Only one letter separates the words ‘paper’ and ‘taper’.
And yet, in the financial world the difference between a P or a T is massive.
After last week’s release of July’s FOMC Meeting Minutes, Wall Street thinks there is no real intention to quit the printing of paper just yet. Paper wins.
Maintaining the same massive dose of adrenalin or slightly reducing the rate is academic. The Great Credit Contraction has damaged the economy’s organs and the stimulants are only masking the deeper problem.
The US Federal Reserve has indicated arbitrary targets of 6.5% unemployment and a 2% annual increase in consumer prices as the signals it wants to see before slowing down the printing presses.
Here is an extract from the FOMC Minutes:
‘First, almost all participants confirmed that they were broadly comfortable with the characterization of the contingent outlook for asset purchases that was presented in the June post meeting press conference and in the July monetary policy testimony.
‘Under that outlook, if economic conditions improved broadly as expected, the Committee would moderate the pace of its securities purchases later this year. And if economic conditions continued to develop broadly as anticipated, the Committee would reduce the pace of purchases in measured steps and conclude the purchase program around the middle of 2014. At that point, if the economy evolved along the lines anticipated, the recovery would have gained further momentum.‘
Basically if (and that’s a big if) the economic outlook as measured by employment and inflation improve, then the Federal Reserve will taper.
Here’s what they had to say about the employment situation:
‘Committee members viewed the information received over the intermeeting period as suggesting that economic activity expanded at a modest pace during the first half of the year. Labor market conditions showed further improvement in recent months, on balance, but the unemployment rate remained elevated.‘
Oskar Morgenstern, the author of On the Accuracy of Economic Observations,best described the compilation of economic data as ‘these numbers are a complex amalgam of errors in the parts whose magnitude is not easily determined.‘
According to the Federal Reserve Economic Data (FRED), the unemployment rate is headed in the right direction – falling from 10% to 7.5%. This is the headline number the ‘talking heads’ wax lyrical about and point to the jobs recovery in the US:
There are lies, damn lies and statistics. The US unemployment data is a statistic – this is the biggest lie of all because it’s an official lie.
The US unemployment rate doesn’t include those who have given up looking for work or those who have moved to disability pensions.
The next chart shows a drop of 2.5% (since the GFC) in the number of people participating in the US labour force. There are many reasons why people give up looking for work (despondency, retirement, ill-health, working in the cash economy etc.), however, you see how the data can be massaged to produce certain outcomes.
In an effort to ‘keep the bastards honest’, John Williams at www.shadowstats.com produces an Alternate Unemployment chart. The methodology behind the chart’s compilation is:
‘The seasonally-adjusted SGS Alternate Unemployment Rate reflects current unemployment reporting methodology adjusted for SGS-estimated long-term discouraged workers, who were defined out of official existence in 1994. That estimate is added to the Bureau of Labor Statistics’ (BLS) estimate of U-6 unemployment, which includes short-term discouraged workers.‘
The red line – the U-3 unemployment rate – is the official number.
The grey line – the U-6 unemployment rate – is the Bureau of Labor Statistics’ broadest unemployment measure. It includes those who are short-term discouraged, under-employed (part-time but would like more hours) and the unemployed.
The blue line – is shadow stats calculation – uses the official U-6 number plus the long-term discouraged workers who are no longer counted in the official data.
In the interest of fairness let’s assume the truth of US un- and under employment lies somewhere between the grey and blue line – around the 18-20% mark.
Employment is the vital organ I referred to earlier. If a greater number of people don’t have sufficient disposable income or the capacity to borrow, how do you revive a consumption based economy?
If the recent disappointing profit announcements from Target, Wal-Mart and Macy’s are any guide, the answer is ‘with great difficulty’.
Bernanke and co may have a 6.5% official figure in mind, but if the number is just a statistic and not reality, then it doesn’t alter the course of the underlying economy.
Paper or Taper? Well here it is straight from the donkey’s mouth (again, emphasis is mine):
‘At the conclusion of its discussion, the Committee decided to continue adding policy accommodation by purchasing additional MBS at a pace of $40 billion per month and longer-term Treasury securities at a pace of $45 billion per month and to maintain its existing reinvestment policies. In addition, the Committee reaffirmed its intention to keep the target federal funds rate at 1⁄4 percent .‘
The Federal Reserve has no intention of changing its ‘print and suppress’ experiment.
This paper or taper caper may make the traders twitchy, but for long term, patient investors the end game will still be the same – quality shares at substantially discounted prices await us.
Vern Gowdie+
Editor, Gowdie Family Wealth
From the Archives…
How Many Warren Buffett’s in a Bar of Gold?
16-08-2013 – Kris Sayce
Two Points to Consider from the Commonwealth Bank…
15-08-2013 – Kris Sayce
Take Control of Your Superannuation, but Know the Limits
14-08-2013 – Vern Gowdie
Why I’m Glad I Missed a Dividend Stock That Doubled…
13-08-2013 – Kris Sayce
No Profit in the Federal Reserve Divination
12-08-2013 – Dan Denning
