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Low Job Numbers Give Fed Excuse to Walk Back Rate Hikes

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Earlier this week we got the first jobs report of 2017, and the headline number was the only positive stat presented. Overall, 227,000 jobs were created in January, which was 52,000 more than expected. As Peter Schiff breaks down on his latest podcast, that number is a bit deceiving.

“First of all,” Peter explains, “as always the lion’s share of these jobs are lower-paying service sector jobs. They’re in retail trade, leisure and hospitality.”

The jobs that were created are not jobs to significantly strengthen the labor force; those jobs are stagnant, if not on the decline. In fact, the most revealing number of the Bureau of Labor’s report was found in the U-6 unemployment rate, which increased from 9.2% to 9.4%. These numbers more accurately reflect the true health of the labor market.


The report’s real problem is its disconnection between a net gain of 227,000 jobs and a large increase in unemployment. What’s causing this? While Obama’s presidency saw a mass migration of workers out of the labor force, Trump’s victory has created a surge in new workers. Over 700,000 have re-entered the force in January.

Peter sees two primary reasons for this:

  • “Remember, Donald Trump campaigned that he was going to be the greatest jobs President, and it’s possible that a lot of people believe that this is going to happen. So, they’re re-entering the labor force to land one of these great jobs that President Trump will be delivering.”
  • “Another reason concerns the people who have been “sitting out” of labor force participation. Maybe circumstances are finally catching up with them, maybe they’re running out of money, or maybe the cost of living has risen to the point that they have to, by necessity, find a job.”

The hype about the dollar at the start of the year has all but died away. The promise of Trump’s fiscal stimulus and rate hikes have failed to halt a six-week decline for the greenback, which coincides with what Peter was saying at the end of 2016:

“The dollar had its worst January in thirty years. This shows you that the markets are just beginning to sense what’s really going to happen at the Fed, and what’s really going on in the US economy.”

The Trump administration holds an unstated weak dollar policy, and the Fed could potentially be marching down the path of quantitative easing. The dollar bulls seem to be running for cover just as fast as they emerged from the outskirts following the election results. The fast-changing economy of the Trump era is making safe havens like gold and silver all the more important for a balanced and secure portfolio.

Highlights from the show:

“We’re not creating the type of jobs that will make America great again. In fact if you look at the higher paying jobs in manufacturing, mining, logging, things like that: these jobs are barely adding any workers if not losing workers.”

“Now first of all, why did so many Americans decide to re-enter the labor force in January? Well there are two possible explanations for that, and maybe they’re both accurate. One might have to do with all the optimism surrounding the Donald Trump Presidency. Remember Donald Trump campaigned that he was going to be the ‘greatest jobs president that God had ever created.’ It’s possible that there are people who believe that this is going to happen.”

“What if the same thing happens in February, March, and April? We keep getting this big influx of workers in the labor market, and unless we start creating four, five, or six hundred thousand jobs a month the unemployment rate is going to continue to rise, despite the fact that we continue to create jobs.”

“So what does this mean when it comes to the Fed? We’re going to have a big increase in unemployment as millions of people reenter the labor force, now officially looking for work. If at the same time all those people looking for work keep a lid on wages, that means the Fed now has the excuse they’ve been looking for not to raise rates.”

“You’re going to see a complete switch in this divergent monetary policy where it’s the Eurozone that’s going to be on the tightening path and the Fed’s going to be on the easing path.”

“The Fed believes in this wage price spiral: that wages and increasing wages are what cause inflation, and of course that’s putting the cart before the horse. It’s the Fed and its monetary policy that causes inflation, and one of the results of inflation is that prices rise including the price of labor”

“So we now really have a weak dollar policy, and you know I think the dollar was going to go down anyway. There’s an old expression: ‘If you’re being chased out of town, run to the front of the crowd and pretend like you’re leading the parade.’ So Trump might as well get out in front of this crowd and pretend they’re leading the parade for a weaker dollar so that as the dollar comes down they can initially claim that this is some kind of victory that is going to help the economy.”

“Everybody’s talking about the Dow; no one’s talking about all stocks. In fact gold stocks were the number one performing sector last year by far. No one even close, and they’re already by far the number one performing sector this year, but nobody really wants to talk about it.”

 

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