Here’s the news of the week – and how we see it here at McAlvany Wealth Management:

Oil Trumps Jobs

A fairly strong jobs report was not enough to buoy stocks on Friday, as oil spiked to an interim high of $104.87/barrel. Stocks fell a quarter of a percentage point and commodities rallied (as they did all week) by the same amount on the day.

We have been saying this for a while now, but job growth may not be as important as cost-of-living increases. The landscape of job creation is changing, and what we mean by this is the type and “value” of the jobs being created. Lower paying manufacturing job growth (although small in aggregate) has been exceeding higher paying private sector job growth for some time now. Plus, U.S. unit labor costs for all jobs have been trending down in the U.S. since the beginning of 2007 (true only if we can take at least one government stat at face value).

However, if it is truly the case that we are getting paid less for each job created, either in an absolute sense or a relative sense (to the cost of living), then the rapidly increasing prices in commodities will be a deterrent to economic growth – and that’s putting it mildly. Click here for a Wall Street Journal article on the Fed’s beige book report, and prices paid by consumers.

Ben Bernanke stated this week that the outperformance in commodities, which he admitted to be inflationary, is only temporary and that he possesses the tools to keep matters “contained.” He draws confidence from the fact that commodities do rally in the early stages of a cycle, so “not to worry.” But we covered this by the numbers in a previous commentary. Stocks and commodities do advance in early stages of the business cycle, but stocks dramatically outperform commodities. At present, the opposite situation is true and the variance is getting larger.

As to whether Bernanke cares in the slightest, it appears he does not at the moment. Growth in the monetary aggregates is back on the rise after a brief period of rest. As seen in the chart below, Bernanke is frantically pumping money into the system at a 6.6% (or 171.6% annualized rate) rate over the course of the last two weeks. Perhaps, he fears that the momentum in the stock market (for reasons we have mentioned) is losing steam…?

As for the metals, their tidy gains this week have been attributed to the unrest in the Middle East and the subsequent rise in oil. However, from our perspective – and it’s more than just a hunch –the causes of the unrest go much deeper and farther than politics.

Serious economic problems have a tendency to linger for a while, and are not solved instantaneously by a wave of any one particular bank’s monetary wand or any country’s change in political power. As Dave Mcalvany mentioned in last week’s commentary, most everyone is feeling the pinch of inflation – especially in countries where the mean wage is less than $2 an hour. In such cases, there is almost zero wiggle room in the pocketbook for higher prices.

Markets in the Middle East may be reflecting this observation, as there has been no bounce from recent lows thus far. Below, is a chart of the Tadawul Index in Saudi Arabia. It may be that the inflation in this region has reached an inflection point, becoming the proverbial straw that has broken the camel’s back – no pun intended.

We have made mention before that the undoing of the Fed’s ability to maintain order would first come from outside our borders and at the expense of our creditors. This seems to be precisely what is happening now. From a timing perspective, it may not be necessary to determine what country the unrest will spread to next; the U.S. economy will have trouble advancing with oil above $100 for any sustained period of time.

The near-term outcome of recent events depends, we surmise, on which force wins the ongoing battle for dominance in the markets. Can Bernanke stay ahead of the curve, printing fast enough to keep his “wealth effect” ahead of the rate of inflation? We suspect he will continue to try until the effort comes to some natural and uncomfortable end.

The consequences of failure will unfortunately be severe – likely for all productive assets. The precious metals and other defensive vehicles may be reflecting a growing awareness of this fact, as their recent strength has been uncharacteristic compared to recent years.

Thank you and have a great weekend.

David McAlvany
President and CEO

David Burgess
VP Investment Management