All Aboard

The train keeps rumbling and trundling down the tracks.

Out the window, the most exciting financial trend we’ve seen so far this year? Al Jazeera:

The gold market is booming as investors seek a safe haven for their investments amid global economic uncertainty. The price of gold has risen by nearly a third over the past year, surpassing $3,550 per ounce on Wednesday to hit an all-time high.

And the biggest worry? Bloomberg:

Global Bond Selloff Deepens with Longer Debt Leading Losses

What are these news stories telling us? We don’t know for sure, but we think this train is headed for a place that begins with an ‘s.’

“The real problem is the money…the dollar,” we explained to French friends last night.

“When the Nixon administration switched to a pure-paper currency, it falsified our money and skewed everything. Foreigners were able to make things cheaper…partly because they are just lower-cost competitors…but also because the US was pumping up labor rates, along with everything else.”

Today, the ‘labor cost’ part of making a product in China, for example, is only about 1/5th of what it is in the US. In Vietnam, it’s only 1/16th as much as the US.

This labor cost gap widened after the phony dollar was put into service. As the fountainhead of worldwide money-printing, US manufacturing costs increased faster than those of other countries — making the US less and less attractive as a place to make things. That’s why so many things are no longer ‘Made in America.’

“It had nothing to do with the lack of tariffs…or with foreigners taking advantage of us,” we continued. “Last year, trillions in trade changed hands, at low tariff taxes…with less than 1% average difference between what we had to pay in tariffs and what others paid us.

“Tariffs were never the problem. And raising them now won’t solve anything. It will just raise costs by creating new barriers to trade.”

That little discourse seemed to do the trick. Our friends changed the subject.

We’d like to change the subject too. But our subject is money. And the new tariff regime is going to ‘play Hell’ with it.

Tariffs are essentially a sales tax. And a sales tax — averaging maybe 15% — is going to reduce consumer purchasing power…and cut into sales and profits. That is, it will be downer.

Fewer goods and services will trade hands. GDP growth will slow. Sales and profits will fall. A real slowdown, in other words.

And look, we strain our eyes…we can now make out the first four letters of the sign ahead — s, t, a, and g….

The tariffs may be struck down next month, along with many other features of the Big Man’s rule. Not knowing what comes next also contributes to a slowdown. No one wants to make a major financial decision while so many balls are up in the air. They might come down on our heads.

Rising bond yields (falling prices for bonds) tell much the same story. It will be more expensive to borrow money tomorrow than it was yesterday. Projects that might have made sense in May or June are looking less attractive in September. Because the cost of finance has gone up.

But of course…there’s always more to the story, isn’t there? And the more to this story is on the signpost ahead — f, l, a, t, i, o, n. That’s the part the gold market is probably talking about.

Tariffs will drive up prices. So will uncertainty itself. Producers will be reluctant to ramp up output. They will want to see sustained price increases before they make further investments. Supplies will go down; prices will go up. And the job market will soften.

A report out yesterday told us that the feds are about to announce a big revision in the unemployment numbers – in which almost a million jobs will disappear.

And then, the Fed, whose job is to make sure we have full employment, will have to lower interest rates…and ‘print’ more money.

Next stop. Stagflation.