Stagflation Reality Sets In
Jul 7, 2006
Today's negative stock market reaction to the weak jobs data
shows that the "bad news is good news market," which
has ruled for the past couple of years, may have finally become
a "bad news is bad news market." With the June non-farms
payroll data rising by only 121,000, verses an expected gain
of over 200,000, it appears that Wall Street is finally acknowledging
that the reality that stagflation trumps, or potentially negates,
the potential for a Fed pause. If that is indeed the case, things
are about to get a lot worse for stocks.
The stagflation alarm rang louder due to an increase in wages
paid of .5%, 65% above the .3% that analysts had been forecasting,
against a backdrop of record high oil prices, which approached
$76 per barrel for the first time ever before pulling back. Once
again, employment in the service sector, including banks and
retailers, contributed the lion's share of the gains, rising
by 75,000, while government payrolls swelled by 31,000. In what
is sure to be the just the tip of the iceberg, construction lost
4,000 jobs, while on the bright side the beleaguered manufacturing
sector managed to add 15,000 jobs. The unemployment rate, adjusted
of course for the millions of discouraged workers who have simply
given up looking, held steady at 4.6%.
However, the big question is will these payroll gains, however
tepid, last? Given that national employment is overwhelmingly
dependent on service sector jobs, which in turn are dependent
on discretionary consumer spending, the prognosis is bleak. With
oil prices on track to reach $100 per barrel (sending pump prices
above $4 per gallon), the Fed likely to raise interest rates
a few more times (further pushing up mortgage payments and rents),
the continuing upward pressure on health care, insurance and
local taxes, and the prospect of rising food prices, discretionary
spending is likely to collapse in the years ahead.
Even more important than the ability of Americans to borrow and
consume, is the willingness of foreigners to produce and lend.
With the endurance of the former and the tolerance of the latter
both likely to be tested soon, today's job gains will likely
become tomorrow's job losses.
Evidence that foreigners' patience is beginning to wear thin
was seen in the sharp and broad decline in the dollar, especially
against the Asian currencies, which are issued by America's largest
creditors. If this trend continues, it will not be long until
dollar weakness spills over into the bond market and consumer
goods, putting additional upward pressure on both interest rates
and consumer prices, while simultaneously exerting downward pressure
on employment and the economy. This two-pronged effect will combine
to cause the federal budget deficit to swell just as rising interest
rates make it increasingly more expensive to fund. Get ready
for the Democrats to break out Ronald Reagan's Misery Index,
only this time it's the Republican majority that will have to
deal with it.
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C.E.O. and Chief Global Strategist
Euro Pacific Capital, Inc.
Mr. Schiff is one of
the few non-biased investment advisors (not committed solely to
the short side of the market) to have correctly called the current
bear market before it began and to have positioned his clients
accordingly. As a result of his accurate forecasts on the U.S.
stock market, commodities, gold and the dollar, he is becoming
increasingly more renowned. He has been quoted in many of the
nation's leading newspapers, including The Wall Street Journal,
Barron's, Investor's Business Daily, The Financial Times, The
New York Times, The Los Angeles Times, The Washington Post, The
Chicago Tribune, The Dallas Morning News, The Miami Herald, The
San Francisco Chronicle, The Atlanta Journal-Constitution, The
Arizona Republic, The Philadelphia Inquirer, and the Christian
Science Monitor, and has appeared on CNBC, CNNfn., and Bloomberg.
In addition, his views are frequently quoted locally in the Orange
Mr. Schiff began his investment career as a financial consultant
with Shearson Lehman Brothers, after having earned a degree in
finance and accounting from U.C. Berkley in 1987. A financial
professional for seventeen years he joined Euro Pacific
in 1996 and has served as its President since January 2000. An
expert on money, economic theory, and international investing,
he is a highly recommended broker by many of the nation's financial
newsletters and advisory services.