Executive Summary

EXECUTIVE SUMMARY

Once Again into the Job Numbers

The US nonfarm payrolls for August released last Friday, September 2, 2016 came below expectations, even as the July nonfarm payrolls were revised upward. Unemployment, both U3 and U6, remained unchanged, as did Shadow Stats www.shadowstats.com unemployment. The weak job numbers coupled with a weak recessionary ISM manufacturing index released on September 6, 2016 has cooled talk of an interest rate hike at the September FOMC. Fed Chair Janet Yellen, at the Jackson Hole speech (along with Fed officials Fischer and Dudley), had rather openly talked up the potential for an interest rate hike. Market reaction was tepid, but gold and the gold stocks jumped. We continue to be concerned about the lack of talk surrounding the labour force participation rate, which remains at mid-1970s levels, and down from levels seen regularly from about 1988 to 2008. It translates into a big jump in those not considered to be in the labour force, while of course lowering the unemployment rate (U3) that the Fed uses as its benchmark. Pundits and the Fed alike seem to ignore it. The Conference Board is showing a decline in labour demand even as the unemployment rate falls. That happened prior to the 2008 financial collapse as well. We also show how the ISM manufacturing index is slowly plunging into recessionary territory, yet everyone talks of recovery.

Has Anyone Even Heard of Hanjin? Well, It Hit a Rock!

Hanjin, for those that don’t know, is a South Korean shipping company, the world’s eighth-largest shipping company and responsible for 7% of Far East-North American trade. Hanjin has been placed into bankruptcy. Ships have been seized in port causing backlogs, and ships languish at sea. Hundreds of millions of dollars of goods being shipped from Asia to North America lie in limbo just as the Christmas stocking season is getting underway. Will you get that t-shirt from Wal-Mart? Maybe. Maybe not. Global trade has been contracting. It is not just container shipping companies like Hanjin, it is bulk commodity carriers, as well as trucking and rail. Contracting trade begets currency wars begets potentially real wars. See the 1930s. The collapse of Hanjin is big, but hardly anyone noticed or cared. Kind of like a big tree being felled in the forest, only to discover all the other trees have been felled as well.

Weekly Market Review

Stocks

Everyone loves to predict the demise of the stock market, except it is not falling. Actually, for the past seven weeks or so, the US stock markets have barely budged. It is rare to see such a prolonged period of little stock market movement. The VIX volatility indicator, a measure of volatility in the markets, is hovering near its lows. But over the past year or so, there have been sudden shocks that caused the VIX to gyrate wildly. Prolonged periods of quiet can suddenly be disrupted by violent moves. With a stock market largely dominated by institutions, the money can flow in and out quickly. The NASDAQ made new all-time highs, but no one else did. A negative divergence? We define break points that investors should watch. We also acknowledge that despite cries for the demise of the stock market, it can—and just might—go higher to defy the bears.

Currencies

The US$ Index continues its trading within a band that has now been in place for over 18 months. It is rare to see such a prolonged period as this. We still don’t know whether the breakout will be to the upside or the downside. All we can do is define the break points, and then go with the flow. There are arguments for breaks in both directions but the coil is getting tighter, so a resolution could soon be at hand. Meanwhile the Cdn$ is looking somewhat positive; we should at least get another test of 80.

Gold and Precious Metals

The weaker-than-expected nonfarm payrolls and ISM number helped spur a rebound in gold, silver and the gold stocks this past week. Despite the rally gold remains below its recent highs, but the good news is that once again gold appears to have rejected a breakdown at the $1,306/$1,310 level. Currently gold has run into some resistance at $1,350/$1,360, but the key really is to take out $1,380/$1,400 to suggest a potential move to $1,500 or higher. The commercial COT is still bearish, but it did improve a little this past week. The gold stocks jumped nicely, but are just below some key resistance that they too must take if we are to see higher prices. Still, the rebound is encouraging and September is usually a strong up seasonal month.

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DAVID CHAPMAN, BMG CHIEF ECONOMIST

BULLION MANAGEMENT GROUP INC. | TORONTO

d.chapman@bmgbullion.com