The financial markets have been fixated for years at the prospect of interest rate increases by the Federal Reserve but have largely ignored the $4.5 trillion elephant in the room, namely the Fed’s gargantuan balance sheet. But last week several members of the Fed began publicly discussing their support to finally start winding down that massive portfolio.
Way back before the global financial crisis, the Fed’s portfolio held pretty steady in the high $800 billion to low $900 billion range. Then, as the crisis hit full force in the last three months of 2008 after the Lehman Brothers collapse, the portfolio more than doubled, ending that year at slightly north of $2 trillion. While the worst of the crisis may have been reached at that point, that was only the beginning of the balance sheet’s growth.
Between the end of 2008 until the end of 2012, the Fed’s portfolio grew gradually by another $800 billion or so, before spiking again, adding another $2 trillion over the next two years as the Fed embarked on quantitative easing. Eventually the portfolio reached $4.5 trillion, including both Treasury and mortgage-backed securities, at the end of 2014, where it has held largely steady ever since. Continue reading "What Happens When The Fed Starts Selling?"→
The much-anticipated decision by the Federal Reserve Board at the Sept. 17 meeting to hold interest rates near zero was met in the resource community with a mixture of relief and disappointment. The 9-to-1 vote citing global economic pressure on inflation left open the possibility of a hike at the December meeting. The Gold Report asked the experts in the resource sector what this means for precious metals and oil prices, and what signs they are looking for that a different outcome will be announced in December.
Joe McAlinden, founder of McAlinden Research Partners and former chief global strategist with Morgan Stanley Investment Management, was disappointed that the Fed "blinked." He called the decision irresponsible and attributed it to worries about China's growth. The veteran investor saw the status quo as bullish for precious metals and oil, but warned, "As the Fed continues to postpone moving towards normalization of interest rates, the potential for future inflation from years of excessive stimulation increases with every delay of the end of the zero interest rate policy."
He continued, "Based on today's decision, we now need to watch economic data from China and the performance of the markets themselves. I do not believe that the Fed's focus on those points is appropriate. Nonetheless, it is now clear that these will influence the timing of the next Fed move. Also, and more appropriately, we should be watching average hourly earnings, overall signs of strength or weakness in the U.S. economy, and the trend of the core PCE deflator." Continue reading "No Fed Rate Hike Good For Gold, Bad Sign For Economy"→
The Gold Report: In honor of Labor Day, let's discuss unemployment. You estimated that when all workers are counted, the unemployment rate in July was 23% compared to the government's reported rate of 5.4%. What is different about the job market today than before the recession?
John Williams: In a normal economic recovery, people who have lost their jobs start working again as the economy improves. That hasn't happened this time, at least not to the extent suggested by a 5.4% unemployment rate (U3), where the government's headline definition of "unemployed" is quite narrow. To be counted among the headline unemployed, you have to be out of work and actively to have looked for work in the last four weeks. If you want a job, but have given up looking, the government counts you as a "discouraged worker" or "marginally attached worker" and you don't show up in the headline number.
If you haven't looked for work in more than a year, even if you would like to work, then the government just doesn't count you in even its broadest measure of unemployment (U6); you just disappear from any of the unemployment measures. As a result, when the government says that 200,000 fewer people are unemployed in a month, and the headline unemployment rate drops, often there isn't an increase of 200,000 people who are re-employed. They just have been defined out of existence. My broad unemployment estimate includes those no longer tracked by the government, those who cannot find a job, who have given up looking for work for more than a year because nothing is available, yet they still would like to find a job, even though they may be doing other thingslike taking care of grandkids. That broader unemployment number is around 23%.
The Gold Report: The last few years have been very volatile for investors, particularly resource equity investors. The mainstream media, citing government statistics of improved employment rates and housing starts, called an end to the recession and is forecasting a slow recovery in 2013. You are looking at the same indicators, but coming up with different numbers. Let's start with the unemployment rate. What are you seeing and why is it different than what we are hearing everywhere else?
John Williams: I contend that the economy effectively hit bottom in June 2009, followed by a period of somewhat volatile stagnation, and it is beginning to turn down anew. There never was a recovery and no economic data shows the type of recovery that the official gross domestic product (GDP) report is showing. The GDP shows levels of activity now that are above where the economy was before the recession. It's been above that level now for more than a year. No other major economic series has shown a full recovery, shy of perhaps inflation-adjusted retail sales, which is due to a problem with the inflation rate used to adjust the series. Generally, the illusion of recovery has resulted from the government's use of understated inflation.
The Gold Report: John, as Mark Twain famously quipped, "There are three kinds of lies: lies, damned lies and statistics." The Bureau of Labor Statistics (BLS) just came out with new jobs numbers that show the country added 114,000 jobs since September and the unemployment rate dropped to 7.8%, down from 8.1% in August. On Shadowstats.com, you argue that the numbers are wrong and pointed to politics as a possible reason for the incorrect figures. Are unemployment statistics being manipulated and if so how?
John Williams: I normally put out a commentary on the numbers, and, in this one, I raised the possibility of politics as a factor. The problem is very serious misreporting of the numbers and the result is what appears to be a bogus unemployment rate. The BLS reported a drop in the unemployment rate from 8.1% to 7.8%, three-tenths of a percentage point, which runs counter to what is being experienced in the marketplace.
What few people realize is that the headline unemployment rate is calculated each month using a unique set of seasonal adjustments. The August unemployment rate, which was 8.1%, was calculated using what BLS calls a "concurrent seasonal factor adjustment." Each month the agency recalculates the series to adjust for regular seasonal patterns tied to the school year or holiday shopping season or whatever is considered relevant. The next month, it does the same thing using another set of seasonal factors. Rather than publish a number that's consistent with the prior month's estimate, it recalculates everything, including the previous month, but it doesn't publish the revised number from the previous month. Continue reading "John Williams on Lies, Damned Lies and the 7.8% Unemployment Rate"→