QE3? Jobs?

On March 13th, 2012, posted in: Economic News, Newsletter by

It was a Fed-watchers delight when Ben Bernanke told the US Congress there would be no QE3 and that the next move by the Fed would be to tighten monetary policy.Oops! That’s not what he said. There were no quotable quotes to that effect. In fact, lots of people thought he said the opposite. A Wall Street Journal headline read Recovery Worries Weigh on Stocks, as “Bernanke took a cautious view of the U.S. recovery.” The Washington Post said “Bernanke Strikes Cautious Tone….” If you take these headlines at face value, Bernanke was dour and his testimony was about a weak economy and the potential for more ease.

If you are watching gold, the gold market did not miss the message – gold futures fell $77 the next day. And stocks reacted negatively to the announcement about the quantitative easing (QE3). Gold goes up when the dollar is falling and inflation is rising. But stocks should rebound quickly to the news.

Reading between the lines, Bernanke’s testimony actually showed surprise at how strong the US economy has been. He explained job growth has been strong, but then said the “decline in the unemployment rate over the past year has been somewhat more rapid than expected.” The Fed is negative on GDP thinking the economy is well below its potential and not growing fast enough. As a result, the Fed is cautious about inflation and remains incredulous that job growth has been strong.

Many economists and analysts look to the Fed to discover their take on the economy. The Fed’s incredulity over employment is interpreted as a dour outlook. The evidence points to how overly pessimistic most observers, media and economists have been on the US economy. The data keeps coming in stronger than the Fed thinks is reasonable, but can no longer deny it.

As a result, Bernanke cannot justify QE3. He probably wants to, but he can’t. The metrics the Fed uses says the federal funds rate should be negative. These metrics model GDP growth, employment and inflation. But because interest rates can’t go below zero, the Fed wants to do more quantitative easing.

If you look at the real world,  how is the economy growing? The Fed says it is growing because of QE1 and QE2. This has been debunked by most economists. There has been no QE3 and the economy and stock market are both doing better. Moreover, even though the Fed’s balance sheet has grown, M2, a measure of  cash and other liquid assets held by households, has not accelerated.. The monetary base has exploded, but M2 has not and if M2 is not rapidly expanding, then QE has not boosted the money supply.

The bottom line is Bernanke wants to make the case for QE3, he can’t. In fact, better news on the economy has cut the Fed off from doing more massive easing projects. In the end, we believe the Fed has finally run out of justification for its excessively easy monetary policy. As the quarters ahead unfold, the prospects of more easing will continue to wane. This is good news for stocks – which do not do well with accelerating inflation – but, it is bad news for gold.

Gold is done….and so is the Fed.

Most of the good news is coming from the critical jobs sector.  The Labor Department reported an increase of 227,000 in non-farm payrolls, with about 150,000 of those jobs coming in professional services, education, and healthcare.  Federal government jobs dropped another 7,000.

The job gains didn’t do anything as far as the nation’s unemployment rate. It remained steady at 8.3%.  More people are coming back to work.  There are 4.5 million people who dropped out of the jobs market. Even so, 362,000 people filed for initial unemployment payments.

Worker productivity increased 0.9% in 4Q 2011, but unit labor costs increased 2.8%.  Wages and salaries grew at the fastest rate since 2007.  This is a strong indicator of inflation building. Adding weight to the job gains was the Institute for Supply Management’s service index which increased from 56.8 to 57.3.  (Anything over 50 is good.)

Consumer credit increased by $17.8 billion in January, the biggest advance in ten years.  Student loans are up more than 400% since 2007.  Some of the credit was due to auto purchases. The average age of a car in the U. S. is about eleven years.

The ISM non-manufacturing composite index increased to 57.3 in February, beating the consensus expected decline to 56.0.  Above 50 is an expanding economy. The key sub-indices were mixed in February. The new orders index rose to 61.2 from 59.4 and the business activity index increased to 62.6 in February from 59.5.  The employment index fell to a still strong 55.7 from 57.4 and the supplier deliveries index fell to 49.5 from 51.0.

This was great news on the service sector! The ISM services index once again beat consensus expectations coming in at 57.3, the highest level in a year.  The sector has now shown expansion for 26 straight months and is growing at a very rapid rate. The business activity index, which has an even stronger correlation with real GDP growth than the overall index, boomed in February, coming in at 62.6. With the exception of one month back in early 2011, this is the highest level for the activity index since 2005.

The new orders index also took off, rising to 61.2, the highest level in a year. Although the employment index fell, it still shows expansion. Pending Wednesday’s ADP Employment report, we expect this Friday’s official Labor Department report to show a gain of 240,000 in private sector payrolls.

On the inflation front, the prices paid index rose to 68.4 after rising to 63.5 last month. These reports signal increasing inflation pressure and make it harder for the Federal Reserve to justify loose monetary policy.

Bottom line: with an improving pace of economic growth and more inflation, another round of quantitative easing is simply not going to happen.

On the down side:

Factory orders dropped 1% on reduced orders for equipment, machinery and capital goods.

The trade deficit increased to $52.6 billion much higher than the consensus deficit of $49 Billion. The reason was a surge in imports, which hit a new record high. Some of the increase in imports was due to the holidays.  This was the biggest increase since 2008.

Bottom Line: While the economy is gaining momentum by adding jobs and boosting consumer confidence, there are still problems. The youth, less well-educated and the long-term unemployed are still struggling.  Their challenges will keep the unemployment rate higher than the Administration would like for quite some time to come.


Q3 Table 1

Past performance is no guarantee of future results. Indexes are not available for direct investment.

The markets continued to climb for the year. The Dow [+5.77%] was up 2.37% for the month.  The S & P 500 [+8.94%, +3.66%] and the NASDAQ Composite [+14.32%, +6.66%] added to their already impressive gains for the year.  The S&P Small Cap index was up 3.66% for the month. The Russell 2000 was only up 0.99%, but it is up an impressive 10.27% for the first two months of the year.

The positive jobs report on Friday didn’t do much to move the markets during the first week of March.  It may be old news or the markets are not buying it.

The GOP election debacle had no effect either. “Super Tuesday” election/caucus results from eleven states did not phase the markets. They seem to be waiting for a more decisive indicator as to who will emerge to challenge President Obama this fall.

With everyone’s eye on Europe, there was some good news as the percentage of Greek bondholders who approved the refinancing proposal easily passed the required level.  There are still some details to work out, but the Eurozone countries seem to have passed a major test, which should bring some calm to the international markets for awhile.  Greece will get another round of “bailout” money from the IMF and ECB, but they still have major economic issues to address. That battle is NOT over.

Interest rates stayed steady in both the Treasury and mortgage markets.  The Fed’s Operation Twist – selling short-term issues and buying long-term ones – is hardly noticeable.  The Fed’s spurning QE3 indicates they are more likely to shrink their portfolio than add to it.

Mortgage rates and the whole real estate sector remains paralyzed.  There are buyers but no inventory available. There is still a large number of foreclosures and bankruptcies to be resolved before there will be any real appreciation in home prices.  Local markets are unique, but the national home price index is pointed lower, at least for the rest of this year.

On the monetary front, despite Greece, the Euro (€) barely moved against the dollar.  The weak economies in Europe, have caused lower exports for the U. S.  Even the Japanese Yen (¥) has dropped against the dollar. This may still be fallout from the earthquake and tsunami last year.

Bottom Line: With 1Q earnings reports just around the corner, the markets are likely to pause for awhile to see if their fortunes are holding steady.  There does not seem to be much on the horizon to drive the markets in one direction or another. Just when you thought it was safe to go into the water – BAM!!! We shall see.


www.magicformulainvesting.com – Here is a website based on the book, “The Little Book That Beats the Market.”  There are a variety of calculators based on specific investment criteria put together by the author, Joel Greenblatt.


Having gas pains?  Bloomberg BusinessWeek, published these gasoline prices from country’s around the world. You can see they vary considerably.  All in gallons:

Q3 Table 2


This information is compiled by Guy Baker from an assortment of news feeds including First Trust, Yahoo Finance, Bloomburg and others. This information is intended to be informational only. This newsletter contains forward-looking statements about various economic trends and strategies. You are cautioned that such forward-looking statements are subject to significant business, economic and competitive uncertainties and actual results could be materially different. There are no guarantees associated with any forecast and the opinions stated here are subject to change at any time and are the opinion of the individual strategist. Investing involves risk, including the potential for loss of principal. Data comes from the following sources: Census Bureau, Bureau of Labor Statistics, Bureau of Economic Analysis, the Federal Reserve Board, and Haver Analytics. Data is taken from sources generally believed to be reliable but no guarantee is given to its accuracy.



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