Wednesday, April 10, 2013 - The Real Question on the Economy

The Real Question on the Economy

by Sinclair Noe

DOW + 128 = 14, 802
SPX + 19 = 1587
NAS + 59 = 3297
10 YR YLD +.06 = 1.80%
OIL +.35 = 94.55
GOLD – 25.70 = 1560.30
SILV - .33 = 27.75

The Federal Reserve released the minutes of their Federal Open Market Committee meeting held March 19-20. The minutes leaked out 5 hours early. The Fed inadvertently sent the report to congressional aides and trade organizations yesterday, and since the details are actually trade-able information, they had to make it public quicker than not. Make no mistake, this was a serious breach of protocol.

Once the minutes were made public, it depressed bond prices, mainly because of disagreements among the Fed's 19 policymakers about carrying on with buying $85 billion in Treasury and mortgage bonds per month to stimulate the economy. Of the 12 officials who have a vote on monetary policy this year, "a few" expected to taper the purchases around midyear and to end them later this year. "Several others thought that if the outlook for labor market conditions improved as anticipated, it would probably be appropriate to slow purchases later in the year and to stop them by year-end.” Proving once again that the prognosticating skills of the Federal Reserve are roughly equal to the singing skills of a fish on a bicycle.

Just like the release of the minutes, their ideas about exiting QE seem a bit premature, especially in light of last week's jobs report, which you recall, was a stinker. And yesterday we talked about job cuts at the big banks; here's the actual quote from a Bloomberg news article: “Rising stock prices, rebounding profits, restored dividends and a growing economy are signaling to US banks it's time for more job cuts.”

The FOMC did have a revelation; for the first time they recognized that $1.1 trillion in unpaid student loans might just constitute a wee bit of a problem for the economy. Rates on the majority of student loans taken out by undergraduates from the Education Department have remained since 2006 fixed by law at 6.8 percent. The spread between the two, which is an appropriate way to measure relative rates, since student loans are generally repaid in about 10 years, has ranged from 4.5 percentage points to 5.27 percentage points since August 2011, the highest gap on record.

And the final report from the FOMC is to stay the course of Quantitative Easing until unemployment hits 6.5% or inflation hits 2.5%; so, nothing really changed. What it reveals is the Fed is getting nervous about watching their balance sheet balloon to $4trillion or more; they're nervous about asset bubbles; they're nervous about how to exit without crashing the party; and they're nervous because this really is a grand experiment in central banking.

Anyway, the stock market moved higher today, and perhaps the best reason I can offer for the big, record breaking day on Wall Street is just that the trend is up.

President Obama sent a $3.8 trillion budget to Congress today calling for more tax revenue and slower growth for Social Security benefits. The president is proposing to replace across-the-board sequester cuts with $1.8 trillion in additional specific deficit reduction over 10 years that includes collecting more taxes from the wealthy and trimming some federal programs. For the first time, Obama is including in his budget an offer made last year to congressional Republicans to change the cost-of-living calculation to a Chained CPI formula for Social Security and tax brackets, which would increase benefits more slowly and subject more income to taxation.

The president’s plan to raise taxes on wealthy individuals and to close loopholes for corporations drew immediate condemnation from Republicans. Actually, the Republicans are licking their chops at the Chained CPI on Social Security. They're already characterizing the President's plan as a way to "save” Social Security, they're just not going to go along with his tax increases. And the plan to change the Social Security formula drew fire from fellow Democrats. I'm not sure what classes Obama actually took at Harvard, but I think he missed Negotiating 101. He apparently wants to show a willingness to compromise, but the Republicans seem unwilling to take yes for an answer.

Now, I'm thinking back to maybe last week, when Obama sent new Treasury Secretary Jack Lew to Brussels to tell the Europeans to ease up on austerity because its bad for growth; or at least it's bad for growth in Europe but apparently it's good for the US. Austerity is an anti-growth policy. It frequently makes the debt-to-GDP ratio larger because it causes such a large fall in GDP, but it's bad for Europe and good for the US. Must have missed that class on Consistency 101.

Now, if you're neck brace hasn't already gone flying off due to the tremendous torque exerted by today's news, let's put a cherry on top. Obama is proposing a new $2 billion infrastructure investment or jobs program that can overcome the damage to the economy caused by austerity in the form of a combined $300 billion in reduced spending and increased tax revenues.

Anyway, let's get back to the Federal Reserve minutes on how they will continue to juice the economy and the president's budget, which nobody likes and is likely DOA, and let's ask – what's wrong with this picture?

If the economy is getting better, then why does poverty in America continue to grow so rapidly?  Yes, the stock market has been hitting all-time highs recently, but also the number of Americans living in poverty has now reached a level not seen since the 1960s.  Yes, corporate profits are at levels never seen before, but so is the number of Americans on food stamps.  Yes, housing prices have started to rebound a little bit, but there are also more than a million public school students in America that are homeless.  That is the first time that has ever happened in U.S. History. Do we measure our economic progress by the false stock market bubble that has been inflated by the Fed's money dump on their Wall Street cronies, or should we measure our economic progress by how the poor and the middle class are doing?

Even as the markets hit new highs, the most explosive growth is in poverty; now at the highest levels since the 1960s. One out of every six Americans now live in poverty; 146 million are considered poor or low income; one in every five children live in poverty; one in five households with children are considered food insecure – meaning the kids are going hungry; and nearly 3 million children in this country live on less than $2 dollars a day, which is the global standard for extreme poverty.

At some point, maybe the President and the Republicans and the Federal Reserve could just stop for a moment and ask the question: What's the economy for anyway?

A side note: I've been talking about cyber attacks as a major trend for a couple of years now. Obama's budget proposes to boost Defense Department spending on cyber efforts to $4.7 billion, $800 million more than current levels, even as it plans to cut the Pentagon's overall spending by $3.9 billion; the idea is to protect computer networks from internet base attacks. Intelligence officials said last month that cyber attacks and espionage have supplanted terrorism as the top security threat facing the United States.

This was one of the trends I talked about at the recent Wealth protection Economic Conference. If you would like to hear the entire Conference, including nine CDs, or the MP3 recordings are now available. Contact Resource Consultants at 800-494-4149 for purchase information.