The unemployment rate is soaring month by month, and, even worse, it appears to understate the true extent of the deterioration, given the unusually high incidence of permanent, as opposed to temporary, layoffs, and the unprecedented increase in involuntary parttime work. – Janet Yellen from the June 2009 FOMC meeting transcripts (note: My friend/colleague John Titus – Best Evidence videos – sourced this quote)
Reading between the lines of the above quote from the then FOMC co-chairman is an admission that the non-farm payroll report is defective. At the time, in order to support the FOMC’s decision to print trillions and take short term interest rates to zero, Yellen admits that the non-farm payroll was underestimating the true level of unemployment in the U.S. economy.
The Fed funds rate “target” has been 0 – .25% for the last 84 months (since December 2008). Since Bernanke’s infamous “taper” speech in May 2013, the Fed has been threatening to raise the benchmark Fed funds rate in an effort to “normalize” interest rates, whatever the heck that means. Clearly the Fed, deep inside its dark heart, knows that it has committed a horrendous policy disaster by leaving rates at zero for over six years.
Since the 2013 Taper Speech, the Fed has kept the market on edge by threatening to raise Fed funds at each next meeting only to defer the decision in classic “moonwalk” fashion. But this time around, since the October FOMC meeting, the dull roar from the regional Fed monkeys transitioned into daily hyena shrieks. The Fed painted itself into a corner, as it would likely no longer be able to move the “do not cross this line” threat without completely destroying the last shred of any remaining credibility.
Last Friday’s non-farm payroll report sealed that fate. Barring some unforeseen staged false flag terror event that causes the stock market to go over Niagra Falls, the Fed has no choice but to move the needle on the Fed funds rate by one-quarter of one percent (.25%).
The reason the markets soared, over and above the standard daily dose of monetary nitroglycerin the Fed injects into the stock market just keep it from crashing, is that the markets are pricing the next policy move after the December hike, which will entail a rate cut plus more QE. The market knows the NFP is phony and the market knows the Fed knows that the NFP is phony. But the Fed is boxed in – it has cried “wolf” too many times. If the Fed found an excuse to defer again, the signal would be an affirmation that the payroll report is a sham and the economy is indeed tanking. The dollar and the stock market would plunge toward Dante’s Inferno.
Gold affirmed this view, as it managed to break free for the day from the heavy restraints placed on its price movement by the Fed/Treasury and soared over $24. It was one of the biggest one-day moves in the price of gold in the last 12 months.
There are two reasons the Fed will have to restart its digital printing press: 1) by early 2016 it will become apparent to all but maybe a few of the blind regional Fed monkeys that the economy is collapsing; 2) with the economy collapsing, Federal tax revenues will head south quickly while defense, healthcare and general entitlement spending will soar. The Fed will have to print more money if for no other reason than to help fund the coming massive increase in Treasury debt issuance.
The markets are going to become very bumpy – both to the upside and the downside. But mostly to the downside. The stock market has become overvalued by any real historical measurement, ex-the phony accounting standards phased in over the last 10 years designed to help hide the degree of overvaluation. It is likely that more QE will only cause very temporary upward spasms in the stock market and most of the action will be to the downside. With regard to the latter, stay tuned…