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Peter Schiff: It’s a Double Whammy

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Gold and silver whipsawed to end last week. Gold fell over $30 on Thursday when weekly jobless claims and the ADP private payroll numbers came in better than expected. But the yellow metal gained back much of the loss on Friday after a less than overwhelming Labor Department May jobs report. In his podcast, Peter breaks down the job numbers and comes to the conclusion that the economy is far weaker than anybody is admitting. Meanwhile, the Fed is still printing money. This is a double-whammy on the economy and a lot of people still don’t get it.

As Peter noted, the ADP and the Labor Department jobs report were diametrically opposed.

The ADP number came in way above estimates. The consensus was for 640,000 jobs added. The number came in at 978,000. The dollar benefited from this data and gold sold off.

The idea being that, oh, all of this job creation means that the economy is stronger. It’s going to put more pressure on prices, so more pressure on inflation, therefore, the Fed is more likely as a result of this strong ADP number to tighten rates sooner, to start tapering its asset purchases sooner. And of course, that feeds into the ‘buy the dollar, sell the gold’ mentality. The algorithms kick in, and we immediately had this reaction in the currency market and in the gold market.”

Peter reminds us that this assumption that the Fed will actually pay attention to these numbers and take action continues to be wrong.

The Fed doesn’t care about these numbers because it can’t tighten monetary policy no matter how good these numbers appear, because the only reason they appear good is because the Fed has got the economy on artificial life support with all its QE and zero percent interest rates. And the fact of the matter is they have to maintain the zero percent interest rates and they have to continue to administer larger and larger doses of QE in order to keep the comatose patient alive.”

But the markets still don’t seem to get this reality. They still expect tightening and that was the catalyst for the big selloff in gold last Thursday.

As it turns out, the entire trade reversed on Friday with the official Labor Department jobs report for May. It was basically a mirror image of the ADP report. The expectation for May was an addition of 650,000 non-farm payroll jobs. That would have been a big improvement on April’s disappointing numbers. The actual number was 559,000.

The unemployment number declined to 5.8%. But one of the primary reasons for the decline was the fact that the labor force participation rate went down.

So, one of the reasons the unemployment rate dropped is because some of the people who used to be unemployed are no longer looking for work. They don’t have jobs, but now they’re not looking. And because they’re content to not have a job and they’re not looking; they’re not officially included in the ranks of the unemployed even though they are not out there working and contributing to the economy.”

And one of the reasons a lot of people are choosing not to work is because the government is making it very lucrative not to work.

Average hourly earnings shot up more than expected. They were up 0.5 in May. Year-over-year, the increase was 2.0%. Peter said this big rise in wages is likely due to the fact employers are competing with enhanced unemployment benefits.

Peter called this a “bad” jobs report. Some might argue that “creating” 559,000 jobs in a month isn’t too shabby. But these aren’t new jobs.

These are just jobs that are being restored. It’s not like we have this vibrant economy and we’re starting up all these new businesses. These are businesses that were ordered to close down, and now they’re reopening. So, that’s all we’re doing is getting back all these jobs that we lost. Nothing here is being created.”

You can’t just look at the headline number out of context. You have to look at it in relation to all the jobs that were lost during the government shutdowns.

And the jobs that aren’t being restored are the ones we need most – manufacturing jobs.

In April, the Labor Department said the US lost 18,000 manufacturing jobs. That was revised up to 32,000 manufacturing jobs lost. The expectation was for 37,000 manufacturing jobs added in May. That number disappointed at just 23,000. That’s less than 4% of the jobs “created” last month. And over the last two months, we have a net loss of 11,000 manufacturing jobs. Almost all of the new jobs are in the service sector.

The problem is all these employed workers in the service sector — they want to buy manufactured goods. But the problem is none of these people are actually aiding in the production of these goods. So, we’re putting paychecks in people’s pockets, which enables them to go into the market and buy goods, but nobody in America is helping to produce those goods.”

So, what happens? Prices go up.

The only reason they’re not going up more is due to the exploding trade deficit. Americans are buying goods hardworking people in other countries are producing. That means US trading partners have more and more dollars they will need to unload into the market. That will put even more downward pressure on the dollar. Bigger trade deficits lead to a weaker dollar.

If the world recycles dollars into US assets, then things are fine. But it looks increasingly like foreigners don’t want those either.

There is a glut of dollars on the market and so the value of those dollars is going to go down.”

The weakness of the economy will create even more inflationary pressure.

The weaker the economy is the more money the Federal Reserve prints to artificially stimulate it. That is inflation. So, the longer the Fed continues to print money, the more upward pressure is put on prices.”

There is a double whammy.

As people are not productively employed, they are producing fewer goods or providing fewer services for people to buy. And then the Fed simply creates money for those people to spend. So, in a weak economy, you have two things happening at the same time. You have more money being created out of thin air and given to Americans to go out and buy stuff. But at the same time, fewer Americans are actually working to produce the stuff to buy.”

So, what does that mean?

It means we have more money chasing fewer goods. For now, the goods-gap is filled by imports, and that’s why we have these surging trade deficits and this big bottleneck of container ships off the coast that are queued up. But this put even more upward pressure on prices — so it’s stagflation. And these economists, these market strategists, they still don’t get this. And when they do, that’s when we’re really going to see the explosive move up in the price of gold and a real collapse in the value of the dollar.

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