Pushing And Shoving Toward The Exits

As the U.S. government throttled toward a shutdown, money invested in all instruments stampeded toward the sidelines around the globe. 

This display of dysfunctional behavior is reprehensible. Holding cudgels over the heads of your fellow governing officials is no way to act. The right wing was daft if they thought for a moment there would be a compromise over putting off the implementation of the Affordable Care Act for a year. 

Hello? It carries the nickname "Obamacare." What President in his right mind would let such signature legislation bearing his own name ever go down? Not to mention the Pit Bull Of The Senate, Harry Reid who, we think, would bite a Tea Partier's leg if it were legal.

All this wailing and gnashing of teeth by the Republicans in the House is because, for good or ill, the major part of the law goes into effect at midnight tonight.

What this has meant for world markets is doom and gloom, despair, and ultra-conservative money-stashing in the form of cash. 

The unknown is always scary for investors and traders. Securities are called securities for good reason. Folks are really worried.

Unfortunately, gold and silver were not immune to the exit-rushing although they are up from their earlier lows. Once again, the precious metals are not performing in their traditional role as safe havens. 

In this specific instance, there is a specific reason. Money did not pour into gold because it wants to "wait, hope and see" if the shutdown issue is resolved quickly and trading can return to normal. 

When the bruising boxing match is done with - the American government can't stay shutdown forever - there are ways gold might benefit. 

Historically, October into November is a bad month for stocks in general. Second, the rumor on the street is that 3rd quarter earnings are looking weak. Third, the Fed will once again not taper QE3 to any significant degree. (Indeed, a little tapering might quell the critics of the program.)

The recent decline in 10-year bond rates are also a good indicator of gold's future outlook. 

If you read between the lines of Fed guidance in the last few FOMC releases and the commentaries following, you will see they are gradually backing off their unemployment targets as a trigger for tapering. Bernanke has said as much, as has Janet Yellen (Board of Governors) and William Dudley (President of the New York Federal Reserve Bank). 

"The committee would also take into account additional measures of labor-market conditions," Bernanke said September 18th.

Labor figures come out Friday and the consensus is that the unemployment rate will remain static. Do not be surprised if there is some backsliding.

Bret Barker, a managing director in U.S. fixed income at Los Angeles-based TCW Group Inc., which manages more than $128 billion, said the shrinking labor force was "always the problem with measuring unemployment, yet the Fed went ahead anyway and tied its policies to the gauge."

Indeed, that is the spanner in the works. We can easily get to zero unemployment in the United States. Simply drive another 8 million people out of the workforce. Of course, then there is that little thing called civil insurrection. 

This circles back around to Congress. Write a budget bill. Stop the nonsense. If most of us acted the way the legislators are acting in our own jobs or personal lives, we'd be sacked or thrown out of the house the next morning.

Once again: poor fiscal policy puts too much stress on monetary policy. The latter is simply not meant to carry the kind of load it has been carrying.  

Wishing you as always good trading,