Another All Time High

The Wrath of Ray KrocThe Labor Department reported last Friday that 165,000 new jobs were added to the economy in April.  That’s nothing to write home about, you’d think.  But, nevertheless, the mainstream press got excited because it was ‘better than expected.’

On top of that, Wall Street went bananas.  The Dow closed the day up 142 points and the S&P 500 ran up above 1,614…to a new all-time high.  On surface, it appeared really great things were happening all around.

Yet, for some reason, we couldn’t seem to grab a hold of the good cheer.  Why’s a jobs report that barely keeps pace with population growth cause for investors to jump and stomp around like Oakland Raiders fans?  Shouldn’t it take double that – or more – before they bang the pots and pans?

Once the dust settled, one critical thing became clear.  The numbers don’t add up.  In April 2008, 62.7 percent of working age Americans had a job.  In April 2013, the percentage of working age Americans with a job sat at 58.6.  With fewer Americans working shouldn’t the unemployment rate be soaring?

Apparently no.  However, the reason is a huge disappointment.  The reason the unemployment rate is now at 7.5 percent is because 9.5 million Americans have left the workforce during the presidency of Barack Obama.  Somehow, if people are not working and are no longer looking for work they are not unemployed.

Investor Complacency

Regardless of how the government statisticians count up the beans, it doesn’t change the fact that vast numbers of people are not working because there are no jobs to be had.  In fact, when the unemployment rate is calculated the way it was before 1980, prior to all the fudge, it is at 23 percent.  That’s quite a difference for sure.

Naturally, a 23 percent unemployment rate is a bright flashing sign that the economy’s in serious trouble.  Even so, the stock market continues to run up like there’s a real boom taking place.  For while quantitative easing hasn’t produced the employment boom it was supposed to it has done a marvelous job of papering over the economy’s defects with higher stock prices.

At the moment, the Fed’s funny money is overcoming economic indicators signaling weak or slow growth.  By all accounts the economic recovery has been a slow slog that’s never really reached escape velocity.  Moreover, at this stage of the recovery it may be time for another recession.

The point is, without this continuous flow of new money into financial markets, stocks would likely role over and fall down.  Instead, investors have come to expect this sort of Fed intervention.  They’ve become complacent to things like price signals and market cycles.

Who knows…maybe the stock boom can continue indefinitely.  Obviously that would go contrary to market history.  But, nonetheless, there never really has been this extreme level of intervention into markets that we’re aware of.

Another All Time High

Certainly the Fed can’t print money forever.  At some point, you’d think, they’d be forced to stop…or, at a minimum, slow down.  So what would cause the Fed to stop expanding its balance sheet?

According to Fed Chairman Ben Bernanke, he’ll stop creating $85 billion a month to buy Treasures and mortgage securities when the unemployment rate falls below 6.5 percent.  There are also other reasons why Bernanke would abruptly cutoff the money flow.

A currency crisis, for instance, brought on by the Fed’s policies of mass money debasement would compel Bernanke to change course.  A rapid dollar devaluation, resulting in the ultimate destruction of middle-class savings, would put an abrupt stop to quantitative easing.  In such an event, the temporary boost quantitative easing provided to stocks would quickly disappear as share prices crash back to earth.

Irrespective, we don’t even think it’ll take a currency crisis for stocks to lose some air.  The stock market has been pushed up to a perilous edge.  Just a bad economic report, or a crisis out of Europe, could be all that’s needed for a moment of panic.

Of course, the market will keep shrugging off bad news until just the moment it doesn’t.  In the meantime, new all-time highs will be set practically every day…like yesterday.  We’ll simply watch the spectacle in awe with anticipation of what follows.

Sincerely,

MN Gordon
for Economic Prism

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