Why The Horrific Nonfarm Payroll Report is Good for Gold

by JDH on January 9, 2010

I know each of you is getting bored with my constant stream of negativity. I know you would like me to think happy thoughts, and write happy thoughts. I know you want to hear that the recession is over, and everything will be fine. You want to know that the nightmare that began in 2008 is over, and 2010 will be a great year.

I know what you want, and I’m sorry, but I just can’t give it to you.

If you want happy thoughts, read the main stream media.

Read Newsweek, with their story about Why losing 84,000 jobs last month isn’t as bad as it seems. They will tell you that:

The recovery, frustratingly slow as it seems, looks better through the rearview mirror than through the windshield. Consider how far we’ve come in the past year. The U.S. economy, which shrunk at a 6.4 percent annual rate in the first quarter, grew at a 2.2 percent rate in the third quarter. That’s a turnaround of 8.6 percentage points in six months. Looking back, with the government having lifted many of its market guarantees, the price of the financial rescue was much smaller than originally thought—and it continues to shrink with every TARP repayment.


The United States Department of Labor issued their non-farm payroll report on Friday morning, and, to quote their release:

Nonfarm payroll employment edged down (-85,000) in December, and the unemployment rate was unchanged at 10.0 percent

Sounds good, right? According to the government, employment “edged” down, and “the unemployment rate was unchanged”, so everything is great, right?


Here’s the truth: The results were horrible.


For the last year governments around the world have spent trillions of dollars to pump up the economy, and to create jobs. The payroll survey, which is essentially a survey of large companies, showed a massive drop in employment, which is bad, since big businesses have better access to credit, and to global markets (so if the economy is slow in the U.S., they can compensate by selling internationally). The true picture of the American economy comes from the Household survey, which is biased towards smaller businesses that don’t have the same level of access to public equity markets, and foreign customers. That survey, if I am reading the numbers correctly, shows that employment fell by 589,000 in December (as compared to November), for a combined drop of around 3 million in the last half of last year.

Yes, I know, the weather was bad last month, and that cost some jobs. Somehow I don’t think it cost half a million jobs last month. Here’s a quote from the survey:

In December, both the number of unemployed persons, at 15.3 million, and the
unemployment rate, at 10.0 percent, were unchanged. At the start of the recession in December 2007, the number of unemployed persons was 7.7 million,
and the unemployment rate was 5.0 percent.

Again, I may be reading these tables incorrectly, but it appears that there were big job losses in construction, manufacturing, retail, wholesale, transportation and real estate, which is pretty much the entire economy. Except for health and education; that went up a little bit, so I guess we still have doctors working. And teachers.

Of course the number of “discouraged” workers is also up, and without that increase the unemployment rate would have been even higher.

The average duration of unemployment is now over 29 weeks, which is an all time high. That’s probably why workers are getting discouraged, and why the participation rate in the economy is at it’s lowest level since the mid 1980’s.

There are roughly the same number of people employed now as compared to ten years ago, but the population (of working age) is about 10 million bigger, so we have big unemployment. And the only way we won’t have big unemployment is if the economy creates a lot of jobs. So if we can create 20 million jobs in the next five years we will be back to even. But the economy has never, even in the boom times, created that many jobs in that period of time. So good luck on that one. (We need to create 100,000 jobs per month just to keep up with population growth, so losing jobs is very bad).

So what this means, I assume, is that the government will have to keep “stimulating”, and the Fed will have to keep interest rates low. And that’s why the stock market was up on Friday. Even though the economy is not recovering (it’s getting worse), investors are happy because things are so bad the government will have to save us, and that’s good for the stock market.


Yes, in backwards world, things are bad, which is good.

So how will this play out? In one of two ways, I assume. Either the weak economy, with no-one working, will cause deflation, or the massive government spending will cause inflation. I’m betting on inflation. So I’m betting on gold.

My current portfolio is 58% cash, because I still expect further market weakness, and I want to be prepared. The rest is primarily gold and silver stocks. I have some blue chip gold stocks:

And blue chip silver stocks:

And some speculative stocks (good juniors, with some resources, that will hopefully be take over targets in the future):

(Note that I am a Canadian, so at the moment all of my holdings are on Canadian exchanges, because I don’t want to be exposed to any currency risk, given the precarious state of the U.S. dollar. If I was American I would presumably be holding the U.S. versions of some of these securities).

I plan to add more juniors to the mix on any weakness, but so far this year there hasn’t been much weakness, so my stink bids have yet to be filled. If there is a big run up this week I will probably do covered writes on my majors to lock in the gains in advance of options expiry after the close on Friday January 15. In fact, if there is strength on Monday and the premiums are decent, that’s exactly what I intend to do. (Note: they are changing the option symbols in Canada this weekend; the symbol will now also include the year, so no order entry will be available this weekend for options while they switch over their systems).

Beyond that, we sit, and we wait. I expect a 20% correction at some point this year, but I don’t know if it will be this week, this month, or six months from now, so buying puts, or RSW – Rydex Inverse 2X S&P ETF, is a pure gamble that I would prefer not to take. I’m up 3.2% in 2010 so far, which is about my performance for all of last year, so I have no objection to staying conservative and locking in profits.

Next week I’m planning a special feature on investment newsletters (Casey and Dines, primarily), so if nothing happens in the market this week, that will be rant for next week. Thanks for reading, and see you next week.

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