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Don’t Fear the Taper

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You can’t avoid reading about it.  The stock market is sinking  . . .  Treasury bond yields are spiking   .  .  .  The TAPER is coming!

The panic began in the wake of Jon Hilsenrath’s May 10 Wall Street Journal  report (after the markets closed on that Friday afternoon) concerning a new strategy by the Federal Reserve to “wind down” its quantitative easing program.  The disclosure was carefully timed to give investors an opportunity to process the information and get used to the idea before the next opening bell of the stock market.

By the time the stock market reopened on Monday, May 13 – the first trading day after Jon Hilsenrath’s article – there was a surprising report on April Retail Sales from the Commerce Department’s Census Bureau.  The report disclosed that retail sales had unexpectedly increased by 0.1 percent in April, despite economists’ expectations of a 0.3 percent decline.  As a result, the Taper report had no significant impact on stock prices – at least on that day.

The Wall Street Journal report carried plenty of weight because of Jon Hilsenrath’s role as de facto “press secretary” for Ben Bernanke, as I discussed in my last posting.  Since the WSJ article’s publication, there has been a steady stream of commentary about the threats posed by the Taper.  Nevertheless, the word “taper” was never used in Hilsenrath’s article.  In fact, the article included an explanation by Philly FedHead (and FOMC member) Charles Plosser, that the Fed has “a dial that can move either way”.  The dial could be set to a particular level with either an increase or a decrease.

Regardless of whatever the Fed may have planned, the flow of commentary has focused on the notion that the Fed is about to taper back on its bond buying.  The current incarnation of quantitative easing (QE 4) involves the Fed’s purchase of $45 billion in bonds and $40 billion in mortgage-backed securities every month.  We are supposed to believe that the Fed will gradually ease back on the bond purchases – whether it might begin with a reduction to $40 billion or $35 billion in monthly purchases  . . .  the Fed will gradually taper the amount down to zero.

Despite what you may have read or heard about the taper, it’s not going to work that way.  Beyond that, taper is not really an appropriate way to describe the Fed’s plan.  In other words:

Don’t fear the taper.

Josh Brown interviewed Jon Hilsenrath for CNBC on May 22.  Here is what Josh Brown had to say about the interview:

There was one thing Jon Hilsenrath did say in my interview with him on TV last night that I think is very important and clears up a big misconception. He explained that Bernanke himself will not be using the term “taper” that everyone else is bandying about. The reason why is that the Fed does not want to create the impression that one policy move will necessarily be attached to three or four others. In other words, suppose the Fed were to drop its rate of monthly asset purchases from $85 billion to some less number in one of the next meetings. This could be a one-off action with nothing else behind it, designed to temper the market’s expectations and gauge the effects.

I’d remind you that what Bernanke, as a self-styled “student of the Depression” fears the most, is a premature tightening a la FDR in 1937-1938, just as the nation was finally on the mend. If you think that this central bank, which has just spent the last six years patiently reflating the economy, is about to yank the rug out from under it at the last moment, then you haven’t been paying attention.

The wave of panic which followed Jon Hilsenrath’s May 10 article about the Fed’s plans for its quantitative easing program has yet to be calmed by Hilsenrath’s clarification about how the Fed’s new strategy is likely to proceed.  As Napoleon once said:

“Men are Moved by two levers only: fear and self interest.”


 

Some Good News For Once

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Since the Great Recession began three years ago, Americans have been receiving a daily dose of the most miserable news imaginable.  Our prevalent nightmare concerns the possibility that gasoline prices could find their way up to $10 per gallon as Muammar Gawdawful takes Libya into a full-scale civil war.

Some people tried to find a thread of hope in the latest non-farm payrolls report from the Bureau of Labor Statistics.  The report was spun in several opposing directions by various commentators.  The single statement from the BLS report which seemed most important to me was the remark in the first sentence that    “. . .  the unemployment rate was little changed at 8.9 percent . . .”.  Nevertheless, David Leonhardt of The New York Times noted his suspicion that “the government is understating actual job growth” while providing his own upbeat read of the report.  On the other hand, at the Zero Hedge website, Tyler Durden made this observation:

Wonder why the unemployment rate is at an artificially low 8.9%?  Three simple words:  Labor Force Participation.  At 64.2%, it was unchanged from last month, and continues to be at a 25 year low.  Should the LFP return to its 25 trendline average of 66.1%, the unemployment rate would be 11.6%.

Indeed, the ugly truth is that as you spend more time pondering the current unemployment situation, you find an increasingly dismal picture.  Economist Mark Thoma came up with a “back of the envelope calculation” of the benchmarks he foresees as the unemployment situation abates:

7% unemployment in July of 2012

6% unemployment in March of 2013

5% unemployment in December of 2013

4% unemployment in September of 2014

If anything, relative to the last two recoveries, this forecast is optimistic.  Even so, it will still take two years to get to 6% unemployment (and if the natural rate is closer to 5.5% at that time, as I expect it will be, it will take another five months to fully close the gap). Things may be looking up, but we have a long way to go and it’s too soon to turn our backs on the unemployed.

Only three more years until we return to pre-crisis levels!  Whoopie!

For those in search of genuinely good news, I went on a quest to come up with some for this piece.  Here’s what I found:

For the truly desperate, the Salon website has introduced a new weekly feature entitled, “The Week In Uppers”.  It is a collection of stories, often including video clips, which will (hopefully) make you smile.  The items are heavy on good deeds – sometimes by celebrities.

I was quite surprised by this next “good news” item:  A report by Rex Nutting of MarketWatch, revealing this welcome fact:

.   .   .  the United States remains the biggest manufacturing economy in the world, producing about 20% of the value of global output in 2010  . . .  (Although fast-growing China will pass the United States soon enough.)

Even though we may soon drop to second place, at least our unemployment rate should be in decline by that point.  Here are some more encouraging factoids from Rex Nutting’s essay:

In 2010, U.S. factories shipped $5.03 trillion worth of goods out the door, up 9% from 2009’s horribly depressed output, according to the Census Bureau.

*   *   *

In 2010 alone, productivity in the manufacturing sector surged 6.7%. Fortunately for workers, it looks as if companies have squeezed as much extra output out of labor as they can right now.  For the first time since 1997, factories actually added jobs during the calendar year in 2010, as they hired 112,000 additional workers.

There will be further job gains as factories ramp up their production to meet rising demand, economists say.

According to the Institute for Supply Management’s monthly survey of corporate purchasing managers, business is booming.  The ISM index rose for a seventh straight month in February to 61.4%, matching the highest reading since 1983.

*   *   *

What is the ISM telling us?  “The manufacturing sector is on fire,” says Stephen Stanley, chief economist for Pierpont Securities.  The new orders index rose to 68%, the highest since 2004, and the employment index rose to 64.5%, the highest since 1973.

Factories are hiring because orders are stacking up faster than they can produce goods.

What’s behind the boom?  In part, it’s domestic demand for capital goods and consumer goods.  Businesses are finally beginning to believe in the recovery, so they’re starting to expand, which means new equipment must be purchased.

Be sure to read the full report if you want to re-ignite those long, lost feelings of optimism.

It’s nice to know that if you look hard enough you can still find some good news (at least for now).


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