A stock market rally is coming, but it may not last as long as you think, argues Allianz Global Investors' top strategist. » Read More
Gold lost $25 in two minutes on Friday morning, as the gold market experience a massive surge in volume that triggered a halt in the middle of the plunge. The move took gold down to a three-month low, and was felt across the commodity markets. And incredibly, a single sell order could be the culprit.
"It appears to have been an order to sell 5,000 gold futures contracts at market," Eric Hunsader of Nanex told CNBC.com, when asked to explain the swift move at 8:42 a.m. EDT. "About 2,700 went off and tripped the stop logic, halting gold futures for 10 seconds while liquidity replenished. When enough liquidity returned (after 10 seconds), the balance of about 2,300 completed."
Fed Chairman Ben Bernanke will not taper the Fed's bond buying before his term ends in January, says the head of U.S. rates strategy at Societe Generale. In fact, Mary Beth Fisher says, the Fed is more likely to increase its quantitative easing program than to decrease it.
And it could all come down to internal politics, Fisher said Thursday on CNBC's "Futures Now."
"I think Bernanke was a little bit more moderate than [Janet] Yellen and [William] Dudley and [Charles] Evans and clearly [James] Bullard in this situation, with inflation very low," Fisher said, referring to other members of the Federal Open Market Committee. Fisher finds it unlikely that Bernanke would "start tapering when he knows that that core of the committee, whose new leader was about to come out of it, were against the idea."
In fact, the strategist suggests that Fed Vice Chair Yellen's then-impending nomination for Fed chair could have been behind the Fed's decision not taper in September, which took markets by surprise.
President Barack Obama's choice of Janet Yellen to head the Federal Reserve was surely bolstered by the fact that her concerns about unemployment outweigh her concerns about inflation. It must have gratified him, then, to learn that her most famous theory attempts to pinpoint the specific cause behind unemployment.
Co-written with her husband, Nobel-winning economist George Akerlof, Yellen's most widely cited paper is borne out of a simple premise: "if people do not get what they think they deserve, they get angry." Yellen and Akerlof go on to argue that workers who receive less than what they perceive to be a fair wage will purposely work less hard as a way to take revenge on their employer. And the worse they are paid, the less hard they will work. Or, as the paper puts it, "workers proportionally withdraw effort as their actual wage falls short of their fair wage."
In the 1990 paper, the economists christen their theory "the fair wage-effort hypothesis," and go on to explain why the phenomenon could explain unemployment.
(Read more: Stocks shrug off Yellen, so I'm getting short: Pro)
But before that is elucidated, it is important to understand that under the admittedly "rudimentary model" used by these economists, unemployment is a bit of a riddle. After all, if the cost of hiring a worker is greater than the value that worker adds, then firms will hire no one.
In that scenario, "the demand for labor is zero, and the unemployment rate is unity," (meaning one, or 100 percent). On the other hand, if there is unemployment, then a given firm could "set its wage at any level." In that case, a given firm would choose a wage that maximizes value—and once they do so, "every firm should hire an infinite amount of labor," which would solve the problem of unemployment.
However, Akerlof and Yellen submit that since people do better work when paid more, firms pay workers a wage that workers consider fair. And since this "fair wage" is higher than the "market-clearing wage" that would lead to an "excess demand for labor," unemployment results. In this way, "this hypothesis explains the existence of unemployment," the economists declare.
That paper, entitled "The Fair-Wage Effort Hypothesis and Unemployment," has been cited in more than 300 academic articles, and has had a huge impact on the field of economics. "It's a very influential paper," said economics professor John Burger of Loyola University Maryland, who cited it in a recent paper of his own.
As recently as Tuesday, I thought news of a Janet Yellen appointment for Federal Reserve chair would go a long way toward reversing stock market weakness. But though President Obama is due to nominate Yellen for the Fed chairmanship on Wednesday, it seems the market has already priced in the news.
It's also possible that, although the market views Yellen as dovish, we realize that she's only slightly more dovish than the current chairman. In other words, all in is all in. Given Ben Bernanke's accommodative policies, how much more dovish could a reasonable Fed chair get?
(Read more: Confirmation seen for 'feisty lady' Yellen)
It the U.S. goes into default because Congress fails to raise the debt ceiling, investors won't rush into bonds like they did in 2011, said Matt Tucker, BlackRock's head of iShares fixed-income strategy. Instead, Treasurys could sell off.
Many have compared this situation to the one in 2011, when Standard & Poor's downgraded U.S. debt because of "political brinksmanship." That tanked stocks, which sent people into Treasurys as a safe haven. So, investors paradoxically ended up buying more of the very asset class that S&P had downgraded.
But on Tuesday's "Futures Now," Tucker said that if the government is prevented from paying bills or spending money, the story could be very different.
(Read more: Reluctantly, market faces a real default threat)
"The difference here is that in 2011, we had a lot of concern about what was happening in Washington. This triggered a flight to safety, and Treasurys rallied," Tucker said. But, he added, "if we actually saw a default, whether it was a technical or otherwise default by the Treasury, that could be a very different reaction. You actually could see a more mixed response from Treasurys, even a selloff."
In fact, Tucker is already seeing holders of very short-term Treasurys demanding more yield to compensate them for the risk.
He noted that the Treasury bill maturing Oct. 31 is yielding more than the those maturing in January, which is quite unusual.
"The fact that the October T-bill is trading so high is a reflection of the uncertainty people have about the government making its payments," he said.
Washington's deadlocked negotiations have bled into the Treasury market, as we have been stuck in the same trading range for two weeks now.
Demand for Treasurys increased once the Federal Reserve announced on Sept. 18 that it would maintain its $85 billion worth of asset purchases, rather than begin to taper the pace of that program, as markets expected. Investors used this as a reason to buy Treasurys.
However, as we step into a three-year auction on Tuesday and a 10-year auction on Wednesday, prices have floundered, as investors become wary of the congressional debt ceiling debate. The impasse in Washington is pretty scary, because it could impinge upon the U.S. government's ability to pay its debt in the short term.
(Read more: Prices dip, investors wary before debt showdown)
Face it—Washington will take its standoff down to the wire. And the shutdown and debt ceiling debate should end up being a golden opportunity.
Gold remained quiet on Sunday night. This, after it traded in a range of over $20 on Friday that tested $1,326, the highest level since Tuesday, as it ran stops through from the mid-week highs. With a failure to follow through, gold settled to a floor close of $1,317.60.
Jim Rogers believes the finance industry is about to slip into secular decline. That's why the famed investor advises young people to pursue careers in farming rather than in finance.
"If you've got young people who don't know what to do, I'd urge them not to get MBAs, but to get agriculture degrees," Rogers told CNBC.com.
Many investors believe that once we are through the shutdown and the debt ceiling debate, all will be well with the market. I don't see it that way.
Over the last couple of months, we have seen some disappointing numbers that I believe will create strong headwinds as we get deeper into the fourth quarter.
First, job creation has not been good. ADP reported on Wednesday that it looks like 166,000 jobs were added last month. That number is below most expectations, and the number of jobs created in the previous month was revised down.
(Read more: Private jobs come in light for September: ADP)
Second, housing has suffered because of the rise in interest rates. New home sales for August came in at 421,000, below estimates of about 450,000. The projected number of sales is now about 450,000 units. To put this in perspective, that number was over 1.3 million at its peak in 2005.
The government shutdown means the Federal Reserve won't taper its quantitative easing program until 2014, several Fed experts contend.
"The longer the political showdown in Washington continues, the greater the chance that the Fed will defer tapering until 2014," Kathy Lien of BK Asset Management wrote in a Thursday note.
She provides two explanations for this: economic damage, and information loss.
First of all, the shutdown is having a direct impact on the economy. As Deutsche Bank economist Joseph LaVorgna writes in a recent note, "Our estimate is that each week of the shutdown reduces quarterly GDP growth by approximately one-tenth in the initial phase, but this drag intensifies toward two-tenths if the shutdown lingers into a third or fourth week."
Since the Fed only wants to taper if it feels the economy can withstand it, anything that weakens the economic recovery reduces the chances of tapering.
Second, because of the shutdown, the government is no longer producing economic data. Most damagingly, the Bureau of Labor Statistics will not release a jobs report on Friday.
And for Eric Rosengren, president of the Federal Reserve Bank of Boston and a voting member of the FOMC, this lack of information is a major concern. The shutdown "does put out further into the future the time when we can get a real assessment of where the economy is," he said on Wednesday, according to Reuters. "It would make me less willing to remove accommodation until we had good data."
For these two reasons, "If the shutdown extends beyond next week, it may be very difficult for the Fed to justify reducing asset purchases in December, and at this stage, we should forget about a move in October," Lien writes.
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