Bernanke pegs further QE to inflation, unemployment

But, given statistical hocus-pocus, what does that even mean?

WASHINGTON, December 13, 2012 – Back to our yo-yo metaphor today. The market rallied sharply yesterday morning as we’d observed in yesterday’s column. It tanked in the afternoon as we’d also predicted. Essentially, the morning rally was in anticipation of a nice bit of QE news from the Fed. And that’s exactly what arrived, as the Fed pledged to keep interest rates low (i.e., continue to buy the dickens out of any housing-related or other bond it can get its hands on) just as long as inflation didn’t get above 2.5% and unemployment remained above a 6.5% threshold. There’s a certain ambiguity here as we’re not sure if this is an either-or or a both-together proposition.

In other words, it will be same-old, same-old indefinitely until and unless Congress gets off its collective duff and either fights or caves in to our Phantom President whose alleged offers and counter-offers we never get to see in print.

The Fed itself—and not for the first time—via Chairman Bernanke said that this was pretty much all the Federal Reserve could do at this point, as the really big decisions are in the hands of the Congress and President, whose collective wisdom has brought us exactly zero budgets for four years now and counting.

The Fed, of course, is basing its learned judgments on unemployment and inflation numbers that are almost hilariously out of whack. In publicly available commentary yesterday from one of our subscription investment services, ETF Digest, we were treated to some interesting charts and stats from another subscription service, John Williams’ Shadow Government Statistics. On a public page, Williams provides a tri-level unemployment chart (which we’ve reproduced below) that shows how this unemployment stuff works to hide reality from the public, with the help, of course, of clueless or compliant “financial journalists” who rarely talk about such stuff.

SGS chart illustrating government-reported unemployment (U-3, bottom line) vs. a more-reliable, but unreported government unemployment stat (U-6, middle line), vs. its own even truer unemployment measure (top line). (Credit: SGS)

Williams explains the three lines in his chart with notable clarity (italics and underlines mine):

“The seasonally-adjusted SGS [Shadow Government Statistics] Alternate Unemployment Ratereflects current unemployment reporting methodology adjusted for SGS-estimated long-term discouraged workers, who were defined out of official existence in 1994. That estimate is added to the BLS estimate of U-6 unemployment, which includes short-term discouraged workers.

The U-3 unemployment rate is the monthly headline number. The U-6 unemployment rate is the Bureau of Labor Statistics’ (BLS) broadest unemployment measure, including short-term discouraged and other marginally-attached workers as well as those forced to work part-time because they cannot find full-time employment.

In other words, the allegedly dropping unemployment numbers are the U-3 numbers—the ones the Obama Administration spoon-fed to the media to help win re-election last month. The ones that make us think things are improving not just for us but also for all Americans.

(U-2 numbers, we assume, still remain in Ireland.)

The Feds, however, quietly maintain a second, more truthful number—U-6—that adds a heavy dose of reality to U-3. It includes the U-3 number but moves it closer to the truth by including workers who’ve recently given up ever finding any work in their geographical area (since housing prices have plunged to the point where Americans have pretty much lost their cherished mobility which would allow them to relocate to where remaining jobs are; those barely holding on to what remains of their current job; and those who are trying to stave off disaster by working minimum wage part-time work with, of course, no benefits. Many in this latter category have probably exhausted even extended unemployment benefits.

The SGS number adds the final dose of reality to U-6. Key to this proprietary stat is quite simple. It attempts to the greatest extent possible to include those who’ve completely exhausted all Federal and State unemployment benefits and who’ve continued to find zilch in terms of work. As the above commentary indicates, the Feds simply stop counting workers as unemployed the moment they drop off the unemployment roles.

Most Americans still seem blissfully unaware of this, accepting instead the U-3 numbers the government puts out as “real.” The reason why the government pushes this intensely misleading stat is quite simple: it’s one of the easiest incumbent protection plans imaginable. And that’s easy to see. As you look at the chart above, you’ll note that even as the official U-3 numbers showed a gradual dip as the November elections approached, the SGS numbers continued a gradual climb and are nearing 25% as we write this article. U-6, at least a better number than U-3, is declining, true. But even this number is declining from a much higher level than U-3, indicating a roughly 15% unemployment rate as of this writing.

Had either the U-6 or the SGS numbers been picked up and trumpeted by even one media organization (Fox, where were you?), this alone might have awakened at least enough Obamabots in time to change the November 6 election results. As always, the free availability of reliable information is what always sets you free. But as any given government becomes more protective of itself and its enablers, both free availability of information, along with its reliability are the first things the ruling class starts to clamp down on.

(BTW, ETF Digest also reproduces another interesting SGS chart—this one showing you the real vs. the bogus government consumer inflation numbers in its [free] December 12 article/analysis. Of course, if you go grocery shopping every week or have to fill up the tank of an SUV every other day, you already know this.)

After this pleasant interlude of elementary social economics, let’s get back to yesterday’s market. The averages tanked after Bernanke’s remarks. That was true to form, really, proving the near-universal validity of that instinctive, knee-jerk, “sell on the news” mantra we hear about all the time.

This morning looks to be a bit more positive. But then again, nearly every Wall Street day, it seems, starts out positive and ends with selling.

It’s clear that these various trading waves are lots of fun for the HFTs’ Hal 2000s, as each back and forth move, nudged along by barrels of false quotes generated by said machines. An up or down move that would barely pay for the trade commission from our discount brokerage house can generate thousands to millions of dollars in profits on huge lots of stocks whose trade commissions are reduced to pennies or fractions of pennies.

This market has degenerated into a virtual playground that’s comfortable only for those algorithmically, headline-driven Hal 2000 brains and those of the ½ of 1% who can afford them. For the rest of us, increasingly, mattresses or T-bills with effectively negative yields are just about the last remaining refuge.

As for the market itself, we anticipate an early up-move followed by more of the same, again depending on headline news and the occasional cleverly placed rumor, the latter of which are illegal but will never be tracked down or punished by regulators with their noses deep in the overpaid government employee trough even as a spare eye looks longingly at those high-paid HFT posts that will be available to them if they spend most of their time looking away from the ½ of 1%’s illegal hijinks.

As for IPO and secondary action, we’d been mentioning Solar City, whose Tuesday offering was postponed on Tuesday. That action got interesting yesterday. Combined with other IPOs, however, this is a whole other topic, so we’re going to put all this action into a second post over on our less-used but more in-depth site, The Prudent Man. Look for it about an hour after this post is up.

Meanwhile, we all should stay somewhat cash-y. The Maven himself is a bit over-invested at the moment and is looking to pare this situation down. Whatever the outcome of fiscal cliff negotiations—so boring at the moment—we’re either near or almost at that happy time of year, the time when we hunt for “year-end bounceback” candidates. These are stocks that, for varying reasons, have been positively getting hammered in the fourth quarter as mutual funds, hedge funds, and HFTs themselves dump their losers en masse even though they might still like the stock. Have to massage those misleading numbers for your investors, you know.

In any event, some perfectly good stocks can get pancaked in November and December for precisely this reason. But then, having accomplished their objectives, those who dumped these stocks but still loved them begin to re-acquire them on a massive scale starting with the opening of trading on January 2 or whatever that first business day might be following New Year’s Day. Not infrequently, among these stocks are the “Dogs of the Dow,” those stocks in the Dow Jones Industrial Average that sport the highest yields on the final trading day of the old year.

Lots of others are in this bag as well. We suspect one really big one might be mighty Apple (APPL) itself, which has been unloaded to a fare-thee-well but seems to us to be about as dead as Microsoft was in 1990. Some of the bounceback action may already be occurring as the selling in these issues seems to be starting earlier and earlier each year as people wise up to year-end bounceback candidates. But we’ll keep an eye on these opportunities. We’ve made money on them pretty much every year except, of course, 2008-2009 when nothing much seemed to work.

Right now, we’ll move along and finish that other article we promised. Meanwhile, keep your powder dry. Opportunities almost always arise from the depths of disaster.

Disclaimer: The author of this column maintains several active trading and investment portfolios and owns residential and investment real estate.

Any positions mentioned above describe this author’s own investment decisions and should not be construed as either buy or sell recommendations. The current market is highly treacherous and all investors travel at their own risk, so caution should be exercised at all times.

Illustrations, charts, commentary, and analysis are only the author’s view of current or historical market activity and don’t constitute a recommendation to buy or sell any security or contract. Views, indications, and analysis aren’t necessarily predictive of any future market or government action. Rather they indicate the author’s opinion as to a range of possibilities that may occur going forward.

References to other reporters, analysts, pundits, or commentators are illustrative only and do not necessarily represent an endorsement of such individuals’ points of view. If specific investment vehicles are mentioned in any article under this column heading, the author will always fully disclose any active or contemplated investments in said vehicles.

 

Read more of Terry’s news and reviews at Curtain Up! in the Entertain Us neighborhood of the Washington Times Communities. For Terry’s investing and political insights, visit his Communities columns, The Prudent Man and Morning Market Maven, in Business.

Follow Terry on Twitter @terryp17


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Terry Ponick

Now writing on investing, politics, music, movies and theater for the Washington Times Communities, Terry was formerly the longtime music and culture critic for the Washington Times print edition (1994-2009) before moving online with Communities in 2010.  

 

 

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