Friday’s news that the US economy added 321,000 nonfarm jobs in November sent the US dollar to new heights. 

The US Dollar Index – which measures the exchange value of the dollar versus a basket of six trading-partner currencies – rose 1.2% for the week. 

That leaves the index at its highest level since all the way back in April 2006 – close to the peak of the US credit bubble.

Friday’s jobs report was the tenth in a row that saw the US economy add more than 200,000 jobs. 

That leaves the official unemployment rate at 5.8% – or about half the European Union rate of 11.7%. 

And it’s just 10 basis points higher than the 5.7% unemployment rate the Congressional Budget Office (CBO) reckons is the “natural” unemployment rate. 

Some rate of unemployment is inevitable in an economy. Right now, the CBO reckons about 6 out of every 100 Americans looking for jobs will remain out of work for underlying structural reasons (i.e., reasons outside the Fed’s control). 

That means the current 5.8% jobless rate is also close to the point at which wage pressure will start to build… and with it inflation pressures from rising wages. 

This is already starting to happen. Hourly earnings rose 0.4% in November – nearly twice the rise Wall Street economists were expecting. 

Wage growth is one of the indicators the Yellen Fed is watching closely. So this – plus a jobless rate butting up against the natural unemployment rate – will up the odds of a rate hike sometime in early 2015. 

If rates rise, it will be bad news for bondholders. 

As interest rates rise, new bonds carry a coupon rate – the interest rate stated on a bond when it’s first issued – that reflects higher interest rates. This pushes down the prices of bonds that carry a lower coupon rate. 

After all, who wants to buy an old bond with a coupon rate of, say, 2% when they can spend the same money on a new bond with a coupon rate of 2.5%? 

Only by discounting the price can sellers of lower-coupon bonds compete. 

Higher wage costs will also put pressure on US corporations’ profit margins, as they will have to use a bigger percentage of their revenues to pay for labor costs. 

If profit margins start to fall, it’s a good bet that overvalued US stocks will follow suit. 

We’ll continue to watch this story closely… But don’t be surprised if US stocks and bonds come under pressure in a world where the dollar is king.

Bill Gross, who left Pacific Investment Management Co. in September to join Janus Capital Group Inc., recommended that investors reduce risk and prepare for asset prices to stop increasing.

“Markets are reaching the point of low return and diminishing liquidity,” Gross wrote in his investment outlook for December. 

“Investors may want to begin to take some chips off the table: raise asset quality, reduce duration, and prepare for at least a halt of asset appreciation engineered upon a false central bank premise of artificial yields, QE and the trickling down of faux wealth to the working class.”

Gross, 70, known for his colorful investment commentaries, suggested that the creation of more debt by policy makers worldwide to solve the credit crisis will be judged by future generations much like smoking in public or discrimination against gays is viewed by people today. The investment outlook, titled “How Could They,” also referenced Punch and Judy nursery rhymes to analyze central bank policies.

“Can a debt crisis be cured with more debt?,” Gross wrote. “I suspect future generations will be asking current policy makers the same thing that many of us now ask about public smoking, or discrimination against gays, or any other wrong turn in the process of being righted.”

‘Bye-Bye’

Gross in October started managing The Janus Global Unconstrained Bond Fund after his surprise exit from Pimco, the bond firm he had co-founded in 1971. In an investment commentary in October, Gross said that investors should bid “bye-bye” to double-digit returns as growth worldwide is slowing down, in a scenario that he and Pimco first expressed in 2009, called “new normal.”

He wrote that there are “structural headwinds” that make it difficult for central bankers worldwide to solve the debt crisis with quantitative easing.

“How could they?,” Gross wrote. “How could policymakers have allowed so much debt to be created in the first place, and then failed to regulate their own system accordingly? How could they have thought that money printing and debt creation could create wealth instead of just more and more debt?”

via Bloomberg

Recent statements by Federal Reserve officials would lead just about anyone to believe that one of the bank’s central missions has always been to guard against the lurking threat of deflation. They warn that since official inflation has remained below the Fed’s 2 percent target for almost two years, the country is liable to fall into a stagnant morass unless the Fed acts boldly to hit its target. It may surprise many that this view is strictly a 21st-century development. The fear (some would say paranoia) regarding sub-2 percent inflation was nowhere in evidence in the past, even when inflation was lower than it is today.

The average headline inflation index (which includes food and energy) in the United States has increased about 1.5 percent since 2013 (this is tabulated based on the many changes in the Consumer Price Index over the past 20 years that have tended to produce lower inflation statistics). In the 70 years since the end of World War II, there was only one similar period, the seven-year stretch from 1959 to 1965 when headline inflation averaged a skimpy 1.26 percent. Contemporary economists would surely assume that during that time the Fed would have broken out the big guns to push inflation back up over 2 percent. In fact, the opposite was true.

Best Selling author Peter Schiff is the CEO and Chief Global Strategist of Euro Pacific Capital. His podcasts are available on The Peter Schiff Channel on Youtube

When investors are ‘reaching for yield’, it’s a sure-fire warning sign.

It’s something that financial historian Russell Napier highlights in his interview with Merryn Somerset Webb this week.

Past experience shows that when investors get desperate, they’ll start lending money to any old enterprise with a good story, as long as it promises some sort of ‘real’ return.

When investors become that indiscriminate about where they put their money, you can be sure that something will happen to burst their bubble sooner or later.

And the an oil price crash might just be the thing to do it.

Investors have been lending rather too freely to high-risk companies

It’s been a great few years for ‘junk bonds’. As the name suggests, this is the risky end of the bond market….continue reading HERE

So it finally happened. The Federal Reserve ended its Quantitative Easing program on October 29, 2014 due to concerns that keeping QE for so long could fuel excessive risk-taking by investors. The U.S. dollar continued to conquer new heights, while gold did not welcome this central bank action. Its price fell in November to $1,142, a four-year low. This is not surprising given the fact that as we wrote (in the last Market Overview), the condition of the U.S. dollar is one of the most important drivers of gold prices.

However, the future (in the medium term) of the yellow metal’s price in the post-QE world is unclear. So much is unknown. When will Fed hike the interest rates? Is the U.S. central bank going to get rid of the enormous level of assets it bought? How and when does it plan to do so? How will the financial market perform without stimulus? Is the end of QE really a sign of a strong U.S. recovery? Some analysts agree, forecasting that gold will fall towards the $800-$900 level, while other economists fear that without Fed’s bond-buying program, a market crash may be on its way, leading to renewed investors’ interest in gold.

As a result, markets are confused right now. In this edition of Market Overview we try to clarify concerns about the impact of the end of QE3 on the U.S. economy and gold market. But first, let’s analyze what the recent halt of QE really means.

The quantitative easing was an unconventional monetary policy of buying financial assets from commercial banks. It increased the monetary base, Fed’s balance sheet and prices of purchased assets, decreasing their yields. The third, and for now the last, round of quantitative easing was announced on September 13, 2012 without stating the end date. Initially, the program involved purchases of agency mortgage-backed securities at a pace of $40 billion per month, but was extended to purchases of Treasuries involving $45 billion per month. In this largest asset-buying program, the Fed purchased assets worth around $1.6 trillion, expanding its balance sheet to about $4.5 trillion.

Graph 1: Fed’s assets (in millions of dollars) from 2002 to 2014

Theoretically, the halt of QE3 means the end of the multi-year asset purchases. However, not completely, because the “Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction,” as seen in the statement released by the Fed on October 29, 2014. It implies that although the Fed discontinued expanding its balance sheet, it will not allow it to shrink, at least for some time. And we are not talking about small amounts. According to Treasury Borrowing Advisory Committee estimates, if the Fed decides not to roll Treasuries (large amounts of them start maturing in 2016) over into new debt, the Treasury would be forced to borrow an extra $675 billion from the public over a three-year period. Therefore, the end of QE3 does not imply the end of quantitative easing. To use a metaphor, ending QE is not putting on the brakes; it is just easing off the accelerator.

However, even the complete reversal of QE3 would not mean the abandonment of the quantitative easing concept. The asset-buying program has become an established part of the Fed’s policy that could be implemented again in times of crises. Fed Chairwoman Janet Yellen has already said explicitly that she would not rule out more assets buying if needed. It is not coincidence that we have witnessed three rounds of the quantitative easing. We hope you remember that after the end of QE1 in March, 2010, there was a substantial correction in stocks (just under 20%), leading the U.S. central bank to start QE2. Then, after the halt of QE2 in June, 2012, there was another important stock market decline (about 20%), and that was the reason why the Fed launched the third round of QE. Given the fragile nature of the global economy, if asset prices fall or economic growth falters, we could witness QE4, especially since the Fed’s actions are data driven.

Thank you.