Incite -- (v) 1: give an incentive; 2: provoke or stir up; "incite a riot"; 3: urge on; cause to act
Tuesday, August 10, 2004

FOMC Messes
Written by: Speculator

Greenspan and Company, which should actually just read Greenspan, as dissents within the FOMC meetings are apparently taboo, meet today to discuss their next move on the craps table. To fashion an analogy that captures the current conditions facing the committee - let's say that the point is FIVE and our shooter has found a favoring for the Horn (11, 12, 2, 3). Now, while I understand that each roll of the dice is independent of the one previous, we are due a 7.

Here's the setup: Job creation for July was far weaker than expected. We added 32K jobs, where the expectation was 240K. Interestingly enough, and this is an element of the report that escaped mainstream media, no doubt due to the fact that it was not in the first paragraph of the report, the unemployment rate dipped 10 bps to 5.5% - the expectation was a maintenance of 5.6%.

Yeah, we got Tom from Tucson on the line - yah go Tom...

"How do we lose 10 bps on the rate, which was unexpected, when we build only 13% of expectations?"

Great question Tom. About twice a year, at, apparently the discretion of the Bureau of Labor Statistics, the Feds will make a "birth/death" adjustment to the denominator. I have looked, but have been completely unable to find any literature describing this mechanism in detail. In essence, it works like a plug, and fancied up the headline number.

So, there are those out there in the fin-press that believe we actually lost on the order of 70,000 jobs in July, sans plug. (Again, I find this to be difficult to back out as well)

The short end of this, Tom and others, is that the economy, as Alan put, is in the middle of a "soft patch" (his words, not mine - rather unsophisticated language for a man with such command).

Is there a possibility that the Feds, in the next 18 months, would actually have to raise rates? It is far too early to attach any confidence to that thought, but, with additional econ numbers printing very softly as of late (Chicago PMI and National PMI all indicated greater production than consumption - we should note an increase in inventories for Aug) there is growing concern that this recovery really was liquidity fueled and that assumptions of tightening, followed by an actual rise in the Fed Funds, has resulted in a pretty impressive, recent abatement in activity.

So, what does this all mean - means we might actually be witnessing the fact that our addiction to the debt crack pipe is reaching its maturity stage. It has long been held that since 1987 - the inaugural year of Captain Alan - we have attempted to extract the down portion of the economic cycle with liquidity injections. It has worked, actually, quite well. But there is a piper to be paid, and as interest piles on top of interest, and our governments debt service requirements sky rocket, it now takes around 6X the amount of debt to generate one unit of GDP as it did 20 years ago.

A great deal of this missive is soft, I avow. But there is one thing that is absolutely understood and is absent even a modicum of uncertainty: the piper must be paid.

Thanks to Tom for the call.

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John Beck

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