Notes From Underground: The Fed’s Dilemma

The Fed’s policy has painted itself into a proverbial corner. A ZEROHEDGE piece shows that in the age group of 16-55 there has been a loss of 2.7 million jobs during the previous few years, while in the 55-69 age group there has been a gain of 4 million jobs. This has been a recurrent theme of Notes From Underground during the last two years. The FED‘s policy of financial repression has resulted in an outcome that its beloved models failed to predict. The baby boomers haven’t been able to retire  because their saving plans have been undermined by the zero interest rate policy. Zerohedge shows that debt-ladened college graduates are unable to find jobs and thus are struggling to repay education loans. Recent college grads are forced to live at home and are not creating new households.

The baby boomers’ savings have been depleted by zero interest rates and have to work far longer than originally anticipated and for wages that make them competitive with the “highly educated” graduates. Earning 1.7% on U.S. Treasuries with inflation at 1.8% erodes one’s savings. Throw in a housing market still under duress and it means that the labor market is not dynamic enough to make way for recent college grads with no real world experience. The FED‘s models have failed to predict real outcomes again.

***Friday’s unemployment numbers were very much right on target. The good news was that manufacturing and construction had healthy gains. The unknown from the construction data was how much was the result of salvaged workers employed in the POST-SANDY clean up. The Canadian data was much stronger than predicted and the Ontario jobs data reflected the strength in the auto sector. The strong Canadian dollar has not negatively impacted the Canadian jobs market and means that the BOC will most certainly begin raising rates shortly. The Bank of Canada is concerned about a robust housing market so interest rates in Canada must rise. Get your Canadian dollar technicals in order to measure developing strength in the Canadian dollar. The Canadian/Swiss cross should be on our radar screens as the Canadian economy continues to outperform.

***There is much discussion in Japan about the newly installed government restarting the NUCLEAR ENERGY sector. After the horrible effects of the TSUNAMI, Japan moved to shut down its nuclear power sector out of fear of another major disaster. However, with Prime Minister ABE‘s effort to weaken the YEN, the cost of imported fossil fuels will drive Japan’s cost of imported OIL much higher so ABE knows that the Japanese will have to return to nuclear power. This is as much a currency issue as a power-generating argument. The weaker the YEN the higher the cost of OIL. If ABE wants to make the Japanese industrial more globally competitive then the renuclearization of the Japanese economy will be a main part of the ABE policy. The more nuclear power plants that are returned to usage the greater possibility for continued weakness in the YEN. Just another variable to watch in relation to the currency markets.

***For some reason, Thursday ‘s blog begot a discussion on the GOLD market. The blog was written prior to the release of the FOMC minutes. I have reread those minutes several times and still fail to see the uproar over the FED‘s possibility of ending QE. The idea of ending the QE program before the end of 2013 is preposterous. The FED has maintained that it will use the threshold of a 6.5% unemployment before it begins raising rates; and that is dependent on other variables.

The GOLD market sold off following the FOMC MINUTES HEADLINES but i maintain that while GOLD may have corrected, its trend will not be threatened as long as REAL YIELDS REMAIN NEGATIVE. Global interest rates are set to remain NEGATIVE as long as central banks continue to battle deflationary deleveraging. Also, the fact that there is a GLOBAL CURRENCY WAR in play, GOLD will continue to be a haven against the follies of the world’s central banks. Yes, corrections will take place but technical support levels will be valuable tools for traders. Investors will continue to hold GOLD in response to NEGATIVE REAL YIELDS.

 

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6 Responses to “Notes From Underground: The Fed’s Dilemma”

  1. MW Says:

    Canadian dollar technicals — which technicals or signals do you like the best here?

  2. yra harris Says:

    MW when I speak in terms of technicals I mean price levels of support and resistance—moving averages,fibs,trend lines–whatever techical tools you prefer to use

  3. Mario Says:

    Question is here will the 6.5% unployment rate be actual jobs created or just the baby boomers retiring? I go with retirement Which brings an issue for the increasing population. Indonesia booming economy has spurred via their skilled artisans with the younger population hence opportunities in the emerging economies, will it sustain itself is another variable, but as of now it looks promising. As i know Europe is always a fan favorite in todays world, Europe Basel Committee of Banking supervision aka the infant body guards have relaxed it deadlines for banks the meet their new rules for liquidity (only 60% of required short term funding in place in 3 years). I bet this is one of many changes.

  4. yra harris Says:

    Mario–a great deal here.The Basel change is certainly significant and shows the lobbying power of the too big to fail banks–even in the international arena—U.S. banks weren’t going to comply anyway

  5. Dustin L. Says:

    Yra- What do you see as the theme among inter-market relationships of late?

  6. Dustin L. Says:

    Also, I couldn’t agree more with your gold commentary here Yra. Good risk-reward trade in the yellow metal at these levels if one is disciplined with respect to limiting their downside. Jan 4th looks technically to have been a highly probable end of the correction that started in October. Time will tell.

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