Saturday, September 28, 2013

Fed no "taper" - So I guess I'll comment too

Why is everyone so surprised that the Fed didn't "taper"?  I guess the consensus of the "in the know" was that they would, or rather that they must.  But, they didn't.  Why would they?  What has changed?  Well, not much really.

The BLS unemployment rate continues to improve with a reading of 7.3 for Aug, 2013 (1).
From this graph we can see that the rate is heading down, but is not yet back to pre-recession levels.  What is not captured in this graph is that the reason the rate is heading down has nothing to do with people finding work, rather the formulas used to calculate the value assumes that people who are not working for a certain number of months have stopped looking and are no longer part of the work force, so don't need to be counted.  A better measure is the labor participation rate which continues to fall, with a reading of 63.2 for Aug, 2013 (2), much below the pre-recession level of ~66, as seen in the graph.
This means that about 3% of the population that were in the workforce are now not.  That translates to about 9,000,000 people!  Which is consistent with the job loss estimate of 8,800,000 jobs during this recession.  For these people this is a depression not another recession.

The only good news on the jobless front is the initial claims reported by the DoL has fallen from a high of ~660,000 in Mar, 2009 to 305,000 in Sept, 2013 (3).  From this chart we can see that the level is about at the historical low level, that may suggest the job market has nearly bottomed.

What about economic growth?  In the second quarter of 2013 the BEA reported a GDP growth of 2.5% (4).  A minimally OK figure, but not signally a strong recover which would be expected coming from the depths to which the economy had plunged in the last five years.  This rate of growth is about what has been seen for the last few years.  The BEA graph shows this less than amazing growth is about all the economy could do.  All this in spite of years of "ZIRP" or near zero interest rates to major banks.  

What about the housing market?  This should be doing well as the Fed has been buying up MBS shares like crazy.  The latest Case-Shiller nominal index is up to 146 in Sept, 2013 (5)  But, this is not good news as this level is still too high as it is above the long term trend which is driven by personal incomes.  The index was below 100 until Mar, 2000 when is started its meteoric rise, and this rebound once again takes the rate of growth above the long term trend.  The increase may make some folks happy, those who own MBS' and those who bought at the peak in 2006, but for regular folks this is just a "head fake" as they say in sports.  This only make housing unaffordable for many and unsustainable again.

The stock market is doing well.  S&P index is up over 18% this year.  This is great if you own stock, of which only a few percent of American have any significant holdings.  

So, in reality there is no good reason for the Fed to "taper" as withdrawing all that juicing of the financial markets will just cause this tepid "recovery" to stall or reverse.  What will the Fed do?  Probably continue as they are until unemployment drops below 6%, and the rest of the overhang of foreclosures works its way through the system.  That will be at least another year.  In the meantime, you can play some nice trades on whether they will "taper" or not, and maybe make a few bucks from those Wall St folks, or loose some if you guess wrong.  Good luck.

PS I like having all these charts on one page.  It really gives a good survey of the state of the economy and financial markets in one look.



  1. "The stock market is doing well. S&P index is up over 18% this year. This is great if you own stock, of which only a few percent of American have any significant holdings."
    I don't think you should ignore the sum total of American's retirement assets. Many assets are supported by stocks and funds of stocks.
    "Retirement Assets Total $17.5 Trillion in Fourth Quarter 2010

    Washington, DC, April 13, 2011 - Total U.S. retirement assets were $17.5 trillion as of December 31, 2010, up 5.2 percent in the fourth quarter of 2010 and up 9.1 percent for the year. Retirement savings accounted for 37 percent of all household financial assets in the United States at year-end 2010."

    1. According to a recent study by the Congressional Research Service, which cites a paper on income distribution, the wealthiest 10% of households holds 90.4% of the value of all stock.