Here comes another boring video about why all the short term moves by the central banks will ultimately destroy us in the future. Why do I call this boring? Because most people would rather not hear the truth, living as if tomorrow doesn’t matter, hoping for a miracle. Certainly our central bankers political leaders are only focused on the present; always looking to kick the can further down the road.
Day traders, momentum traders and many regular investors also are only focused on the short term. Inherent in their misguided investment philosophy is that they will be able to get out and take their profits before “reality” hits the fan. That’s despite the fact that history has taught us repeatedly that pigs eventually get slaughtered.
Talking about short term results, our macroeconomic editor Madeline Schnapp is reporting that the US economy is actually improving a bit. Madeline estimates that 210,000 jobs were created in September, a number that probably is much bigger than the Bureau of Labor Statistics will report this Friday. Indeed I say the BLS number is no more than a “wild ass guess’ based upon their methodology of using sample surveys tied to historic data.
Madeline, who bases her job estimates on real numbers — increases in withholding taxes that flow daily into the US Treasury — says that the job gains are coming mostly from a pickup in real estate and a much easier car loan world. Yes, 3% mortgages are spurring home sales. And banks now are willing to make car loans to people with 500 credit scores. These factors and others are temporarily boosting economic activity. But the real problem is these short term gains are not sustainable. At most, the recent gains will add about $300 billion to the annualized take home pay from all taxable income.
Think about this. The current federal deficit is $1.2 trillion or so and on top of that the Fed is currently printing over $500 billion annualized. In other words, it takes a newly created $1.7 trillion to boost incomes by $300 billion. That would not be so bad, if the $300 billion was self sustaining, meaning that it would keep on happening without more borrowings and money printing. But the growth is not sustainable without more and more deficits and money printing.
To understand why you have to look at the big picture. When the Fed first eased in March 2009, the US economy was shrinking rapidly as all the inventory in the pipeline emptied out, and was not refilled. As a result of higher stock prices from the first two easing, US companies sold a record of almost $600 billion of new shares in 2009 and 2010 combined. Add to that record bond sales . The results: Balance sheet cash soared. All that cash obviously encouraged companies to rebuild inventories. That inventory restocking process started boosting profits and free cash flow starting in 2010. But by early this year, the inventory restocking process was completed. That is why earnings growth is slowing right now. There is very little real growth in final demand to encourage companies to increase production.
Another way of looking at this, is deficits and Fed printing has been around $7 trillion so far. Since 2.3 million jobs have been created since job growth resumed in 2010, that means it has cost a whopping $3 million to create one job.
Mr. Bernanke justifies his debasing of the long term health and wealth of the US economy by saying: he is only doing his job. In a speech the other day. Mr. Bernanke said, and I quote: “The Federal Reserve’s goals are given to us by the Congress. Those goals of price stability and maximum employment mean, basically, that we would like to see as many Americans as possible who want jobs to have jobs, and that we aim to keep the rate of increase in consumer prices low and stable.”
In other words, why should Mr. Bernanke worry about the long term? To governments and central banks, just like traders and politicians, the long term is not relevant.
President & CEO TrimTabs Market Research
Portfolio Manager, TrimTabs Float Shrink ETF (TTFS)
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