As Fed Beige Book Disappoints Markets Realize There is No There There (Except For Roaring Gold)

The Fed national Beige Book was released today and the data within reinforced what shrewd analysts have been saying all along. The US economy is not going anywhere until it gets some real inflation fires stoked.

"A number of districts cite the strong dollar as restraining manufacturing activity as well as tourism spending," the book said. In particular, the steel sector remained weak, as the dollar's appreciation permitted for more import competition, especially from China.
The Fed survey said labor markets tightened in most districts with some reports of labor shortages, especially for skilled workers. However, in a worrying sign as the central bank continues to mull a 
rise in interest rates for the first time in almost a decade, reports of wage gains were "mostly subdued" with only "scattered reports" of wage gain pressures. These were concentrated among highly skilled 
workers, the Fed said.

Let’s reassert what should be but isn’t obvious to all economists, business people and politicians: until there are higher wages in the United States (and the rest of North America and Europe), there will be 
no full recovery and consequently the prosperity that we are accustomed to will not return.

As if to underscore the Beige Book snapshot, retail sales barely rose in September. The Commerce Department said retail sales edged up 0.1% last month because cheaper gasoline pushed service station receipts down 3.2%. Giving the report an even weaker tone, sales in August were revised down to show them unchanged instead of rising 0.2%.

Even worse on the wage/inflation/growth front, in a separate report, the Labor Department said its Producer Price Index fell 0.5% in September, the largest drop since January. The PPI was unchanged in 
August.

In the 12 months through September, the PPI fell 1.1% after declining 0.8 percent in August. It was the eighth straight 12-month decrease in the index. The ramifications of all this information are serious.

First, the drop in spending by consumers will drop the bottom line of most, if not all, companies. Second, the disinflation is dangerous to profits and to the bottom line of households. It’s clear what lower prices do to companies’ margins. Less clear for many people is what happens to households.

The activity that will be most damaged is housing. As wages – that is, the pricing of labor -– remains stagnant or declines, -fewer people will be able to afford houses, especially young people.

This brings us around immediately to the Federal Open Market Committee meeting coming up in a couple of weeks. Can the committee even contemplate raising interest rates? Sounds like a death wish.

Globally, major indices around the world were off. The Dow fell 150 points, or almost 1.00%. Japan’s Nikkei fared worst of all, dipping nearly 2.00%.

All of the factors we speak about above were contributors to the dynamic upside moves witnessed today in the precious metals complex. Gold roared past former resistance at 1170 at reached toward 1190, closing at 1184, a $15.00 dollar gain on the day.

Wishing you as always, good trading,