Not Out of the Woods Yet: Stocks, Bitcoin, and Gold Markets in Reaction Mode!

As usual, applying linear, common-sense logic to the financial markets will only fray your sanity. At any given moment, bad news can be good or bad for stocks and other assets. The only way to make sense of it all is to apply Charlie Munger’s principle: “show me the incentive, and I’ll tell you the outcome.”

If you’ve been holding gold and Bitcoin like I’ve been recommending for years, your incentive is probably to hedge against the incentives of government and central bank officials. With an election year coming up, we all know what their incentives are.

Naturally, they’ll do whatever it takes to make the numbers fit their agenda and the narrative they’re trying to pass off to the voting public. For instance, they’d like us to believe that the economy is healthy. One measure of this is the gross domestic product (GDP), which was reported as growing 2.4% year-over-year in the April-June period.

Then, they pulled the old trick of blasting out a positive-looking headline number before quietly revising it lower a month after the fact. In this instance, they revised the GDP growth number from 2.4% to 2.1%. Of course, no one actually accepts the blame for getting it wrong the first time.

This is part of the “soft landing” narrative that central bankers have been pushing this year, which is like the “transitory” inflation narrative that the Federal Reserve had to abandon last year when it became evident that inflation was here to stay.

Anyone who believes the story that inflation is under control apparently hasn’t filled up their car with gas lately and hasn’t paid attention to the U.S. housing market. Crude oil is currently up to $86 per barrel, and the Goldman Sachs Housing Affordability Index just hit its lowest level on record.

It’s a strange market with bond prices at rock-bottom levels and yield curves inverting but the stock market somehow deciding that “this time is different.” Yield curve steepening has consistently preceded recessions in the past, yet the A.I. trend and a mad rush to the “Magnificent Seven” stocks is apparently enough to keep large-cap stock indices afloat in 2023.

Then, there’s the bad news that the market decided is good news this time: the U.S. unemployment rate for August was higher than expected at 3.8%. Again, another imminent recession indicator is flashing because this has been the consistent outcome of the unemployment rate bottoming out and then moving higher.

The 3.8% unemployment rate reading is the highest since February 2022; meanwhile, the real unemployment rate (which includes discouraged workers and people working part-time for economic reasons) increased to 7.1% in August.

Large-cap stocks jumped on the labor data, which may seem counterintuitive but is the market’s twisted logic at work. Stock traders were looking for an excuse for the Federal Reserve to stop raising interest rates, and a deteriorating economy (as evidenced by rising unemployment) is apparently just what the doctor ordered.

At the same time, the government doesn’t want to paint a picture of the economy that’s too gloomy. They proclaimed that America added 187,000 jobs (as measured by the nonfarm payrolls) in August, which would be a decent number if we actually believed it to be accurate.

Then again, the government continues to use that same tactic of blasting out a nice-sounding number and then revising it lower a month later. It can’t be mere happenstance that the Bureau of Labor Statistics has revised every monthly nonfarm payroll number lower this year (compare the red bars versus the blue bars in the chart above).

It’s a dirty trick, but it works in the short term. The market has little to no trepidation now as the VIX volatility index continues to sink and stocks grind higher despite a slew of red flags. In contrast, gold is staying in place slightly below $2,000. This is actually a good sign since high government bond yields would normally be expected to push gold prices lower.

The gold market clearly doesn’t expect the Fed to push bond yields higher for much longer. This makes sense because the government can’t afford to pay high interest rates on its massive debt load.

Then there’s Bitcoin, which is bouncing around as the SEC plays its anti-crypto games. But what else would you expect from a government entity when it feels threatened by a non-government currency?

I’m sticking to the same investment game plan I’ve had in place for many years. Anytime I can diversify away from government debt notes, I can sleep better at night knowing that my wealth isn’t “protected” (controlled) by politicians and central bankers.