In the Seinfeld episode titled "The Bizarro Jerry," Elaine meets a group of people who are complete opposites of Jerry, George, Kramer and Newman. The group takes pride in helping each other in their daily lives and hangs out at a "Bizarro Coffee Shop" named Reggie's. When describing Elaine’s newfound friends, Jerry says, "Yeah, like Bizarro Superman-Superman’s exact opposite, who lives in the backwards Bizarro world. Up is down; down is up. He says 'Hello' when he leaves, 'Goodbye' when he arrives." The show provides a rather striking similarity to today’s Bizarro financial market.
Making the episode even more strange, Kramer accidentally lands a job at a company called Brandt/Leland. However, instead of buckling down and producing value added work, he completes meaningless tasks and carries around a briefcase full of nothing but crackers. Investors also spend time on meaningless tasks, as they wait for recycled European headlines, all while carrying hopes of more quantitative easing in their briefcases. Jim Rogers explained it well when he said the Federal Reserve was "ruining an entire class of investors." Instead of investors allocating capital on fundamentals, the market is now hooked on easy money. Since the beginning of the financial crisis, central banks around the world have pumped trillions of dollars into the financial system to prop up asset prices and create a wealth effect. Precious metals have benefited greatly from these actions in the longer term, but have recently struggled.
As Kramer learned at his phony job, you cannot fool all of the people all of the time. No matter how much liquidity central banks pump into the system, the fundamentals eventually surface and breakdown. Last Thursday, central banks in China, the Eurozone and the United Kingdom all announced more actions to delay the inevitable. The People's Bank of China cut interest rates for the second time in two months and the European Central Bank slashed its main refinancing interest rate 25 basis points to 0.75%, its lowest level in its 14-year history. Meanwhile, the Bank of England launched another round of QE by announcing it would buy £50 billion ($78 billion) of asset purchases. These developments would normally appear to be supportive of higher gold and silver prices, but both precious metals declined on the news as Bizarro economics now dominates market swings.
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Despite the United States' growing national debt, upcoming fiscal cliff and numerous QE programs, investors continue to flock to the greenback as a safe-haven, at least in the short-term. On Friday, the dollar hit a two-year high against the euro. The move was rather unusual considering that the unemployment report showed it was another dismal month for Americans. In June, the U.S. economy added just 80,000 jobs, well below estimates of 100,000. The headline unemployment rate was unchanged at 8.2%, but the U-6 rate, which includes everyone in the headline rate, plus people who are either employed part-time but prefer a full-time position, or want work but have stopped looking, ticked higher to 14.9%. For the second quarter, the U.S. economy gained 225,000 jobs, (225K) averaging only 75K per month. In comparison, the first-quarter averaged 226K jobs each month.
Although the American economy added 20K fewer jobs than expected, the report was apparently not bad enough to justify more Fed easing. The price of gold fell $30 to settle at $1,578/ounce (oz), while silver dropped $0.75 to close at $26.92. Both precious metals bounced on Monday after Fed Whisperer Jon Hilsenrath from the WSJ reported that the jobs report "increases the likelihood that the Federal Reserve will launch a new bond-buying program to boost economic growth." However, gold and silver erased these gains as the Bank of Japan said on Tuesday that it was implementing "strong monetary easing steps, such as its near-zero interest rate policy and asset purchases in order to overcome deflation." Former Bank of Japan Deputy Governor Kazumasa Iwata also said the central bank may need to take more easing steps in the future. Once again, the jawboning was fundamentally bullish for precious metals, but the U.S. dollar index benefited the most as it climbed above 83.
Even though we now have a Bizarro Mr. Market where every weaker-than-expected economic indicator is viewed in relation to central bank easing, the fundamental picture has not changed for gold and silver. Instead, the two precious metals are simply waiting for stronger easing actions to warrant higher prices. As growth rates, unemployment levels and equity prices continue to struggle, it appears that it is only a matter of time before the Fed or ECB take more definitive actions to secure the lead in the race to debase fiat currencies.
Investor Insight: How Much Longer Can the Fed Jawbone Markets?
Eric McWhinnie
Wall St. Cheat Sheet
Disclosure: Long EXK, AG, HL, PHYS
