Markets Are Moving on a Fantasy

We’ve seen a sharp selloff in both gold and silver. Gold was down over $40 an ounce Friday. Meanwhile, the US dollar saw a sharp increase, along with a rise in long-term Treasury yields. The catalyst for these sharp moves was a better-than-expected jobs report and expectation that it will spark a quick pivot to monetary tightening by the Fed.

The markets are moving on fantasy, not economic reality.

Yes, the employment report was better than expected, but not nearly strong enough to justify the gold and silver selloff and the dollar rally.

If you actually look at the employment number but also look at all the other economic data that came out, not only on the day, but on the week, all of this data continues to support a weak US dollar and a stronger gold price. But the markets are not trading on fundamentals. Fundamentals have nothing to do with this market. This market is based on hype, based on momentum, and it’s based on algorithms.

These algorithms are a great example of “garbage in, garbage out.” Whenever they get a good economic number, they trigger gold sales and dollar buys. Or whenever somebody at the Fed talks about the mere possibility of tightening, the computers trigger the same moves. But there is no real rational understanding of what the numbers actually mean and the bigger picture. In the long run, the fundamentals are the only thing that matter. And that’s why in the long run, we’re going to see a big drop in the dollar and a surge in the price of gold.

Looking at the employment numbers, there’s a good explanation for the surge in jobs that has nothing to do with the underlying economy. Many red states cut the extra $300 a week from their unemployment benefits. Nearly 1 million people went back to work in July. All this does is provide more evidence to what obviously was common sense, that paying people not to work results in people not working. And when you stop paying people not to work, they go back to work.

But that doesn’t mean we have real strength in the US economy.

Meanwhile, average hourly earnings were up 4% year-on-year in July. That signals more pressure on inflation.

This data means we are ostensibly closer to the conditions that the Fed says need to be met in order to raise interest rates and shrink the quantitative easing program.

It’s this anticipation of the tightening process happening sooner rather than later that is the real reason that you saw the big bid in the dollar and the sell-off in gold — despite the fact that none of this really matters because the Fed is just bluffing about what conditions would be necessary for it to tighten monetary policy because the conditions don’t exist that would actually cause the Fed to do that.

The bottom line is this employment report does not signal some booming economy that will allow the Federal Reserve to remove all of the monetary supports holding up the economy. In fact, absent those monetary supports, the numbers would not be this good. They would be a lot worse if we didn’t have all the help from the Fed. And the Fed knows if they remove that help then everything is going to implode that’s been built on the foundation of artificially low interest rates and quantitative easing.

There was a big jump in consumer credit in June. This was supported by the Fed’s ultra-low interest rates. And if consumers couldn’t borrow all this money, they wouldn’t have been able to spend it.

Obviously, if consumers were not able to borrow all this money, then they couldn’t have spent it. They couldn’t have bought all this stuff but for their ability to borrow money. And the only reason they can borrow money is because the Fed is supplying it. The Fed is making all this money available. It’s holding interest rates artificially low so that people can pay the interest on all this money that they’re borrowing. And that is what is helping to create a lot of these service sector jobs that would not exist but for the ability of Americans to go deeper into debt.

Ultimately, the inflation train has left the station and if the Fed tries to turn off the monetary spigots, the economy will end up getting derailed. The bubble economy depends on air supplied by the Fed. If the Fed stops supplying that air, the whole thing is going to deflate.