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The Recovery?

Last Friday the Labor Department published the August employment report and the headline numbers may have incorrectly caused some to believe that our nation is on a good track.  The official Unemployment number fell from 7.4% to 7.3% and employers added 169,000 jobs, which while not at the desired 200,000 monthly number wasn't too far off.

However, looking a bit more deeply there is great cause for concern in this report.
 In fact, there were some real shockers.  The number of people reporting that they had jobs actually fell by 115,000, indicating that the reduction in the unemployment number came from people abandoning their search for jobs rather than from people finding jobs.  In fact, 312,000 working-age Americans left the workforce in August.  As a share of the population, there are actually fewer Americans working or looking for work than at any time in the past 35 years!  This statistic, known as the Labor Force Participation Rate, fell to 63.2%, a number not seen since August 1978, and a time when women participation in the workforce was considerably lower than it is now.  August was the 40th consecutive month that more unemployed people left the labor market than found jobs.  There are more than 4 million who have been out of work for more than 6 months.

And, the financial markets’ response to economic news continues to reflect the distortions caused by the Fed’s heavy intervention.  In the past, when bad numbers on the economy were published markets would decline.  Now, because investors anticipate that a continued weak economy will cause the Fed to continue it stimulus policy of printing money and injecting it into the market and managing interest rates low, prices gain more traction.  Value investing has been preempted by Fed watching.  Fundamental analysis has been rendered virtually irrelevant.  For how long can this endure?  And when, or if, this fantasy period yields to one where the fundamentals of economic reality dominate, what will be the impact upon investors who have invested at today’s price levels? 

I read recently that the central bank of Singapore lost massive amounts of capital intervening in the currency markets to deflate its currency in a futile attempt to overcome the effects of U.S. monetary policy.  The U.S. dollar is the world’s reserve currency and when our central bank intervenes as it has in the past 5 years the consequences for the rest of the world are profound.  While I don’t know what will bring about a change to today’s highly complex and manipulated global financial marketplace, I cannot imagine that this situation will be permitted to continue for too much longer.  When things do change, they usually do abruptly, and if this were to occur chaos will reward those who have been patient.

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