Correlation Economics Backup

Marc Faber at a Thai studio. Most important sentence: "The Fed has lost control of long term interest rates". That can be seen here. Even with this money printing and expansion of the Federal Reserve's balance sheet, they can't keep interest rates low anymore. But more importantly , I note that they have also lost control of short term interest rates. As you can see here, the adjustable mortgage rate is edging up, even when they hold the fed funds rate at zero. So at some point the fed funds rate needs to go up. But there is one other solution, going the other way. Let's see if Janet Yellen is going to apply negative interest rates...

The unemployment rate is a key indicator for the Federal Reserve to set the Fed Funds rate. Whenever the unemployment rate goes up, the Federal Reserve will lower interest rates.  This can be witnessed on Chart 1 which gives the Employment-Population Ratio Vs. the Fed Funds Rate. Chart 1: Federal Funds Rate Vs. Employment-Population Ratio Since the economic crisis of 2008, the employment-population ratio has never really recovered, that's why there is very little incentive to ever increase interest rates. Be advised that we need to look at the employment-population ratio rather than looking at the unemployment rate numbers, as these numbers are subjected to hedonic measures (discouraged workers, part-time workers), which started from 2008 onwards. To show this, look at Chart 2. You will see that since 2008, the correlation didn't apply anymore. Indeed, the U.S. government has been manipulating the unemployment numbers since 2008 (Chart 3). Chart 3: Unemployment Rate

As gold prices and gold mining shares rebounded on the news that the Federal Reserve didn't taper its bond purchases in September 2013, there are a lot of opportunities to be found in the gold mining business and I believe we have seen the bottom in gold. In today's environment, everyone is bearish on gold and investors should know that when the future is the darkest, the most money can be made if you are willing to take the risk. I'm not talking about doubling on your principle investment, but rather multiples. The key is to choose the right mining stock. I will focus on one gold mining company which has the potential to give a return of ten to twenty times your investment and I'll explain why. The company in question is San Gold Corp. Just recently, Eric Sprott said in an interview with Marin Katusa (Casey Research) that he bought a gold mining company that is trading at 2.5% of its four year high while the company actually produces more gold now than several years a...

I don't think we will ever see a taper again and here is why. One simple chart. As you can see the 10 year treasury yield is now at 3% and surprisingly, this is almost as high as during the 2008 financial crisis, where the yield was 3.6%. But there is one big difference between then and now and that is that the U.S. public debt has doubled from $9 trillion to $17 trillion. As a result, interest payments as a percent of GDP have gone up. So today we are worse off as compared to 2008. To keep yields down I don't see any other option than QE to infinity. There is this question on how long QE can continue to raise equity prices. Do you think this can go on till infinity? Of course not, first off, I showed with the  Potemkin anti-rally  that the Dow Jones hasn't been rising along QE. But more importantly, we need to watch what the U.S. dollar is doing. That's why I made this chart to show the Dow Composite Index, weighed to the U.S dollar index ( blue line). You can see the ...

It can be interesting to watch how the budget deficit, the trade deficit and the current account deficit evolves over time. As I said before , deficits are inversely correlated with the currency value. Ever since 1970, the U.S. dollar decreased in value as deficits went up. The following chart gives the annual budget - trade - current account deficit. The budget deficit (yellow chart) is a measure of how much the federal government is spending more than it receives. The budget deficit = Federal government spending minus Federal government receipts. We currently have an annualized $1 trillion budget deficit. The current account (BOPBCA) (green chart) is simply a measure of how much money is flowing out of the country compared with how much is flowing in from foreign sources. The balance of trade (BOPGSTB) (red chart) is the biggest part of the current account. It measures the value of what we sell overseas minus what we buy from overseas. The U.S. trade deficits started since 1970, ...

As predicted here , there was no way that the Fed was going to taper. Just wanted to put a souvenir on the blog. Gold shot up almost 3% while silver shot up more than 3%. Now what do we have to expect from the future then? Of course, precious metals are the place to be. U.S. bonds can be bought for a quick trade. Equities will follow the continued balance sheet expansion upwards. Cash is the worst you can have in your pockets as the U.S. dollar will drop, especially with the increase of the debt limit soon.

A small update on how the COMEX is doing. As we can see on this chart, the blue line is getting closer and closer to a blow up. Soon there is no registered physical gold left in any vaults of the COMEX. Maybe we'll see something happening in October 2013. I have always said that open interest should follow the amount of registered gold, because the COMEX needs to have the physical stock available in order to leverage their paper gold contracts. What we see now is that open interest is much higher than the registered gold at the COMEX. The black chart below shows the immense leverage. What is the result? You won't get your gold anymore. Grant Williams reports that people cannot get anymore physical gold at the GLD ETF. And with this news, we will see that the physical gold stored at GLD will not go down anymore. Indeed, when you make the chart of GLD ETF, you can see that the red chart isn't going down anymore. (Maybe they don't even have the physical gold at GLD...) Th...

The non-farm payroll number is a leading indicator for the unemployment rate. Check the economic tracker to predict the NFP numbers. Watch the household employment level vs. non-farm payrolls. Household employment level surveys actually include small businesses unlike non-farm payrolls. Household employment is a leading indicator as small businesses adapt much faster than large businesses. There is another way to calculate the non-farm payroll numbers and this is called the JOLTS (Job Openings and Labor Turnover) data. When you subtract hires and separations from each other, you get the change in non-farm payroll numbers. Change in NFP = Hires - Separations. JOLTS data is more accurate than the NFP data (which gets revised a lot). You can use the JOLTS data to predict the NFP data and with NFP data, you can predict the trend of the unemployment rate. Job postings give an idea of the trend.  

And the July 2013 gold imports from Hong Kong to China are steadily going up.

As predicted in this article , the improving trade deficit numbers in the U.S. weren't going to last. It is now flatlined (2014).This brings me to a new correlation. The trade deficit is correlated to the U.S. dollar. The following chart gives the monthly U.S. trade deficit (red chart) Vs. the U.S. dollar index (blue chart). If the trade deficit widens (red chart goes down), the U.S. dollar index will drop (blue chart goes down). As you know, a trade deficit means that imports exceed exports. Americans buy more stuff from foreigners and in exchange they give money to these foreigners. This money needs to be in the currency of the foreigners. Let's say an American buys a Chinese TV. He will have to pay yuan to the Chinese merchant. To do this, he will convert U.S. dollars to yuan. This will lower the value of the U.S. dollar. The other way round is also true. China has a trade surplus and will sell its goods to America in exchange for U.S. dollars. These U.S. dollars will be con...