· Inflation, as the Fed measures it, is still historically low. And even through the unemployment level has “improved” to 7%, this analysis clearly shows that the unemployment is mostly due to the tanking participation rate. And Bernanke did mention his concern with the “quality” of unemployment numbers in his last speech. Thus, it would seem that neither of their goals of 2% inflation and <6.5% (with quality) are being bet. So it seems they have no “reason” to taper.
· However, if you’ve had time to read my analysis of Bernanke’s speech from Nov. 19th, he also made it clear that they are worried about the efficacy and possible risks of continued QE. He also made the statement that the market’s reaction (bond market selling bonds and forcing yields higher) to the mere mention of a taper was “neither wanted nor warranted”. I still can’t believe he actually said that out loud.
· With all that said, I believe the Fed desperately wants to start tapering as soon as possible. And as I mentioned earlier this week, taper talk has increased over the past week and the 10yr has “behaved” this time around. Thus I believe that as long as the 10yr continues to behave, the Fed will announce a taper at the conclusion of the FOMC meeting next Wednesday.
· I also believe the taper will be 10bil. That was the number floated last time, and anything more or less may cause market moving interpretations. The Fed will want this to go as smoothly as possible.
The Real US Unemployment Rate: 11.5%
ZeroHedge
While it may appear at first glance that the first chart below shows just one data series, what we have shown are two data sets: one presents, on an inverted axis, the Civilian Employment-to-Population rate, which unlike the unemployment rate as a fraction of the labor force (most recently printing at just 7%), has barely budged since the Lehman collapse. The other data set shows what an implied unemployment rate as calculated by Zero Hedge would be assuming a long-term average of 65.8% worker labor participation rate.
As we reported earlier, according to the BLS this number most recently was 63.0%: a 20 bps rebound from the 35 year low posted in October, but still woefully wrong. The chart shows much more accurately what the real unemployment rate would be when looking at the overall noninstitutional population instead of the ever rising amount of Americans who for one reason or another are not in the labor force.
On the next chart, we then proceed to juxtapose the implied unemployment rate with the officially reported BLS data.
In short: applying a realistic labor force participation rate to the unemployment rate series, shows that the real US unemployment rate is now 11.5%, a 4.5% difference from the reported number, and the second highest ever, only better compared to October's 4.7%.
Of course, don't inform the Fed of this discrepancy: if aware, the Fed's monetary mandarins would likely never taper. Then again, if indeed the Fed never does taper as many suggest (since it is the flow, not the stock), we will know just which series of unemployment data the Fed is looking at.
Randy Woodward
Managing Director, Fixed Income Capital Markets
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