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Slowdown In The Rebound; Stop Listening To Central Bankers

This is a syndicated repost courtesy of Alhambra Investments. To view original, click here. Reposted with permission.

The primary reason for that first rate hike in a decade in December 2015 was ferbus figuring that full employment had probably been reached, certainly close to where the unemployment rate had fallen at that time. The Fed’s main econometric model calculated this key economic level at between 4.8% and 5.0% unemployment; the actual rate for that month hit five on the nose.

In the mainstream Economic policy manual in use at the time, this was the signal to begin putting the brakes on the economy before it overheated into something like the 1970’s.

A big reason why Janet Yellen’s Fed hadn’t hiked rates before then was that the FOMC couldn’t figure out what was going on otherwise. They kept thinking forward towards the seventies, but the economy worldwide kept (“unexpectedly”) leaning back toward 2008-ish. Yes, the unemployment rate had tumbled, but inflation wasn’t showing up and, worse, forward-looking inflation expectations were tumbling faster.

It shouldn’t have been that way.

Even before December 2015, the mainstream models had been forced to adjust their estimates for what today they call maximum employment. Time and again, these had been reduced because in late 2014 and early 2015 the actual unemployment rate would’ve dropped underneath the lowest long run calculation.

With no inflation in sight, and expectations for it falling hard, the Fed’s statisticians had no choice but to go back to the drawing board and redraw their picture for full employment. So they did; again, and again, and again, and again…twelve times in all. You might be left with the impression they don’t really know what they are doing – and you’d be right (as we’ll see).

In 2016, however, inflation expectations began to rise. As they did, the Fed temporarily stopped revising down their max employment calculations figuring (in models as well as conceptions) that though 2015 had been a mess of a mystery things maybe were coming around in 2016.

And then 2017 was globally synchronized growth.

But then 2018 didn’t continue it even though that year’s earlier months were filled to the brim with inflation hysteria (if only in the media). By the middle of that year, especially following May 29, inflation expectations began to decline all over again (having never really increased that much from 2016’s lows; see: below).

The unemployment rate view hadn’t changed at all; to the contrary, the sucker kept going lower and lower and lower to the point it was so far underneath the Fed’s much-reduced lowest full employment estimate even these Economists couldn’t avoid the truth. It would keep going all the way to a 50-year low.

The unemployment rate had to have been faulty all along. Jay Powell’s central bankers would begin recognizing this fact starting November 2018 with his grand strategy review. The release of this review’s findings in August 2020 – officials really didn’t need a year and a half to figure all this out – simply gave up on trying (the cowards have buried it, only quietly changing up what they now intend to do, why there’s this absolute joke of average inflation targeting).

Many, myself included, had warned about this for years. In June 2017, one of those times, amidst the burgeoning inflation hysteria predicated almost exclusively on “full employment”, you could easily see how it was all built on a lie:

We are left with no other choice, then, the inescapable conclusion that is derived from the deranged nature of these extreme levels of labor statistics. They have to be faulty and therefore highly misleading. It is not much of a stretch to claim they have been this way for all this time, just not so obviously unfounded as they are right now. The 4.3% unemployment rate does not compute properly as the denominator as beset by the participation problem.

And that was always why the rate was wrong, all the way from 2008 to today. The participation problem had meant too much leftover macro slack. An economy not recovered, unhealed after massively deep scars created a permanent shock Economists’ unshakable belief (based on econometrics) had wrongly convinced them such a thing was impossible. The unemployment rate’s denominator, the labor force, had all along left way too many out of it (meaning it had been, and still is, a mathematical problem for both the numerator and the denominator).

It would only come as a surprise to those who listen to central bankers (meaning the entire financial media, for one). Stop listening to central bankers. They’ve even stopped listening to their former selves. And while they try to find their new selves, nothing has changed.

What had moved inflation expectations if not full employment or even favorable views on the defective unemployment rate? The obvious answer was available the whole time and not just in the TIPS market. From nominal rates to swap spreads to the dollar’s exchange value, and a big bunch of others, the eurodollar system is shown in real-time to be in charge of everything.

The direction of financial market (even stocks at times) as well as the global economy is dictated by the overriding condition in the global monetary system (eurodollar), the world’s true reserve currency regime. Reflation #3 had shown up and that’s what made all the difference in 2016; not the employment rate, rather the end of Euro$ #3.

The unemployment rate instead had been among the sole means for central bankers to fool the public into disbelieving these coherent, contradictory “bond market” signals.

And so, here we are yet again. As noted earlier with the release of today’s payroll reports, the unemployment rate is tumbling and inflation expectations have instead attained a slight downslope. Once more, at odds. Going back to late August 2020, this is consistent with all those other similar market indications as well as the rest of the labor market data outside the unemployment rate.

Slowdown in the rebound. Not much QE is going to do about it, either. If there’s a Reflation #4 somewhere in our future, it must still be well out in our future.

The unemployment rate therefore remains the same unemployment rate; COVID didn’t magically fix the thing. And if the unemployment rate is all there is left in the “V” column, no wonder so many doubts. It’s been that way for years, except nowadays even the statisticians at the Fed finally stopped relying on it.

No money flood. No looming inflation (not even reflation). The only thing left rising is uncertainty about the near future. Euro$ #4 doesn’t seem to have been shoved aside by the COVID rebound even with all its gigantic positives (and good payroll figures). Obviously not (LOL) QE, either.

Wall Street Examiner Disclosure: Lee Adler, The Wall Street Examiner reposts third party content with the permission of the publisher. The opinions expressed in these reposts are not those of the Wall Street Examiner or Lee Adler, unless authored by me, under my byline. I curate posts here on the basis of whether they represent an interesting and logical point of view, that may or may not agree with my own views. Some of the content includes the original publisher's promotional messages. No endorsement of such content is either expressed or implied by posting the content. All items published here are matters of information and opinion, and are neither intended as, nor should you construe it as, individual investment advice. Do your own due diligence when considering the offerings of information providers, or considering any investment.

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