Wednesday, August 1, 2012 - The Fed's Gone Fishing - The Machines Take Control - The Check is in the Mail

The Fed's Gone Fishing -The Machines Take Control - The Check is in the Mail
-by Sinclair Noe


DOW – 37 = 12,971
SPX – 4 = 1375
NAS – 19 = 2920
10 YR YLD +.05 = 1.54%
OIL + .71 = 90.38
GOLD – 14.80 = 1601.10
SILV -.56 = 27.54
PLAT – 20.00 = 1403.00


The economy has slowed down over the past few months; I know it; you know it; the Federal Reserve knows it; anybody who can fog a mirror knows it. And so, it was widely anticipated the Federal Reserve would acknowledge the slowdown today as they wrapped up a two-day FOMC meeting. They did. They issued a statement saying:  “economic activity decelerated somewhat over the first half of this year. Growth in employment has been slow in recent months, and the unemployment rate remains elevated.” 


And then they did absolutely nothing. The did not extend their Zero Interest Rate Policy into the next millennium and beyond; they did not cut the interest they pay member banks for not making loans; and they did not announce another round of quantitative easing. Nobody seriously expected QE3 but it was expected the Fed would make some small, incremental concession. Nope. They did nothing. Squat, zilch, zip, nada. They couldn't even throw a dog a bone. Generally they expect inflation to be under control and employment to slowly improve just a smidge, and apparently Bernanke is going trout fishing in Wyoming. They promised to keep an eye on things; if it goes to hell in a handbasket, they'll reel in their line and go back to printing money. Maybe the Fed will come up with a new program at the Jackson Hole meeting in late August, after they catch their limit of rainbow and cutthroat along the Little Snake River; maybe at the next FOMC meeting in September; maybe they're just waiting on the ECB; maybe they've figured out they can't change anything; maybe they just wanted to see if we're still awake and cognizant that the Fed is continuing with Operation Twist – which is the current Fed money printing scheme. 


Friday we'll find out whether the Fed needs to wrap up their fishing trip early or merely restock the Winnebago. We got a hint at the Friday jobs report from the ADP National Employment Report showed private employers created 163,000 jobs in July, more than the 120,000 that had been expected though slightly less than June's 172,000. The economy has been cutting public sector jobs and the ADP report usually varies from the monthly report by about 50,000 jobs. So, it looks like the economy added about 110,000 jobs net; that's not enough to lower the unemployment rate from 8.2%.

Here in the USA we never really made it out of the depression; the share of American 18- to 24-year-olds who were employed fell to 54 per cent last year, the lowest since the labor department began tracking data in 1948. The share who are in college has risen, but the researchers say this only partly explains the drop. The jobless rate for Americans age 16 to 24 is above 16 per cent, more than twice the national rate. I get weary making the argument that we are still in a depression. Youth unemployment  is a global problem yet it is unique in the US where we have high youth unemployment capped off with excessive student loan debts. We've shackled an entire generation and I'm guessing the results will be unpleasant. 


We're still stumbling along but the Federal Reserve is sanguine; or maybe the Fed is double dog daring  Congress to actually do something;  or maybe the Fed is finally admitting that QE is a failure at creating jobs. It would be more efficient to just send out checks to everybody. Better yet, just spend the money on infrastructure improvements. I know, a public works bill is the job of Congress but they have proven they are dysfunctional morons, incapable of anything other than gathering up campaign contributions. How do you think we can best create jobs?  Whatever idea you have it is probably better than anything coming out of Congress and it is certainly more than anything offered up by the Fed, which is, as I said: zero, zip, nada, zilch, and ZIRP. 


Tomorrow we'll see if the ECB will do whatever it takes to preserve the Euro-Union. Greece and Spain are in outright depressions. Things are rapidly getting worse in Spain. Bond yields have risen to over 7.5% today. The region of  Valencia has apparently failed and now needs help from Madrid. The region of Catalonia has canceled paychecks for about 100,000 public sector workers. In line with this bad news on the state of the government coffers, the price has increased for a form of  insurance policy, or a credit default swap, against Spanish default. Investors’ views of Spanish companies are just as gloomy as of its government finances. The Spanish stock market, as measured by the IBEX 35, is down 30% this year; the Spanish economy isn't going to lift itself up by the bootstraps. If Draghi was bluffing about doing whatever it takes, there will be problems. 


Meanwhile, the computers became self aware this morning and they took control from their human masters. The machines rose up and started trading stocks, and they were even worse at this task than their human counterparts. The humanoids at the New York Stock Exchange looked on with flabbergasted amazement and helpless bewilderment as hundreds of millions of stocks were traded between computers. They claim it was a technical glitch at Knight Capital, not a flash crash or a Facebook fiasco, just a glitch; an algorithmic syncopation gone sour. Trades that had been triggered during the glitch were canceled, at least some were canceled. There is a good chance that Knight Capital really took a bath on this glitch. And if ever there was a reason to reign in the high frequency traders, this was a good reminder. 


Yesterday, before the machines took over Wall Street, Bill Gross, the bond king from PIMCO declared stocks were a Ponzi Scheme and the cult of equities is dying or dead. The reasoning is if stocks appreciate at  about 7% a year forever, while GDP only grows at about 3%, the stock market will soon be worth more than the entire world. I guess this just proves that the machines have good reason to take over.


Meanwhile, the US Postal Service is broke, busted, and in default. The Postal Service failed to make a $5.5 billion Congressionally mandated payment to cover health care costs for future retirees. At post offices around the country, everything will function normally. Postal trucks will be on their routes, and the mail will get delivered.


Six years ago Congress mandated that the USPS start pre-funding health benefits for current employees for the next 75 years, and it told the postal service that it had to set aside at least $5.5 billion or more a year to do so.  And for a while, the post office was able to make those payments. So far the post office has set aside more than $20 billion in the pre-retiree fund. But in the past few years mail volume has declined rapidly and the Postal Service has had a hard time keeping going; they built up a $25 billion dollar deficit, but the big financial problem is setting aside retirement funds for 75 years into the future, literally paying for the retirement of workers that haven't been born yet.