Notes From Underground

The unemployment number on Friday was tepid relative to consensus. The ADP data on Wednesday raised Wall Street’s “animal spirits” and ramped up expectations of a NFP number of more than 200,000. Hours worked and average hourly earnings were also soft. The outlier on the data was the UNEMPLOYMENT RATE which dropped to 9.4 percent from 9.8 percent. Soon after the report was released, an avid reader, ASA, pointed out a piece on ZERO HEDGE, that analyzed what an aberration a 103,000 job gain is in relation to such a significant drop in the rate of the unemployed.

It seems that December’s data raises more questions about the underlying growth in the U.S. economy and allows the FED to stay the course of quantitative ease. The market action post-UNEMPLOYMENT certainly believes that the FED will pursue QE2 to its prescribed alloted amount. GOLD was about to be trashed but rallied as it reads FED policy maintaining its course and full speed ahead. The EQUITY markets initially sold off due to the disappointing jobs data but late in the day found some strength as it respects a robust FED monetary policy more than it fears the credit crisis in EUROPE and the debt overhang of several U.S. states and municipalities.

Immediately after the unemployment report, FED Chairman Bernanke appeared before the Senate Budget Committee. The prepared statement was nothing out of the ordinary but soon into the questioning the Senate Committee allegedly went into closed session. It’s certainly the Senate’s prerogative to hold closed meetings but it is certainly out of character for a FED CHAIRMAN, who puts himself out to the mass media to defend the FED‘s policies to head behind closed doors. The mystery bothered the markets and yet little more was heard about it as the day progressed. It’s always interesting to find out what must be kept from public view.

In a speech delivered by FED Vice-Chairman Janet Yellen to the Allied Social Science Association on Saturday, Yellen claimed that the FED‘s QE programs will have boosted private payrolls by about 3 million jobs. Citing a FED study by four FED economists using what Yellen cites as the main economic forecasting model of the central bank, the Bernanke team has accomplished much in stemming the economic slide and halting a cycle of deflation. Yellen goes on to state that there ought to be no inflationary worries for with the unemployment rate so high there is enough slack in the economy.

Furthermore, for those nations that have criticized the FED‘s QE policy as weakening the DOLLAR for U.S. benefit the data does not prove out. The study shows limited market impact on four currencies, the POUND, CANADIAN, YEN and EURO. It’s interesting that the study chooses the EURO and POUND, which have been two of the most problem plagued currencies. The YEN is also plagued with problems but still managed to close out the year at near-record levels versus the DOLLAR. The strength of the CANADA is well noted and that is in spite of being so dependent on the U.S. economy as a trading partner. The AUSSIE, KIWI and SWISSIE all performed well against the DOLLAR so the FED modelers are playing fast and loose with the data.

The YELLEN speech is very DISCONCERTING for it puts the FED into a position where everything they have done has been a success. It’s not possible to argue a hypothetical, “What would have happened if the FED lowered rates and did not pursue a quantitative ease doctrine? What if fiscal policy carried more of the weight and banks were forced to liquidate most of the distressed loans that they carried?”

Did the FED‘s four economists ask those questions? Causing further angst is the proven fact that FED MODELS HAVE PROVEN TO BE SO BADLY FLAWED. Do we wish to recall how the FED so badly misunderstood the credit crisis they were facing? How many times did Geithner as NYFRB PRESIDENT and CHAIRMAN BERNANKE understate the impact on HOUSING all the way through early 2008.

His eminence, Sir Alan Greenspan, also a noted admirer of FED MODELS, and we know how well he did. It makes one very uneasy to hear that Vice Chairman Yellen is still depending on flawed FED models to make the case for the success of Monetary Policy. I have been an admirer of Yellen but now I am feeling very uneasy. So should the all large holders of DOLLAR assets.

Tags: Asa, Aussie, Ben Bernanke, Dollar, Euro, Europe, Fed, Illinois, Janet Yellen, Kiwi, Loonie, model, Nonfarm Payroll, Pat Quinn, Pound, QE2, swissie, unemployment, Yen

This entry was posted on January 9, 2011 at 9:53 pm and is filed under Currency, Federal Reserve, unemployment, United States. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.