Strong Labor Market Means Higher Interest Rates
The Bureau of Labor and Statistics published the August jobs report. The report said 315,000 new jobs were added to the economy, and 344,000 new unemployment claims were made. The increase in unemployment is about 0.2% above July, bringing the total to 3.7%, or six million people in unemployment.
The unemployment statistic only reflects the people actively looking for work. An additional 5.5 million people were not included in the unemployment numbers because they did not look for a job in the four weeks before the survey. For comparison, there were 5 million people not included in the unemployment numbers before the pandemic in February 2020, and the unemployment number was also 3.7%. The increase of jobs is 40.1% lower than July and the lowest add since April 2021.
The problem is that the Fed has committed itself to weaken the economy to fight inflation. The Fed will use the positive job numbers to justify higher interest rate hikes at the September Federal Open Market Committee (FOMC) meeting. Higher interest rates will be a disaster for investors across the spectrum. Bonds go down when interest rates go up. Profits go down when businesses face a higher cost of capital. Housing will be less affordable, and fewer buyers will be in the markets, driving prices down. Fewer buyers will also translate into more market days, further dragging housing prices down.
Why Does the Fed Want to Destroy the Job Market?
At the annual Jackson Hole Conference, Fed Chairman Jerome Powell stated, “We will use our tools forcefully to bring price stability.” What are the tools? The Fed has two primary tools (three, if you count politicians, which control the police and military). It can print money and control interest rates. Printing is to raise prices, and interest rates are to lower prices. The issue is that prices are too high, so the Fed measures how it can use interest rates to bring prices back down. Powell repeatedly mentioned the job market. Concerning the Fed's actions, Chairman Powell said, "…this will bring some pain to households and businesses.” The Fed is using the word “forcefully” and “pain.” Forcefully does not imply a soft landing. Combine that with "pain," and it sounds like a body slam on concrete.
Government and Fed economists believe a strong job market creates two inflationary pressures. Companies tend to offer higher wages to attract talent when there are more jobs than workers to fill them. The first problem is that employees will have more money to spend. Since most people spend to the level of their wages, higher wages put more dollars in circulation. More dollars chasing the same or fewer goods, and prices go up. The second pressure is that higher wages drive company costs, and those production costs come to the consumer as higher prices. If the Fed stifles consumer spending, prices can be driven downward. The problem with this logic is that consumer spending makes up 70% of GDP. American consumer spending is the bedrock of the entire world economy.
The government thinks jobs and wages are the problems, but printing and high business taxes are much more significant. If there is truth in their arguments, it makes more sense for the government to exercise self-control by not printing so many dollars and lowering taxes on businesses. The Fed printing trillions of dollars adds to money in circulation, and taxes are huge business expenses that will be passed on to the consumer. Both government actions, printing, and business taxes drive inflation significantly more than paying someone a couple extra thousand dollars per year. President Ronald Reagan famously said, "government is not the solution to our problem. Government is the problem.” Concerning inflation, truer words have not been spoken.
How Will Higher Interest Rates Affect You?
It depends. How exposed to the stock, bond, or housing market are you? Rates have risen 1.5% in 2022, and the bond market is down more than 10%. Stocks are down 15%. The overinflated housing market is showing weakness and is contracting. For the first time in 17 months, the average housing price was below the asking price. Also, 20% of sellers are lowering their asking price. Additionally, housing sentiment is the lowest in a decade. The Fed has given a clear, unambiguous warning that it only gets rockier from here. Most people are standing on the tracks and have no idea a train is heading straight for them, their investments, and retirement accounts.
What Can You Do?
First, get your family off the tracks. Decide that no matter what happens, your family will be safe. Many people exercise their second amendment right to protect themselves. Why not also take deliberate actions to protect your wealth? Owning gold is like owning a gun. It is better to have and not need than need and not have. Gold has been trusted for thousands of years to protect wealth. Gold is not a miracle cure to everything wrong in the economy and won’t make you rich overnight. Metals are considered a hedge against inflation. Gold and other precious metals aren’t an offensive investment strategy. Instead, like a handgun, metals are for defense. They help people not lose what they have earned. There are growth opportunities, but gold is primarily about protection.
More people are becoming increasingly concerned about the economy. In addition to storing some gold at home, they are moving their retirement accounts into precious metal IRAs. It is a simple process, but you will want to ensure you do it correctly. Call and ask to speak to a Retirement Specialist. Our caring Retirement Specialists are here to assist you every step.
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