside during the quarters that followed. This time around, the nonfarm payrolls report showed a net gain of 162,000 (compared to expectations for a gain of 175,000 to 200,000). About one thousand less than expected jobs created every day during the course of July has been enough to convince many investors and analysts that the Fed will stay with the $85 billion monthly pace indefinitely. Look for that mindset to shatter during the next 60 days.
One of the slow spots in the U.S. economy during the first half of the year was manufacturing. A number of the manufacturing activity gauges slowed or even contracted during the late spring and early summer. The word went out in financial circles that the economy was about to fall flat on its face – and thus encourage Ben Bernanke and the Fed to come riding to the rescue with yet another round of expanded monetary stimulus. A lot of people swallowed that theme hook, line and sinker and have not given the matter much thought as the summer season has provided the usual distractions and slower trading/business activity conditions. That is too bad, because the evidence has been piling up to show that manufacturing is catching its second wind (or in the case of the current recovery – its third or fourth wind). Earlier this month, the July report on manufacturing was released by ISM. The headline index came in at a reading of 55.4. That was up from 50.9 the previous month and 49.0 in May. The Chicago PMI report was also bullish. It came in at 52.3 – up from 51.6 the previous month. The Philadelphia Fed report came in stronger than expected (a reading of 19.8 – up from 12.5 in June and far above the anticipated number in the area near 5.0).
The hangovers from the fiscal cliff debate/resolution and the budget sequester acted as headwinds for the economy. Inventories were allowed to drift lower as many companies chose prudence over risks. New orders slacked off and manufacturing activity slowed as a result. The shallow recession in Europe and new waves of uncertainty about China also helped to hold back U.S. manufacturing during the first half of the year. The data (and not just government data) have been showing some improvement in that industry. So far, the QE crowd seems to be uninterested in such evidence. That’s because it suggests that the Fed is going to have some maneuvering room during the time ahead when it comes to the tapering. Wall Street and the media can argue all they want about the direction of Fed monetary policy – in the end – employment will lead the way. While the QE boosters believe that employment conditions are slipping toward recession territory, I expect to see improvement in the next monthly release. The stronger than expected ISM manufacturing report that I referenced earlier also showed some significant improvement on the employment front. The ISM Employment Index for July came in at 54.4 – up from 48.7 the previous month. That is encouraging news for the U.S. economy. Manufacturing has been one of the weakest links in the recovery this year.
The latest employment report from the Federal government showed a net gain of just 6,000 manufacturing jobs during July. That was actually an improvement from the previous four months (which all registered net declines month-over-month). During the past year, manufacturing added only 18,000 jobs. That is the kind of number that the army of bears and skeptics really love to see. They believe it shows that the recovery has already run out of steam and that a recession will be in place during the time ahead – at least that is what organizations such as the Economic Cycle Research Institute (ECRI) wants you to believe. There were some similar disruptions in manufacturing back in mid 2011 – as the problems in Japan and the debt ceiling debate undercut new orders and confidence about the future. In the end, the economy was able to power its way against that current and come out on the other side with plenty of pent-up demand and businesses and consumers ready to unleash that bullish force. Look for manufacturing conditions to improve during the second half of 2013 – triggering some much-needed job creation in that sector and connected industries. A year from now, I expect to see manufacturing employment up by at least 200,000 jobs. That would be the kind of economic activity that would help to convince the Fed to wind down its quantitative easing program. Are investors prepared for such a change? Are you? More next week.