Dear Friends,
It seems to me, the economic theater we have been watching this last week, is more about what is known but not said than what is said but not known. Bernanke’s speech after the Open Market committee meeting to Congress was as unenlightening as any he has given. The 5 or so percent correction as a result, might have been more about the fact a correction needed to happen sooner or later, or it could have been far more pernicious. Economic forces that dwarf the power of the Federal reserve are winding up that those in the know recognize. These forces have the power to trigger a far larger economic and banking disaster than the 2008 crash.
I heard most of Bernanke’s speech and he didn’t say anything he was not expected to say. In light of the slightly better economic numbers, he said he might consider slowing bond purchases, if the economy continues to improve. That is not heresy, it is economic reality, but the reaction in the media, that seemed to be mirrored in the markets was overblown, considering… Bernanke also said he would evaluate continuing buying bonds, both Treasury and mortgage backed, to the tune of 85 billion dollars a month… if conditions deteriorated. Basically, Bernanke fed the market and the media, milk toast, which they immediately threw up.
Every economist worth his or her salt expected some correction. Markets never go straight up, they go up then down a bit then back up further. This bull market has gone up, but not given any back, behaving more like a bubble than a fundamentals driven up market. So, theoretically, all the market needed for a correction of perhaps 10 percent, was an inducement, and Bernanke’s speech was that inducement. This would hold true if the market is simply an over excited bull market… but if it is a bubble it might go down similarly.
If the money printing is the primary driver of the market rise since September 2012 then any mention of stopping the free ride would trigger a panic. The depth and breadth of the panic would coincide with the scope of the threat to the money printing. Since Bernanke had the audacity to mention, if the economy improved he might taper the printing, this might have caused panic among those who think this way. They would have sold off expecting the masses to catch on too. When we didn’t, the market stabilized, and appears to be a correction instead.
What is known but not mentioned, is that the drop in unemployment is not due to more jobs, but fewer workers. As the grindingly high unemployment figures continue along with the low bar to getting food stamps, disability insurance through Social Security and outright welfare, the incentive for the long term unemployed, is to move onto disability or welfare. This is especially true for the low skilled. As the Congress passes the omnibus immigration reform and introduce 9-12 million new legal low skilled workers into the workforce, the value of unskilled labor will drop commensurate with the supply percent of new workers, exacerbating the under utilization of labor problem in the US.
Obama care is having a deadly effect on job creation in the US. Every incentive in this law undermines the ability of firms to hire and keep labor. The law so drives up compliance costs that every responsible business owner must examine his labor needs carefully, wringing out every worker he or she can, else they risk the real possibility of going belly up, due to their costs being higher than their profits. Large firms get a few breaks under Obama care so they can more effectively out compete small more nimble firms. (The source of real growth in an economy).
Dodd Frank Banking regulation has taken hundreds of bureaucrats years to write. They have only partially finished, with thousands of pages of regulation written for all banks to follow, that is supposed to solve the “Too Big To Fail” dilemma. In truth, it makes the problem worse, as is the true end of all legislation. Dodd Frank makes it unprofitable, and in some cases illegal, for small and medium sized banks to lend to small businesses. Large banks can’t, due to the high costs of leveling the asynchronous knowledge field, that small and medium banks don’t have. Again, small businesses loose out but in this case so do small banks, and Too Big To Fail is made worse.
Lastly, what is unknowable, the tensions building up from the government actions like, Continued low interest rates have driven capital into the market, to try to capture some profit but at greater risk, rental real estate has become a new boom with the low interest rates, small businesses are frozen out of the capital markets, these are but a few obvious examples of how the economy is being distorted by government action. All these tensions are starting to warp the economy in unforeseen ways… which never turn out well.
That Bernanke’s milk toast speech was met with such a reaction, could be proof of a market bubble, or it could simply have sparked a much needed correction. To be rational maximizers, we must ask ourselves, “If there is this much panic over the mere mention of slowing the printing of money… how is it possible for the Federal Reserve to actually unwind all the bonds they have bought to date, let alone what they will buy in the future?” The Obama administration and the Federal Reserve have gotten us into quite a mess. Most probably… historians in the future will use us as an example of what not to do in the case of recession.
Sincerely,
John Pepin
