DC and the Fed manipulating Interest Rates and Your Money

The results are in for the two-day Federal Open-Market Committee meeting, where Ben Bernanke and the rest of the Fed eggheads set interest rates. This time, no one expected them to make a move on rates, and the Fed did not disappoint — rates were held the same.

In the simple press release that followed, we learned the Fed’s intentions remain the same. Its quantitative easing (QE) plans—that is the Fed’s buying of Treasuries to goose the economy—have not been expanded, nor have they been fully implemented. But if the economy forces their hand, they will!

After the Fed announcement, the dollar immediately sold off against the euro and the pound.

The end of June brought the third revision of the U.S. gross domestic product reading. It was revised to a slightly better figure than expected. In accordance with the trading patterns of late, strength returned to the dollar as its counterparts sold off strongly.

Then there was the massive Treasury auction, with a record number of Treasuries up for bid. Despite fears of no one showing up, the auction went off quite well. Bidding was strong and yields dropped from their recent highs. Of course, falling yields are bad for the dollar, so even though demand for U.S. investments held up, the dollar’s value fell.

That put the focus back on the euro and the pound, which gave the dollar a nice beating. But then on Tuesday the U.K.GDP numbers came out worse than expected. – and once again the dollar was the shining star.

Dizzy yet?

The currencies just keep vacillating from strength to weakness. The problem is, every time they show more strength, they quickly back off. It is hatefully referred to as a churning market. Lots of movement, but no real direction.

Lots to consider: GDP from Canada; Case-Shiller Home Price Index, consumer confidence, the ADP Payroll numbers, continuing jobless claims and non-farm payroll here in the United States; and rate announcements from the United Kingdom and the European Central Bank.

But the numbers you should keep a close eye on this week are the Bureau of Labor Statistics’ continuing jobless claims and the early holiday release of the non-farm payroll report (which is usually done on the first Friday of the month).

Crooked Math

Now, I’m not asking you to look at the numbers as a setup for a potential trade. It’s just that the numbers will highlight something I’ve been saying all along.

Here’s how it goes: The monthly report was expected to show a negative 350,000. That means we lost 350,000 jobs last month. However, the weekly figure will come in at a negative 600,000 (or so).

Funny, that. If have new jobless claims running at about 600K per WEEK, how can we only lose 350K jobs per MONTH?

Sometimes readers will complain about my politicizing the weekly wrap-ups in my newsletter. But doggone it, stuff like this really sticks in my craw. I have little confidence in the present administration, and I had little confidence in the last administration. And that’s just the start of it. I believe the mess we are in is the product of the last 100 years of administrations.

For far too long, our leaders have paraded themselves around in the most expensive of accommodations, spent our money like it is as plentiful as dirt, presumed to make intelligent decisions, and foisted them on the public as such when, in truth, they are no brighter than the emperor in his “new clothes.”

That bothers me. Immensely.

So when I complain about government intervention, I’m not specifically talking about the current occupiers of the White House or Capitol. (It just so happens the current administration has been big on intervention.)

For example, I’ve been asked what I meant by “the repressive taxation being currently inflicted on the citizenry.” “Where are the new taxes?” Essentially, I was being asked to point to a specific spending bill with accompanying taxes.

But that’s not exactly what I meant. My point was — and continues to be — this: whenever the “government” enacts a new law, it enacts a tax by default.

We have a current view of law that is “positivistic.” In other words, rather than making laws that restrict, we make laws that propose. There’s a huge difference. A negativistic view of the law is basically what we find in the Ten Commandments: Thou shalt NOT kill. Thou shalt NOT steal. Thou shalt NOT committ adultery. Each of them is negative or restrictive in nature.

Modern law, being positivistic, actually demands new behaviors. Thou shalt wear a helmet when riding a bicycle… Thou shalt wear a safety belt when riding in a car… Thou shalt provide insurance for former employees. Thou shalt produce cars with better gas mileage and friendlier emissions. Thou shalt purchase carbon credits for excessive pollution.

What’s all this got to do with taxes? Well, it costs money to enforce and police the new standards of behavior. They must be enforced and policed upon the entire population. Whereas the old laws were only enforced upon the minority who were murderers or thieves. In any “civilized” society, they are a minority, and the cost to enforce the law upon them, if it is done right, is miniscule.

But when you must police and enforce behavior across an entire population, the costs increase exponentially. That’s why with every new bill that is pushed out by Congress, taxes must go up. Unless we believe the Polyannic line that they will cut costs over here to pay for new “programs” over there!

Finally, without exception, I believe any taxation above 9.9% in toto is repressive and draconian. Only God is great enough to require 10%. [Any government that requires more has a lot of nerve—ed.]

Now, I say all that for this reason: These government statistics do not add up. When they don’t, we know they must be manipulated. If a government will manipulate its currency (which is downright theft), manipulating some monthly numbers will not cost them any sleep at night. And this month, at least in the weekly and monthly job figures, it will be out there for everyone to see who will look at it.

How does this play into your investment strategy? Well, if you were purely a technical trader, you’d say it doesn’t factor in at all. Technical traders only watch the charts and price action. Their mantra is, “Price action tells the whole story of the market.”

Now, I believe charts and price action have their place, but I would argue that it’s been stunted by the recent market. What should be good news for the dollar has often turned out to be bad news, and vice versa. Thus, if a trader is watching price action only, he would just be able to react to the markets reaction to the news, rather than trading what he thinks the market ought to do. So that’s why I think this kind of top-down, fundamental analysis should have a role in looking for investment opportunities.

And those fundamentals include studying the policies — and contradictions — spewing from the government.

Bill Jenkins

July 9, 2009