There's Gold in Them There BREXITs!

Yesterday Britain voted to exit the European Union the so called BREXIT.  As expected the decision was close but the result was unexpected and threw global markets into a frenzy.  The European markets took the brunt of the selloff with Germany down more than 8%.  US markets reacted in less of a panicked fashion but were still off more than 3% at opening.  The initial knee jerk reaction will probably be muted in the short run as the actual exit will take a number of years to effect and it remains unknown as to what sort of impact this will really have on the UK and the rest of the European Union.  Certainly the press and the economists of the world are having a field day predicting a catastrophe but as we all know these predictions are more often than not vastly exaggerated.

I for one am not even going to try (in this blog at least) predict the long term fall out of this decision but there is a chance that other European countries try to exit as well causing the downfall of the EU.  This may well happen but the main question is whether the core group of nations remain and I believe that there are sufficient benefits for the 6 largest economies to remain unified regardless of whether smaller outlier countries exit (not that the UK is a small economy but the UK has sat on the fence of the EU since it was created so the result of an exit should be less impactful than one of the core group of nations exiting).   So while the markets of the world gyrate wildly to the unexpected news it is my thought that in the long run the overall impact will be muted.

That said the vote exposed just how annoyed the world is with their various political bodies.  Not only did the UK snub their noses at the incumbent party leading to the resignation of the Prime Minister, but now there is renewed talk of Scotland leaving Britain.  The United States is no different in that Trump has achieved a level of success that few believed would be possible without a population that is resentful of their leaders.  With the vast majority of Americans feeling that their politicians are out of touch with their plight plus the increasing divide between the have and the have nots it is clear that a change is inevitable.  It is just a shame that this desire for change was not directed towards a candidate with real leadership qualities that could infect rational change rather than a crass bully but unfortunately the desperation has been misdirected.

The other thing that should be clear is that precious metals and particularly gold are a hedge against the current malaise of the world.  Gold spiked more than $70 an ounce after the BREXIT was announced.  As opposed to the collapse of the global markets gold rallied more than 6%!  Gold stocks also went into orbit with some names up more than 10%.  It is amusing to me to listen to gold haters argue about what a poor investment gold is when during times of crisis it has repeatedly proven its worth as a hedge against disaster.  If you believe, as I do, that the world is clearly on the wrong path then owning gold, gold stocks or gold ETFs is a must.  Even if you hate the idea of owning gold today should be a signal that gold will provide downside protection for your highly overvalued stock portfolio.

So take note and realize that there’s gold in these BREXITs and other global catastrophes particularly when you have the world’s central bankers determined to destroy any kind of fiat money value.  Take this as a warning and position yourself accordingly.

A Recipe for Stagnation

"Agitate! Agitate! Ought to be the motto of every reformer.  Agitation is the opposite of stagnation - the one is life, the other is death." - Ernestine Rose

As has been widely broadcast the minimum wages across the country are heading higher.  It seems like the States are in a race to see who can force minimum wage to $15 an hour in the shortest amount of time.  The theory is that if you can move minimum wages higher, the people at the bottom of the wage scale will be moved to a position of financial strength improving their spending power and benefiting all.  Politicians look at it as a transfer of wealth from those that can afford it to those that need it most.  On paper this seems to make sense but digging a little deeper and it is clear that this is another government intervention that will have unintended consequences.

I certainly understand the political agenda behind raising the minimum wage.  I also understand that without some form of government  intervention wages at the lower end of the spectrum would stagnate forever.  That said the problems with the most recent round of forced increases are the timing and the rapid acceleration of the base wage. 

First let's look at the timing of the wage increase.  Were the economy booming companies would be competing for workers and the natural order of business would result in pay rates rising to attract workers.  Currently the economy is on such weak footing that the Reserve Bank is hesitant to raise interest rates even a 1/4% higher.  Furthermore as long term readers of this blog will know, while the unemployment rate is relatively strong, the labor participation rate and the U6 unemployment rate is pointing to anything but strength.  Had the politicians waited for economic strength the market would have been resilient enough to handle the increases however this is not the case today.

The second issue is that the wage rates will increase pretty much every year through 2020 by which time most if not all States will have a minimum wage of $15 an hour.  This rapid acceleration will impact earnings significantly and will be a factor that needs to be considered before starting any new business or expanding into new areas.  This will slow down hiring and make companies reduce expansion affecting job creation.  Furthermore the wage increases are not limited to minimum wage earners but has been extended to lower management as well. 

By the end of the year salaried employees earning less than $48,000 a year will be required to be paid overtime.  This impact will be the largest of all as companies will scramble to reduce these key employees' hours or remove the position completely by consolidating the position into one higher paying position.  It will also impact the upwardly mobile as these go getter's will have to reduce the hours worked thereby negating their advancement opportunities as they will not be able to showcase their can do attitudes without costing the company money. 

The biggest impact of these new policies though is that this is yet another barrier to entry for small and start up companies.  To these companies a high level of pay would be $40,000 a year and that would equate to a senior manager.  Making this position cost more is akin to putting a bullet in the heart of small business and business start ups.  As you would have read in last week's blog there is already a major slow down in net company formations and this slowdown is one of the largest causes of anemic GDP growth.  Raising the cost to starting a company even further will have a massively negative impact on small company start ups which will kill any idea of GDP expansion. 

The results of all of this is that the economy will stagnate.  GDP growth will be anemic until such time as all of these wage increases can be factored into the price of goods and services and given the weakness of the global economy this will take a long time.  In the meantime during this adjustment period the divide between those that have and those that do not will widen even further in complete contrast to the desired impact.  This new law has effectively placed another golden spoon in the hands of large business at the expense of the job and GDP growth engine, small business; their moat is even more secure and this is a huge problem if you want to see GDP accelerate.  Better get used to the stink of stagnation!

Two out of Three Ain't Bad?

"And all I can do is keep on telling you, I want you, I need you; But there ain't no way I'm ever going to love you; Now don't be sad, 'cause two out of three ain't bad" - Lyrics to the song Two Out of Three Ain't Bad by Meatloaf

If there is one metric that tells the true story of the state of the economy it is the labor statistics.  Or does it?  As I have repeated in previous blogs, pretty much every statistic from inflation to the labor market numbers are fudges, guesses, estimates stabs in the dark; call them what you will but they are manipulated and the labor statistics are no different.

As an example take the monthly labor reports.  Each month the Bureau of Labor Statistics adds a fake 75,000 jobs to the labor force from their Birth/Death computer model to account for new company births.  This is based on the range of new company start ups from the previous 20 years prior to the financial crisis.  During this period on average the net number of new firms (that means more firms opening than closing per year) ranged between 75,000 and 200,000 a year.  To account for this the BLS blindly adds 75,000 new jobs per month to their reported numbers.  Well according to the US Census Bureau the number of net new company openings since the financial crisis is just 33,000 a year, less than half of the prior period so this fake number of new jobs is vastly overstated.

Even though we know the numbers are wrong they do tell a story.  If they are consistently wrong each month then at least we have a benchmark to work with.  Taking this benchmark as being overly optimistic (based on the above analysis) means that the printed numbers are far worse than what is published.  To offset some of the errors adjustments are made to reflect miscalculations and these result in revised numbers that are possibly closer to the true number however most people ignore the revisions but their story tells a clearer tale.

Therefore taking today's published May job figures (prior to revisions) of non farm payroll increasing by 38,000 and private sector payroll increasing by 25,000 regardless of the how wrong they are they are still anemic.  Consensus was for them each to increase by 160,000 so these are truly disastrous figures.  On top of this April and March's numbers were revised downwards even further to fall well below the 160,000.  This 160,000 number is Wall Street's current "required" number to show economic health.  This number has also been revised lower as the economy was sputtering so badly that they had to reduce the number in order to print bullish headlines.  Were the economy truly healthy this "required" number would be in the range of 250,000 a month but as that is not even remotely possible, Wall Street analysts have quickly reduced their number of economic stability.

The next interesting statistic comes from the unemployment rate which fell to 4.7% versus 5.0% in April.  Wow, so magically the unemployment rate is falling even as less firms are added to the pool of companies AND as hiring falters.  In an economy the size of the United States you need to increase the number of jobs by roughly 150,000 a month just to remain at status quo in terms of the unemployment rate.  The reason for this is that the population is growing so the economy needs to suck up the additions to the work force to maintain equilibrium but magically the unemployment rate is falling.  How is this even possible?

Well when a person goes on unemployment benefits they are logged as unemployed.  As long as they remain on benefits they are counted.  If their benefits run out before they can find a job then they are magically "employed" according to the count!  This is how the number is improving.  Taking a look at the U6 number which includes people working part time but want full time work the number quickly balloons to 9.7%.  This number is stuck at roughly the same level as where it ballooned to during the 2002 and 2003 recession; hardly something to sing about.

The most telling number of all to me is the participation rate.  This number basically takes the total number of people working divided by the number of people in the population (not quite as simple as that but you get the idea) and this results in another metric.  This number FELL to 62.6% from 62.8% and is well BELOW where it was at the height of the recession!  Yes back in 2009 this number was around 65% so 5 trillion dollars of money has managed to make this number worse by almost 4%!  And to think that they are actually considering an interest rate hike because the economy is "strengthening"; what a joke.  I guess the rate hike is based on the lyrics of the song that, "two out of three (employed) ain't bad'!