Stocks rallied sharply on last week’s unemployment news, but shouldn’t they instead have fallen? In the past, it has not been changes in the unemployment rate per se that caused stocks to rise or fall, but rather the perceived impact of those changes on Fed policy. In the bizarre, inverted world of Wall Street tiny-think, “bad” unemployment news was always greeted with high-five exuberance, since it argued implicitly against Fed tightening. To be sure, last week’s news was good as far as Wall Street was concerned: The 7% jobless rate announced on Friday was the lowest since 2008. But could those who helped goose the Dow Industrials 200 points have forgotten what Helicopter Ben said last summer – i.e., that the Fed would end its quantitative easing program if U.S. unemployment got “in the vicinity of 7%.” Of course, there are the usual mitigating factors to be considered that could alter the actual turn of events. For one, because Bernanke’s job is to say what he means without necessarily meaning it, we shouldn’t hold him too closely to his word. And for two, the phrase “in the vicinity of 7%” leaves some wiggle room, Under the circumstances, it’s conceivable that unemployment could fall all the way to, say, 6.7%, before the Fed feels obliged to invoke the dreaded Tapeworm. (“Not on my watch!” Janet Yellen might say, were she not merely one more Fed lackey who moves only when her strings are pulled.)
DaFacto Tapering
We’ve asserted here numerous times that the odds of a Fed Tapeworm are about the same as a Martian invasion. But we’re going to qualify that, as follows: However the Fed reacts to this (literally) too-good-to-be-true gusher of unemployment news, it will happen in such a way as to leave everyone wondering whether the Fed has in fact “tapered” at all. One thing’s for sure, whatever policy action is taken, it will not be one that subjects Treasury debt to market forces. Our guess is that we will see some “de facto” tapering, starting with an announcement after-the-fact that the Fed has bought less dubious paper in a given month than the customary $85 billion in Treasurys and mortgage-backeds.
Meanwhile, the news media, led by the over-the-top cheerleading of the Wall Street Journal, acts as though the 7% unemployment rate actually means something. We prefer Shadowstats’ spin, which puts unemployment at about three times the official rate. It’s amusing in any event to watch the news media get all worked up about the supposedly improving economy when any idiot outside of America’s giddy newsrooms can see that most businesses and their employees are struggling just to keep their heads above water. Incidentally, the Journals’ op-ed page continues to get it right, using the term “Great Recession” to describe an economy that has continued to stagnate since the recession officially ended in 2009.
I think the Fed will continue to print. Politics trumps the good of the people. Period. default is not an option. Deficits have to be paid. No one is willing to give up their free stuff. The takers out number the producers. It is a slow motion train wreck which is gaining speed geometrically. Don’t kid yourself. This is not going to end well.