By Michael Lombardi, MBA for Profit Confidential
What a remarkable past 20 hours it’s been…
Yesterday afternoon, the Federal Reserve announced it might cut back on its $85.0-billion-a-month money printing program later this year.
The Dow Jones Industrial Average tanked 200 points following the news (and continues to fall this morning), European stock markets fell about two percent, Asian stock markets saw about the same, bond yields jumped to their highest level in years, and gold bullion prices are getting hit hard this morning.
Now, here’s an opinion on what’s really happened over the past 20 hours, and what will happen going forward, that you won’t read anywhere else:
Back in December of 2012, the Federal Reserve announced it would continue with its quantitative easing program until the unemployment rate in the U.S. economy fell under 6.5% and inflation increased beyond 2.5%.
If I heard the Fed Chairman correctly yesterday, those targets are out the window now.
In a press conference after the Federal Open Market Committee (FOMC) meeting minutes were released, Federal Reserve Chairman Ben Bernanke said the central bank might change the pace of the asset purchases later this year depending on the performance of the economy. He hinted that the Federal Reserve may even end quantitative easing by mid-2014 if the outlook on the U.S. economy remains as it expects. (Source: Financial Times, June 19, 2013.)
The Federal Reserve expects the U.S. economy to grow between 2.3% and 2.6% this year and between 3.0% and 3.5% in 2014. And the central bank doesn’t expect the unemployment rate to decline below 6.5% until 2015. (Source: Economic Projections, Federal Reserve, June 19, 2013.)
So the tone of the Federal Reserve has changed from “we’ll keep money printing going until the unemployment rate hits 6.5% and inflation goes to 2.5%” to “we might start pulling back on money printing later this year if the economy continues to improve.”
Dear reader, I have been writing about this for months. I’ve even created several video presentations on the topic:
By creating trillions of dollars in newly printed money, the Federal Reserve inadvertently created a bubble in the bond market and spurred a big rally in the stock market.
The bond market bubble, which I have been warning would burst, has already started to do so. In my opinion, the Fed sees a stock market bubble coming too and put the brakes on that rally yesterday by making it very clear to market participants not to count on quantitative easing to boost the market higher.
But here’s what wasn’t said yesterday:
By the end of this year, the Federal Reserve will have printed just under $1.0 trillion in new money—roughly equal to the U.S. government’s budget deficit for the year. What a coincidence.
So if the Federal Reserve stops buying U.S. Treasuries, who will step in and buy them? We know foreign investors have pulled back on buying U.S. Treasuries for a variety of reasons. To attract buyers to U.S. Treasuries in the absence of the Federal Reserve buying them, interest rates on the U.S. bonds will have to rise…and that’s exactly what has been happening in the bond market.
But won’t higher interest rates kill the housing market and stifle an economic recovery that is already questionable?
You’ve got it, dear reader. The Federal Reserve’s comments on pulling back on its money printing program have surely cooled the stock market rally for now. But the real question is: will the Federal Reserve really be able to stop printing money given that 1) the government’s pool of buyers for its bonds has diminished, and 2) higher interest rates will kill the so-called housing and economic “recovery”?
I surely wouldn’t bet on the Federal Reserve pulling back on money printing anytime soon. Any forms of investment that were hit particularly hard by the Fed’s comments yesterday might actually be a buy right now.
Did I just hear someone say “gold bullion”?
Michael’s Personal Notes:
As I hear more and more talk about jobs being created in the U.S. economy, it’s obvious politicians and the mainstream are not looking at the conditions in the jobs market—they are simply following the government’s “official” manipulated unemployment rate.
The reality is that the jobs market is fundamentally tormented; and hands down, it has become the biggest hurdle for an economic recovery in the U.S. economy.
As I have said many times, the unemployment data provided by the government do not depict what’s really happening with the jobs market. The so-called “recovery” we have seen in the jobs market of the U.S. economy has been nothing but a large number of jobs created in low-wage-paying sectors.
Consider Texas, the second most populous state in the U.S. economy. In 2012, Texas had 282,000 people working at jobs that paid the minimum wage set by the federal government—$7.25 per hour—and there were 170,000 others who earned less than that.
Combining these together, those earning minimum wage or less totaled 452,000 people or 7.5% of all hourly paid workers in the state. But back in 2006, before the U.S. housing bubble burst, there were only 173,000 hourly paid workers in Texas who earned minimum wage or less. (Source: Bureau of Labor Statistics, March 12, 2013.) In six years, there has been a 161% increase in the number of workers who are earning minimum wage or less in Texas.
Sadly, this isn’t just happening in Texas. Other states in the U.S. economy have very similar issues. In North Carolina in 2012, there were 137,000 workers who earned minimum wage or less, a jump of 200% from 2007, when only 46,000 individuals were in this category. (Source: Bureau of Labor Statistics, March 28, 2013.)
The government can pump out its monthly official unemployment rate, which shows us that less than eight percent of the population is unemployed, but the truth is that these figures do not include people who have given up looking for work and people who have part-time jobs but want full-time jobs, which they can’t find. Add those two numbers to the mix, and the real unemployment rate in the U.S. is between 13% and 14%.
The fact is the U.S. economy will only experience real economic growth when consumers increase their spending. But right now, with the anemic jobs market, consumers simply don’t have the financial resources to increase their spending.
In fact, in May, the Bureau of Labor Statistics reported the average hourly earnings for all employees in the U.S. economy fell 0.2%. (Source: Bureau of Labor Statistics, June 18, 2013.) What this means is that the pockets of consumers have shrunk even further.
The number of people in the U.S. economy with a full-time job and a secondary part-time job has also been on the rise. In May, there were 3.7 million Americans who were working two jobs. This number has increased five percent in the U.S. economy since the beginning of 2013. (Source: Federal Reserve Bank of St. Louis web site, last accessed June 19, 2013.)
U.S. consumer spending makes up almost 70% of the U.S. gross domestic product (GDP). With only minor improvements in the jobs market since the credit crisis hit in 2008, real economic growth in the U.S. economy is far from happening.
What He Said:
“The conversation at parties is no longer about the stock market, it’s about real estate. ‘Our home has gone up this much’ or ‘our country home has doubled in price.’ Looking around today, it would be very difficult to find people who believe that one day it could be out of vogue to own real estate because properties would be such a bad investment. Those investors who believe a dark day will never come for the property market are just fooling themselves.” Michael Lombardi in Profit Confidential, June 6, 2005. Michael started warning about the coming crisis in the U.S. real estate market right at the peak of the boom, now widely believed to be 2005.