Initial Claims: Still Dovish?

In a repeat of last week, the headline number of initial unemployment claims disappointed, the prior week’s numbers were revised upward by several thousand, but the underlying, non-seasonally adjusted data actually looked pretty healthy. However, we’re now skeptical that it implies a lower risk of recession.

The downtrend in non-seasonally adjusted (NSA) claims remains intact:

The four-week moving average (4W MA) of NSA claims has fallen below its September 2008 level (however, if recent upward revisions continue, this may turn out to be false):

It’s worrisome that, if we assume the Bureau of Labor Statistics (BSL) is getting the volatile seasonal adjustment factors correct, then the incipient uptrend in seasonally-adjusted (SA) claims (blue line in the prior chart) is not a good omen.

And finally, given that the rate of unemployment is much higher now than it was going into the last recession, is it possible that NSA numbers look dovish because so many people have already been laid off?

To assess that question, we adjusted the claims data by the size of the civilian labor force. As the next chart shows, a strong upturn in this ratio has been a good leading indicator of recession over the last forty years, and a peak tends to coincide with the end of recession (perhaps due to the recession-dating methods of the National Bureau of Economic Research).

While the current level may not appear too alarming, there are two important facts to note: (1) it appears to be bottoming well above the lows of the last two decades, and (2) it remains at a level that has coincided with past recessions. In other words, there’s nothing about the current level that argues strongly against another recession:

Taking a more granular look at the data, we can compare the ratio at the onset of past recessions. By this measure, we should be concerned today, especially if SA claims continue to trend upward while labor force participation remains depressed:

And finally, if we condition the prior chart on the demographic (age structure) trends identified by economist Diane Macunovich and others, which took a negative turn in the late 1990s and will remain in a negative trend for most of this decade, then today’s ratio actually becomes quite worrisome:

As the graph shows, the median ratio at the start of the last two recessions, when negative demographic headwinds were at work, was 0.25%, while the current level is 0.26%.

Thus, despite the dovish-looking NSA claims data, there’s nothing about it that takes a recession off of the table. And given that almost every other indicator we watch is signalling or very close to signalling a recession, it tells us that risk aversion may still make sense.

We continue to expect a bear market in risky assets between 2011 and 2013, and believe its severity will depend heavily on whether policymakers, especially in the European Monetary Union (EMU), Japan, UK, and U.S.  continue to pursue austerity measures (worse) or stop worrying and start to love sovereign deficits (better). Importantly, if a balanced budget amendment gets traction in the U.S. or EMU (the worst possible outcome), then all bets are off.

Our clients remain defensively positioned in anticipation of things getting worse before they get better.

IMPORTANT DISCLOSURES: Symmetry Capital Management, LLC (SCM) is a Pennsylvania registered investment advisor that offers discretionary investment management to individuals and institutions. This publication is for informational, educational, and entertainment purposes only. It is not an offer to sell or a solicitation to buy securities, or to engage in any investment strategy. Past performance is not indicative of future results. This material does not take into account your personal investment objectives, your personal financial situation and needs, or your personal tolerance for risk. Thus, any investment strategies or securities discussed may not be suitable for you. You should be aware of the real risk of loss that accompanies any investment strategy or security. It is strongly recommended that you consider seeking advice from your own investment advisor(s) when considering any particular strategy or investment.  We do not guarantee any specific outcome or profit from any strategy or security discussed herein. The opinions expressed are based on information believed to be reliable, but SCM does not warrant its completeness or accuracy, and you should not rely on it as such. SCM is a participant in the Amazon.com Associates program, and earns a revenue-sharing fee for qualified click-through purchases from the Amazon.com website. Neither the firm, nor its principals, nor its clients own securities issued by Amazon.com.

Turmoil in the mid-Atlantic!

The stock market can’t get a break. After rallying yesterday and today, news wires are abuzz about a 5.9 earthquake that just struck the eastern U.S. with its epicenter in northeastern Virginia.

We felt a brief jolt in southeastern PA, and tremors reportedly extended from South Carolina to Toronto, but it sounds like things were more intense in the surrounding cities, including Washington, DC (New York legal buildings were also reportedly evacuated—sounds like the public sector is on top of its disaster planning—parts of it, anyways).

Here’s hoping that there are no serious injuries. Stock markets took a bit of a jolt too after rallying in the first half of the day, but have since recovered nicely.

IMPORTANT DISCLOSURES: Symmetry Capital Management, LLC (SCM) is a Pennsylvania registered investment advisor that offers discretionary investment management to individuals and institutions. This publication is for informational, educational, and entertainment purposes only. It is not an offer to sell or a solicitation to buy securities, or to engage in any investment strategy. Past performance is not indicative of future results. This material does not take into account your personal investment objectives, your personal financial situation and needs, or your personal tolerance for risk. Thus, any investment strategies or securities discussed may not be suitable for you. You should be aware of the real risk of loss that accompanies any investment strategy or security. It is strongly recommended that you consider seeking advice from your own investment advisor(s) when considering any particular strategy or investment.  We do not guarantee any specific outcome or profit from any strategy or security discussed herein. The opinions expressed are based on information believed to be reliable, but SCM does not warrant its completeness or accuracy, and you should not rely on it as such. 

Turmoil at Standard & Poor’s

Bloomberg reported today that Standard & Poor’s (S&P) president, Deven Sharma, will be leaving his post at the end of the year.

You never know for sure if a chief’s departure is politically-driven or voluntary, but the timing and details of this one definitely argue for the former. For example, his replacement will start in mid-September, whereupon Sharma will be assigned to a “strategic review” detail. Against the background of the nasty political fallout that followed S&P’s questionable downgrade of the U.S. government’s credit rating, it would appear that Sharma took a big gamble and lost.

And the firm’s recent actions under his leadership (in addition to its credit rating missteps under prior leaders) have tainted its reputation and credibility. In other words, they’ve done real damage to shareholders, employees, and other stakeholders, and possibly everyone who has been impacted by the USG downgrade.

Of course, in our view, the downgrade was a non-issue for markets. But if it enables or motivates U.S. policymakers to tighten when they shouldn’t be, then Sharma and S&P will be responsible for significantly more suffering that they are today.

As for its reputation, the damage done to can be seen in the scrutiny that recent whipsaw changes in S&P’s rating on Google’s stock are being subjected to:

Standard & Poor’s upgraded Google’s stock on Monday, giving it a “hold” rating, reversing its much-debated downgrade the prior week.

S&P had slapped Google with a Sell rating — the only such bearish call on the Internet giant’s stock among almost 40 analysts tracked by Thomson Reuters I/B/E/S — after a surprise August 15 announcement that it will buy Motorola Mobility Holdings Inc for $12.5 billion…

Shares of Google have fallen more than 10 percent from their closing price before the deal was announced, trading just a whisker below $500 in the afternoon, compared to the Dow Jones Industrial Average’s roughly 3 percent drop during the period.

But while several analysts adjusted targets on Google’s stock price following news of the deal, no other firm appears to have downgraded Google’s stock, according to Thomson Reuters data.

Another misstep? Doesn’t sound like it (emphasis added):

Scott Kessler, the head of technology sector equity research at S&P, said the sell-off in Google’s stock following the Motorola news had brought its share price down to the $500 target that he set for Google when he downgraded the stock.

“It’s very hard for us to say sell this stock when it’s trading below its target price,” Kessler told Reuters in an interview on Monday.

The fact that the back-to-back Google downgrade and upgrade came from S&P Equity, whose parent’s unprecedented downgrade of United States sovereign debt this month roiled global markets and prompted discussion, made the move all the more striking.

The fact that the moves came from S&P is probably the only reason anyone’s reporting on it!

Kessler acknowledged it was unusual to see a stock’s recommendation change so quickly. But he said the move was consistent with S&P’s approach to equity research.

“If we made a change to our fundamental commentary or the target price, that would understandably be a little curious,” he said.

And so what sounds like reasonable analysis and a second ratings change based solely on prive movements (markets have been extremely volatile of late) has to be explained to the media, most likely to several news outlets, costing people, teams, and departments at S&P time and resources.  

IMPORTANT DISCLOSURES: Symmetry Capital Management, LLC (SCM) is a Pennsylvania registered investment advisor that offers discretionary investment management to individuals and institutions. This publication is for informational, educational, and entertainment purposes only. It is not an offer to sell or a solicitation to buy securities, or to engage in any investment strategy. Past performance is not indicative of future results. This material does not take into account your personal investment objectives, your personal financial situation and needs, or your personal tolerance for risk. Thus, any investment strategies or securities discussed may not be suitable for you. You should be aware of the real risk of loss that accompanies any investment strategy or security. It is strongly recommended that you consider seeking advice from your own investment advisor(s) when considering any particular strategy or investment.  We do not guarantee any specific outcome or profit from any strategy or security discussed herein. The opinions expressed are based on information believed to be reliable, but SCM does not warrant its completeness or accuracy, and you should not rely on it as such. Neither the firm, nor its principals, nor its clients own securities issued by Google or McGraw Hill.

Listen to Don Peck!

Great interview with Don Peck, author of Pinched: How the Great Recession Has Narrowed Our Futures and What We Can Do About It.

[A]uthor Don Peck not only describes the harsh economic times we currently live in, he also explains how ‘The Great Recession’ will impact generations to come.

“People think of recessions as temporary, jobs go away, jobs come back. But in particularly deep long recessions, society is left permanently [scarred] and permanently changed in different ways,” he tells Aaron in the accompanying clip.

One of these permanent marks left by the previous recession is what’s happened to neighborhoods hit by a wave of home foreclosures. Peck points to areas in Florida, Arizona and Nevada that are starting to disintegrate — just like what happened to some inner cities back during the 1970s. Further exacerbating this housing problem is the fact that the millennial generation cannot find work in this difficult job market, which prevents them from moving out of mom and dad’s house and renting or buying a new home.

But there is hope, says Peck. There are things that can be done to erase these permanent stains and turn the economy around by putting people back to work: invest in infrastructure that is crumbling anyway, and create a Manhattan type project to create breakthrough innovation that will make the U.S. more globally competitive.

Unfortunately, these two ideas likely fall on deaf ears because it seems the current U.S. Congress is more prone to playing visceral partisan politics vs. working towards the good of the American people.

Like Paul Krugman and others, Peck is probably operating out of a deficit-dove paradigm rather than a sounder monetary and fiscal foundation (for example, it doesn’t have to be large-scale investments, just large and effective enough spending and/or tax cuts; that doesn’t exclude big-project ideas, of course; they might still offer an optimal route). At this point, an emphatic turn away from near-term Tea Party austerity would be powerfully stimulative, even with the longer-term threat of Tea Party or Clintonesque austerity.

IMPORTANT DISCLOSURES: Symmetry Capital Management, LLC (SCM) is a Pennsylvania registered investment advisor that offers discretionary investment management to individuals and institutions. This publication is for informational, educational, and entertainment purposes only. It is not an offer to sell or a solicitation to buy securities, or to engage in any investment strategy. Past performance is not indicative of future results. This material does not take into account your personal investment objectives, your personal financial situation and needs, or your personal tolerance for risk. Thus, any investment strategies or securities discussed may not be suitable for you. You should be aware of the real risk of loss that accompanies any investment strategy or security. It is strongly recommended that you consider seeking advice from your own investment advisor(s) when considering any particular strategy or investment.  We do not guarantee any specific outcome or profit from any strategy or security discussed herein. The opinions expressed are based on information believed to be reliable, but SCM does not warrant its completeness or accuracy, and you should not rely on it as such. SCM is a participant in the Amazon.com Associates program, and earns a revenue-sharing fee for qualified click-through purchases from the Amazon.com website. Neither the firm, nor its principals, nor its clients own securities issued by Amazon.com.

Reminder: An Antidote to Toxic Reasoning

From a January 2011 post in response to bizarre comments from PIMCO’s Bill Gross, who seems to have gone off the rails since losing his best macro analyst, and whose flagship strategy is getting its rear end handed to it of late (see charts below): 

There’s plenty of…toxic reasoning circling the world nowadays. As an antidote to PIMCO’s recent contributions, we suggest numbers one, two, and three of Warren Mosler’s deadly innocent frauds (pdf, our comments in brackets):

Seven Deadly Innocent Frauds of Economic Policy

1. The government must raise funds through taxation or borrowing in order to spend. In other words, government spending is limited by its ability to tax or borrow. The federal government can always make any and all payments in its own currency, no matter how large the deficit is, or how few taxes it collects.

2. With government deficits, we are leaving our debt burden to our children. Collectively, in real terms, there is no such burden possible. Debt or no debt, our children get to consume whatever they can produce.

[And if under certain conditions larger deficits are more optimal than smaller ones, then smaller deficits will impose real opportunity costs on current and future generations.]

3. Government budget deficits take away savings. Federal Government budget deficits ADD to savings.

[This one may sound strange, but remember that the monopoly supplier of something that everyone else requires must run ongoing deficits of it. If we were on a gold standard, no one would be fretting about the mines running large 'deficits' of gold, or be thinking that some day we have to pay it all back, i.e., put it back in the ground.]

We can’t hammer these points hard enough today. Too many people have been out of work for too long in what is still the world’s most robust and dynamic economy. Let’s learn to stop worrying and love federal budget deficits and the national debt, at least until they start reaching inflationary levels.

Despite what you hear day in and day out, we’re nowhere close to those levels yet. To repeat an observation we made yesterday, “As with Japan over the last twenty years, it will be very hard for the federal government to provide additions to financial assets and real demand that exceed the economy’s desire for them.”

+++

Comparison of PIMCO’s flagship Total Return Fund to a benchmark-related ETF and a long-term Treasury ETF:

Quick investment primer: The price of a security doesn’t usually tell you about prior cash flows like dividends, interest payments, capital gains, fund distributions, etc. To make a fairer comparison, you need to look at total return, especially for fixed income funds, where current yield from interest payments make up most of their long-term returns.

The following chart shows that PIMCO’s Total Return Fund isn’t losing as badly as the first chart makes it appear.

However, for the biggest bond shop in the world, and the go-to guys for economic and fixed-income commentary, 100 basis points (1.00%) of underperformance against the benchmark, and a gross (though widespread among their peers) tactical error in going short Treasuries (lower allocation to U.S. Treasuries than the benchmark index) and/or duration (lower allocation to longer-dated securities, based on the expectation that long-term interest rates will rise), do not boost credibility. (Or at least they shouldn’t!)

These data also make it clear just how absurd Bill Gross’ accusations of “financial repression” have been. The only thing that has “oppressed” his clients’ returns are his mistakes, which, if his most recent ‘government out of bullets’ comments are any indication, he may continue making.

Holders of long-dated Japanese government debt have been anything but repressed over the last 20 years. History’s waving the evidence right in front of his nose, but Gross just can’t seem to jump off of the austerity fashion-wagon.

Securities diclosures: Some clients of the firm own shares of TLT. Neither the firm, its principals, or its clients own AGG or PIMCO Total Return Fund.

IMPORTANT DISCLOSURES: Symmetry Capital Management, LLC (SCM) is a Pennsylvania registered investment advisor that offers discretionary investment management to individuals and institutions. This publication is for informational, educational, and entertainment purposes only. It is not an offer to sell or a solicitation to buy securities, or to engage in any investment strategy. Past performance is not indicative of future results.  This material does not take into account your personal investment objectives, your personal financial situation and needs, or your personal tolerance for risk. Thus, any investment strategies or securities discussed may not be suitable for you.  You should be aware of the real risk of loss that accompanies any investment strategy or security. It is strongly recommended that you consider seeking advice from your own investment advisor(s) when considering any particular strategy or investment.  We do not guarantee any specific outcome or profit from any strategy or security discussed herein.  The opinions expressed are based on information believed to be reliable, but SCM does not warrant its completeness or accuracy, and you should not rely on it as such.  

When Governments Run Out Of Money

In a short comedy segment on Fox News, John Brown claims that we’re in the third stage of the global financial crisis, where governments run out of money and currencies collapse, and fellow commentator Al Lewis asserts that the government is out of bullets.

I think Brown is on to something when he says that the government has had its foot on both the brake and the accelerator, but it has definitely taken its foot off the accelerator at this point, and to say that a sovereign government can run out of money is the height of foolishness. If memory serves, he was good on the real estate crisis and stock market recovery, but his prediction of a currency collapse and a return to a gold-based monetary system are in the realm of fantasy, based on what’s happening in the world today.

On the bases of financial cycles, age structure, and market behavior, it’s now very difficult to deny that we are following in Japan’s footsteps, a possibility we’ve been writing about since at least 2009, and became highly confident in by 2010, after reading the work of Diane Macunovich, John Geanakoplos et al, and others on the impacts of age structure on economies and markets.

And there is nothing about the Japanese Yen (its inverse exchange rate against the USD is shown in the chart below) since its financial crisis and two-decades-long stagnation that argue for currency crises in the countries that are now on a similar path.

If anything, rising risk aversion and demand for liquidity, and a resulting secular decline in the velocity of money should prove favorable to those currencies.

Of course, given its global reserve currency role, our assumption that it may have become the funding currency of choice for carry trades given the Fed’s promise of near-zero interest rates until 2013, and the fact that many trading partners remain mired in export-dependent economic models, we shouldn’t expect the U.S. dollar to follow in precisely the same footsteps as the Yen has. But those factors do argue for a sideways trend like the one that prevailed in the chart above from about 1999-2007 (the Yen’s behavior since 2007 supports our assertion that the USD is now the carry traders’ funding vehicle of choice).

To call for a dollar collapse is almost as ridiculous as saying that the U.S. government can run out of money. If anything, the current austerity fetish and the continuing lack of sound global financial regulation will lead to sharp, periodic reversals, like those exhibited by the Yen (most notably during the global financial crisis of 2008), even if the dollar remains in a long-term downward or sideways trend against other currencies.

And gold is almost certaintly entering its mania phase. The more foolish it makes us look, the more confidence I have in that assessment. The fever will eventually break. They all do.

Policymakers would have to commit historically severe errors in a direction that no government is even pondering at the moment in order to cause a collapse of our current monetary system. The opposing argument is nothing more than a political narrative whose recitation makes some folks feel smart and energized (admittedly, I have some of those too).

Securities disclosures: Some clients of the firm own shares of CurrencyShares Japanese Yen Trust (FXY).

IMPORTANT DISCLOSURES: Symmetry Capital Management, LLC (SCM) is a Pennsylvania registered investment advisor that offers discretionary investment management to individuals and institutions. This publication is for informational, educational, and entertainment purposes only. It is not an offer to sell or a solicitation to buy securities, or to engage in any investment strategy. Past performance is not indicative of future results. This material does not take into account your personal investment objectives, your personal financial situation and needs, or your personal tolerance for risk. Thus, any investment strategies or securities discussed may not be suitable for you. You should be aware of the real risk of loss that accompanies any investment strategy or security. It is strongly recommended that you consider seeking advice from your own investment advisor(s) when considering any particular strategy or investment.  We do not guarantee any specific outcome or profit from any strategy or security discussed herein. The opinions expressed are based on information believed to be reliable, but SCM does not warrant its completeness or accuracy, and you should not rely on it as such. We are considering adding positions in the next 72 hours that would benefit from a decline in the price of gold. SCM is a participant in the Amazon.com Associates program, and earns a revenue-sharing fee for qualified click-through purchases from the Amazon.com website. Neither the firm, nor its principals, nor its clients own securities issued by Amazon.com.

AP: Economists See Growing Risk of Recession

We expected to see a headline like this at some point.

WASHINGTON (AP) — Discouraging economic data from around the globe have heightened fears that another recession is on the way…

Here’s what you won’t see: “Economists Come Around to the Realization that they Deserve Most of the Blame”.

IMPORTANT DISCLOSURES: Symmetry Capital Management, LLC (SCM) is a Pennsylvania registered investment advisor that offers discretionary investment management to individuals and institutions. This publication is for informational, educational, and entertainment purposes only. It is not an offer to sell or a solicitation to buy securities, or to engage in any investment strategy. Past performance is not indicative of future results.  This material does not take into account your personal investment objectives, your personal financial situation and needs, or your personal tolerance for risk. Thus, any investment strategies or securities discussed may not be suitable for you.  You should be aware of the real risk of loss that accompanies any investment strategy or security. It is strongly recommended that you consider seeking advice from your own investment advisor(s) when considering any particular strategy or investment.  We do not guarantee any specific outcome or profit from any strategy or security discussed herein.  The opinions expressed are based on information believed to be reliable, but SCM does not warrant its completeness or accuracy, and you should not rely on it as such.  SCM, its principals, and its clients may hold positions in any securities mentioned.

The Neoliberal, Neoclassical Endgame?

More nonsense from the White House (emphasis added):

WASHINGTON (AP) — The White House has asked federal agencies to propose ways to cut spending by 10 percent or more for the upcoming budget, underscoring the political jockeying under way as President Barack Obama and Congress prepare for a fiery autumn clash over the economy and the debt.

In a letter released Thursday, White House budget chief Jacob Lew told agency heads to submit financial blueprints with spending for the 2013 budget at least 5 percent below this year’s levels. He also asked them to present additional proposals that would trim spending by a total of at least 10 percent that year.

The White House has asked agencies in years past to propose similar savings. But Lew’s letter comes just two weeks after Obama and congressional Republicans ended an epic debt ceiling battle that has left both sides eager to demonstrate a willingness to trim red ink, just as the 2012 presidential and congressional elections approach.

More narrowly, Lew’s request for two sets of potential savings is aimed at living within the debt ceiling agreement the White House and Republicans worked out after a lengthy battle that consumed much of the spring and summer and drove the government to the brink of a potential default. Their deal created a series of spending targets and would save tens of billions of dollars a year.

“By providing budgets pegged to these two scenarios, you will provide the president with the information to make the tough choices necessary to meet the hard spending targets in place and the needs of the nation,” Lew wrote.

In a monetary economy, every unit of “saving” by the monopoly supplier of money equates to a net deficit (“dissaving”) in the other sectors (households, domestic and foreign corporations, and state, local, and foreign governments). There are few economic conditions under which this is a good thing. And they sure as hell aren’t in effect right now.  Far from it.

Not to be outdone, Cogressional GOP leaders responded with their version of the same nonsense:

A spokesman for House Speaker John Boehner, R-Ohio, said Lew’s letter was a reasonable way to start addressing the agreed-upon spending limits.

“But the White House must get serious about real structural reform of our entitlement programs if we’re going to get our debt under control to help our economy grow and create jobs,” said the spokesman, Michael Steel, referring to huge and fast growing benefit programs like Social Security and Medicare that help drive annual deficits skyward.

There is not a single shred of real-world evidence that our national “debt” (that’s really not what it is) is out of control.

There is no sound theoretical basis for claiming that lower deficits and debt will “help our economy grow and create jobs”. The few empirical studies proponents can point to tend to highlight cases of an individual country that’s a net exporter. Those studies have absolutely no relevance whatsoever to a world of large, sovereign currency issuers all pursuing austerity measures at the same time.

The U.S. government is not subject to financial constraints. The only risk its position as monopoly supplier of money gives rise to is inflation. And based on demographic and other trends, deflation remains the greater risk in the coming decade. As with Japan over the last twenty years, it will be very hard for the federal government to provide additions to financial assets and real demand that exceed the economy’s desire for them.

Thus, the only issue at work in future entitlement spending is whether the command of real resources allocated to beneficiaries is politically acceptable to everyone else.

To sum it all up, our leaders in Washington remain intently focused on the wrong battles, and at the worst possible time, with depressed capacity utilization and global and domestic unemployment likely to rise again in the next couple of years from already elevated levels.

What I think we are witnessing is historic. It’s the dead-end alley that both neoliberal and neoclassical economics have been leading us toward over the last eight decades. Billions of human beings are now hurtling towards a brick wall of our own making, and people with influence who know better are unwilling to educate the public because it means that their credibility is potentially at risk, as they’re the ones who’ve helped build and perpetuate this dangerous edifice that imposes harmful fiscal and monetary policies on all of us.

For those folks, here are a few thoughts:

• Some of you are great admirers of Keynes. You may recall that when the facts didn’t suit his opinions, he recommended changing the latter instead of ignoring the former.
• This is an opportunity to demonstrate intellectual leadership and courage. And publishing a new edition of your macro textbook edition is the surest way to support itsprice tag, remember?
• Most of you have tenure of some sort, whether academic, a protected position in the private sector, or both. Think and act for the greater good. You can afford it.

Let’s do the right thing for our country and the world—admit we’ve been wrong, turn our gaze (and bludgeons) away from fiscal boogeymen, and focus instead on fostering sustainable long-term economic performance and a rising standard of living for ourselves, our children, our grandchildren, and all future generations.

IMPORTANT DISCLOSURES: Symmetry Capital Management, LLC (SCM) is a Pennsylvania registered investment advisor that offers discretionary investment management to individuals and institutions. This publication is for informational, educational, and entertainment purposes only. It is not an offer to sell or a solicitation to buy securities, or to engage in any investment strategy. Past performance is not indicative of future results.  This material does not take into account your personal investment objectives, your personal financial situation and needs, or your personal tolerance for risk. Thus, any investment strategies or securities discussed may not be suitable for you.  You should be aware of the real risk of loss that accompanies any investment strategy or security. It is strongly recommended that you consider seeking advice from your own investment advisor(s) when considering any particular strategy or investment.  We do not guarantee any specific outcome or profit from any strategy or security discussed herein.  The opinions expressed are based on information believed to be reliable, but SCM does not warrant its completeness or accuracy, and you should not rely on it as such.  SCM, its principals, and its clients may hold positions in any securities mentioned.

Gold Making Us Look Foolish

Markets often make fools out of analysts who believe they’re applying sound reasoning to an asset’s value.

We’re now 0-for-2 on gold, having once again called it a likely bubble, only to watch it subsequently work its way to new record highs.

Today, the spot price broke the $1,800 barrier for the first time:

In our active mandates, we tried to buy out-of-the-money put options on a gold exchange-traded fund (ETF) earlier in the week but did not get a fill, luckily.

We continue to stand by our most recent assessment that gold is either in a bubble (one which will go as high as irrationality wants to carry it), or its fundamentals have shifted in a way that—if you understand how fiscal and monetary systems operate today—would be very difficult to justify.

Still, we realize that most smart people are on the other side of this trade still (George Soros being a notable exception), and until there’s a large enough Ponzi element involved that eventually breaks due to rising financing costs, margin calls,  and thinning out of buyers’ ranks, it’s not likely to pay off.

That said, we may still try to nibble around the edges of a bet on lower future gold prices.

IMPORTANT DISCLOSURES: Symmetry Capital Management, LLC (SCM) is a Pennsylvania registered investment advisor that offers discretionary investment management to individuals and institutions. This publication is for informational, educational, and entertainment purposes only. It is not an offer to sell or a solicitation to buy securities, or to engage in any investment strategy. Past performance is not indicative of future results.  This material does not take into account your personal investment objectives, your personal financial situation and needs, or your personal tolerance for risk. Thus, any investment strategies or securities discussed may not be suitable for you.  You should be aware of the real risk of loss that accompanies any investment strategy or security. It is strongly recommended that you consider seeking advice from your own investment advisor(s) when considering any particular strategy or investment.  We do not guarantee any specific outcome or profit from any strategy or security discussed herein.  The opinions expressed are based on information believed to be reliable, but SCM does not warrant its completeness or accuracy, and you should not rely on it as such.  We are considering adding positions in the next 72 hours that would benefit from a decline in the price of gold.

Bullish Claims Data (Seriously!) Trumped by Europe, Manufacturing

Although an above-expectations headline number and upward revisions to the prior week’s data may have had a negative impact on market sentiment this morning, the internals of last week’s initial unemployment insurance claims actually look pretty good.

The unadjusted four-week moving average has declined 14.4% year-over-year, and fallen through the lows of late 2010 and early 2011, all bullish signs.

The seasonally-adjusted number (the blue line in the chart above) is a bit more worrisome, as it is still above its 2011 lows. However, as we’ve previously noted, the seasonal adjustments seem a bit shaky judging by the increasing volatility and magnitude of the adjustment factors used by BLS:

It’s also comforting to see that the current data are much more benign that in 2007-2008, when the usual seasonal peaks and troughs displayed an unmistakable rising pattern:

However, it’s important to note that current levels are still well above those that prevailed prior to the last recession, and that claims don’t always provide a leading signal of recession, as shown in the following chart (they were relatively tame prior to the 1973 and 1981 recessions).

What good news there was in the claims report was swamped by continuing financial stresses in Europe that are impacting the entire world, a CPI inflation reading that came in a bit hot, and a horrific manufacturing survey.

Core Europe’s policymakers continue to dither while the European Central Bank half-heartedly backstops its financial system. That the most concrete proposal from the recent meeting between Sarkozy and Merkel was a financial transactions tax is truly astounding.

If only we could make mainstream economists and policymakers appear before the public as they truly are, chanting bizarre incantations to nonexistent gods; we might then be able to make some progress on public understanding of fiscal and monetary policy. But as things stand, conditions will have to get much worse before anyone with sufficient power and influence is willing to acknowledge their cumulative errors and change their paradigm. In the meantime, expect ongoing tremors and a full-blown recession on the continent.

On CPI, there are serious problems with it and similar inflation measures (they overstate it, contrary to what most of my fellow critics believe). But there may be some concern that this ties the Fed’s hands as far as further “easing” goes (whether the Fed actually eased with QE2, as opposed to just fueling speculative portfolio shifts, is open to question).

And the Philadelphia Federal Reserve’s manufacturing survey came in at a dreadful, contractionary level that strongly supports our recession call. It severely undermines the positive ISM report from Tuesday, and supports the argument that manufacturing appears to be moving from a global slowdown to a global contraction. Note that the current activity index fell well below the 2010 lows, and is approaching the lows from the depths of the 2007-2009 recession:

Bottom line is that we expect markets and asset prices to continue to be subjected to rising risk aversion and falling complacency as more people finally come around to the fact that recession is a near certainty in the quarters ahead, and may already be occurring in parts of the world.

There were some mildly bullish ideas being floated by the White House this morning on infrastructure investment, but it’s the same old J. Wellington Wimpy stuff that will do very little to reverse long-term trajectories, and worse, they were coupled with promises of more substantial deficit cuts.

As we said in a recent client letter, we wish there were more reasons for optimism and bullishness, but there are very, very few at the moment.

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