American Account: Jobless figures show why the US isn't working
Comment of the Day

November 06 2013

Commentary by David Fuller

American Account: Jobless figures show why the US isn't working

Here is a sample from this excellent column by Irwin Stelzer for The Sunday Times (UK) (note: subscription required for the full text but a PDF version is in the Subscriber's Area).
The unsatisfactory state of the labour market, along with the slow pace of the recovery, persuaded the Federal Reserve Board's monetary policy committee to continue its bond purchases rather than "taper" as it was planning to do only a few months ago. The Fed's gurus believe the unemployment rate is too high to allow them to slow the printing presses and, more important, that a continuing decline in the labour force participation rate bodes ill for the long-term future of economic growth and productivity.

More than 90m men and women over the age of 16 are not working - 10m more than were idle when President Obama took office. The private sector created an average of 129,000 jobs a month in the third quarter of this year, far below the 200,000 monthly average in the first half of the year. The Wall Street Journal put it this way: "For every three Americans over the age of 16 earning a paycheck there are two who aren't even looking for a job."

With Janet Yellen due to move into Ben Bernanke's chair at the Fed, this situation will certainly lead to a continuation of QE3 - the printing of money. There will be only two more job reports this year, one later this week, the other early in December. Neither is likely to cause the Fed to roll back its bond purchases, which is why share prices are soaring. "Tapering is off the table for the foreseeable future," says Andrew Law, head of the phenomenally successful money manager Caxton Associates.

Early next year Yellen will be in charge, and she has made it clear that the unemployment situation is intolerable, that she firmly believes that loose monetary policy can create jobs, and that looser is better than merely loose. She has also made it clear she does not feel bound by the Fed's long-standing inflation target of 2% a year. No less a figure than Harvard's Kenneth Rogoff told the media that the Fed should push the inflation rate to 6% for a few years to boost the economy. Older economists who remember Jimmy Carter's stagflation - high inflation, no growth - are appalled. Younger ones view the Carter years as ancient history with no relevance to present-day policy, and see Japan's deflationary "lost decade" as the example of the greater evil.

David Fuller's view Accommodative monetary policy remains the big driver for the global stock market bull trend. Moreover, with a soft jobs market in the USA and little evidence of inflation, at least in terms of wage pressures or commodity prices, investors continue to discount a continuation of quantitative easing (QE) well into at least 1Q 2014.

However, an increasing number of people within the US financial community are saying that QE tapering should have commenced last September. Their main concern is that Fed policy is distorting the economy by keeping interest rates artificially low, while driving investors into a US stock market which is no longer cheap after this year's considerable rise. Moreover, there are additional signs that this bull trend is now in its latter stages.

For instance, exactly one year ago Wall Street opinion polls showed that more investors were worried about another significant sell-off, rather than anything like advance we have seen. That told us they were underinvested at a time when valuations were still generally low. Today, you may have noticed that some investment managers interviewed on US financial programmes are talking the market higher on the basis of P/E Ratio expansion. This tells us that they are long and possibly leveraged, against the background of a soft economy and modest earnings growth. They would not need to predict P/E Ratio expansion if the economy was strong and earnings growth robust. Moreover, corporate earnings are often flattered by share buyback programmes.

In a cheap and oversold stock market, there are virtually no initial public offerings (IPOs). In an expensive market, there is a surge of IPOs. Consider this these three sentences from Reuters today:

The equity market also saw support from a host of initial public offerings, with six new issues starting to trade on Wednesday, a day ahead of Twitter's IPO. Barracuda Networks Inc shares jumped 26.3 percent to $22.7 on its first trading day.

According to Thomson Reuters data, if all 13 scheduled IPOs price this week, it will be the busiest week of the year in terms of number of primary issues since September 2007.

How reassuring is that? In 2007 the US stock market was in the fifth consecutive year of a strong bull trend, just like today. I do not think for a minute that we are heading into another severe credit crisis recession and collapse of the banking system, as occurred in 2008. However, we are most likely heading towards QE tapering next year, and if not, a softer US and also global economy. We do not know exactly how either of those scenarios will play out because we have experienced nothing like QE, or more importantly its tapering, for a very long time. Nevertheless, either outcome is very likely to roil stock markets.

Meanwhile, QE continues and the sequence of higher reaction lows evident on most of the broader US Indices, such as the S&P, NASDAQ and Russell 2000, remain intact.

Lastly, I commend the rest of Irwin Stelzer's article to you. Interestingly, he also concludes with a summary of the USA's longer-term advantages which you have been hearing about from Fullermoney over the last year, commencing with technological innovation and increasing self-reliance in energy.

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