International Forecaster Weekly

POST-MORTEM ON JOBS REPORT, DEBT CEILING, STAGFLATION AND GOLD

Wednesday’s article listed a handful of reasons why the coming months could be opportunistic for gold. Add one more to that list… 

Investors are beginning to worry about stagflation — a combination of lower growth and higher inflation — which hasn't been a thing since the early 1980s.

But too big to fail Goldman Sachs reported today that "stagflation" was the most common word in client conversations last week as equity market volatility remains elevated.

This week, their clients are focused on the risks posed to growth by supply chain challenges and rising energy costs.

Guest Writer | October 15, 2021

By Dave Allen for Discount Gold & Silver

Gold Could Skyrocket with Stagflation

Wednesday’s article listed a handful of reasons why the coming months could be opportunistic for gold. Add one more to that list… 

Investors are beginning to worry about stagflation — a combination of lower growth and higher inflation — which hasn't been a thing since the early 1980s.

But too big to fail Goldman Sachs reported today that "stagflation" was the most common word in client conversations last week as equity market volatility remains elevated.

This week, their clients are focused on the risks posed to growth by supply chain challenges and rising energy costs.

We already know we’ve had elevated inflation all year. We’ll know more about how subpar growth is when we get 3rdquarter GDP numbers on the 28th and 4th quarter figures in late January.

If forecasts are any indication, expect 3rdquarter growth to be in a range of 1.3%-3.7%. GDP grew 6,4% and 7.9% in the 2nd and 1st quarters, respectively.

A number of recent indicators — like jobs, GDP and inflation — suggest the economic rebound is slowing. 

Elevated inflation could be damaging to investors if companies’ future cash flows of financial assets are impacted by the double-whammy of low growth and higher inflation.

World Gold Council research finds that defensive assets, like gold and silver, are the best performers in a stagflationary environment, where the opportunity cost for non-yielding assets is lower. 

Gold has seen good to excellent returns in these periods, both standing alone and relative to other assets (see chart above).

Indeed, prices could skyrocket — boosted along with elevated risk, stock market weakness, low real interest rates (especially negative) and a weaker dollar.

The September Jobs Report

Of course, WallStreeters are looking for any silver lining in Friday’s disappointing jobs report.

So today, they’re pointing to the headline U-3 unemployment rate dropping below 5% for the first time since the pandemic sent workers home by the tens of millions.

But here’s the thing — a good chunk of what pushed it down to 4.8% was reduced labor force participation.

The labor force, which includes anyone who either has a job or is actively looking for one (i.e., within the past four weeks), ticked down by 183,000 in September.

People who have stopped looking for jobs aren’t counted in the labor force or in the unemployment rate.

The labor force participation rate has been persistently stuck in the 61.5% area since June 2020, a recovery of less than half its pandemic nosedive.

September's decline suggests that many Americans have, for all intents and purposes, given up on finding jobs — at least for now.

There are still 5 million fewer people working than there were in February last year. Two reasons: women and recent retirees.

The participation rate for women, more often than not the primary caregivers for kids or elderly parents, slipped again in September, to 57.1% (the rate for men actually went up — to 70%).

And more — mostly well-off — people near retirement age are calling it quits early. 

Why? They can afford it, thanks to significant growth in asset values like stocks and real estate over the last year and a half.

The irony, of course, is that the Federal Reserve has been waiting for more job growth before pulling back on its emergency market support.

But it turns out that support may be contributing to the lack of job growth among workers closing in on retirement age.

Oh, and the eminently more accurate unemployment figure — as measured by the government’s U-6 rate — was 7.9% in September.

We’re not nearly as close to “full” or “maximum” employment as we’re being led to believe.

The Debt Ceiling Dilemma

Eleven Senate Republicans voted on Thursday with all 50 Democrats to temporarily extend the government’s debt limit until December 3rd.

After months of refusing to cooperate, Senate Minority Leader Mitch McConnell offered Majority Leader Chuck Schumer the deal to increase the ceiling enough for the Treasury to continue paying the bills into early December. 

Still, Congress is staring down the same potential financial catastrophe with no clear long-term answer in sight.

Without the short-term extension, the country was looking down the not-so-smiling barrel of a 12-gauge shotgun set to go off sometime between October 18thand early November.

And, as I wrote in last week’s newsletter, Democrats and Republicans are at an impasse over how to actually fix the problem. I’m not so sure that either party wants to.

Republicans continue to argue that Democrats, who control both chambers of Congress and the White House, should address the issue on their own without any GOP votes.

Democrats, on the other hand, insist the issue is a shared bipartisan responsibility since a majority of Rs approved deficit-financed spending during the prior administration.

House Speaker Nancy Pelosi and Senate Majority Leader Chuck Schumer have been clear they don't want to do this on their own using budget reconciliation.

Last Monday, Schumer filed cloture on Senate Democratic resolution to suspend the debt ceiling through December 2022, setting up a vote to break a Republican filibuster on it later this week. 

Republicans are expected to unanimously block the bill from advancing, as McConnell has promised. 

That leaves little option for a path forward — especially as another deadline hangs over Congress’ collective head.

The President has called the reconciliation process "fraught with all kinds of potential danger for miscalculation" and warned against it. 

That may have been more compelling last week, with little more than just 8-10 days until Treasury Secretary Janet Yellen said the government would run out of money to pay its bills — namely, interest due on bonds.

But he didn't entirely rule it out, arguing that he was only going to cross that bridge when he got there. Well, it’s time, Mr. President, Madam Speaker and Mr. Majority Leader.

Lawmakers are used to confronting major deadlines and waiting until the last minute to address them. I’m convinced it appears as an essential duty on their job description.

Take what happened a week and a half ago, for example, when Congress narrowly averted another government shutdown. 

In that case, lawmakers faced an absolute deadline of midnight on September 30th to act before government funding would expire. 

Ultimately, both chambers of Congress cleared a stopgap bill to extend funding to early December and prevent a shutdown just hours before the deadline.

Now, however, that there are seven weeks until the new debt ceiling would precipitate a financial crisis, it’s time for Dems to get to work and go it alone — for the sake of our economy and nation as a whole.

It will likely be a time-consuming, politically difficult process, with the Rs using every opportunity to paint the Ds as nothing but a band of drunken Robin Hoods.

Another “vote-a-rama” would get the reconciliation process started and another one would end the process. That's two more rounds of debate for the Rs to launch lengthy all-night vote marathons.

Most Washington observers say that process would take up to two weeks. So, given that time flies when you’re having fun (i.e., engaging in political dysfunction), the Ds will have to decide soon if they want to go that route. 

But the Dem's reluctance to use reconciliation is real. They’re sincere in their belief that it’s Republicans' responsibility to help finance debts that they helped to incur. 

And raising the debt limit through reconciliation requires Democrats to vote for exactly how much they want to raise it by. That’s an incredibly big ask for Ds up for reelection in 2022.

One thing is almost certain — that is, unless reconciliation fails to get enough votes and there’s no way to avoid a debt default — the president won’t authorize Yellen to strike a $1, $2 or $3 trillion coin to solve this problem.

That option, as I explained last week has limited but growing support — from the likes economists, a Nobel laureate, and even a few members of Congress.

But it’s just too far out, gimmicky and unproven for a guy like Joe Biden to get behind. Rightly so...at least for now.