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Why The Fed's Policies Are Actually Hurting The Unemployment Rate

Tyler Durden's picture


We received an interesting letter from a reader today:

So far I have read nothing about QE2 causing high unemployment. Why do I say this…

1)    Fed is printing free money for the markets (stock market included).
2)    Every company wants their share of the free money.
3)    Each company’s share is determined by how much the stock rises which is stimulated by rising earnings.
4)    Organic sales growth is anemic, so in order to grow profits you have to lay off or maintain as lean as possible employment.

If a company started to hired and drive down their margins they would be crucified by their shareholders.  In effect the Fed is spending hundreds of billions to prevent employment growth.

We would like to add a few thoughts to this.

First, a look at margin contraction. As Charles Hugh Smith pointed out earlier, the great uncertainty of what the Fed's policies are doing with input prices is one of the main reasons why everyone is guarding their margins like a hawk. And we use the term "uncertainty" loosely. Following surges in commodity costs that can only be matched by what happened to the commodity complex in 2008, it is now more than clear that the bulk of companies are now aggressively shoring up capital to eat through whatever sales they are unable to pass through to the consumer (remember sales = PxV). In essence, many are concerned that the price jump in the top line will result in lower sales volumes, in effect eating away at margins. And since variable costs are the only ones that can be controlled (read S,G&A which includes labor) few if any are proactively willing to hire into what is now abundantly clear is an inflationary environment at least on the cost side. Thus no hiring. This is mostly impacting the traditional driver of employment growth: small and medium-sized businesses.

How about the large, multinational companies?

David Rosenberg earlier had some thoughts on why the top line growth for many companies will soon be crippled considering the decline in the natural source of organic revenue growth: that coming from international subsidiaries. With ever more developing countries, not to mention an austere Europe, in monetary tightening mode, there is less incremental money flowing through to the bottom line, and to employees.

But the bigger risk has to do with the ongoing spike in M&A activity. Suddenly every company has become either an acquiror or a target. Those which are shopping themselves on the block, in plain sight or hidden, are doing everything in their power to be cash machines: i.e., to generate gobs of EBITDA and Free Cash Flow. This means a cut to all variable costs (again), as well as to CapEx, as many shareholder groups are looking for a quick exit from their investments courtesy of an uber-frothy market.

On the other hand, the companies that are closer to the Fed's free liquidity, and are thus perceived as "strategic acquirors", are looking at their business models in the context of an expanding or rolling up paradigm. Simply said, they are all evaluating "synergies" from possible acquisitions, and as everyone is fully aware, synergies and organic labor expansion rarely if ever go hand in hand. Ironically, Bank of America noted in a recent note that financial purchasers (read LBO firms) are getting increasing pressure from strategic conglomerates as cheap credit is now an ubiquitous phenomenon, and in world of rising stock prices, the acquisition currency - stock - has greater value if all go "all in" on the ploy. In other words, this creates a closed loop whereby both buyers and targets focus on keeping their income statement in the slimmest possible state, especially with Commercial Paper holdings continuing to decline, as the bulk of companies who used to rely on such short-term funding, have become increasingly their own lender banks (courtesy of the much discussed "cash hoard" even if the bulk of it is overseas and thus not readily accessible: how long until the HIA2 is finally announced?).

The bottom line of this line of thinking is that in addition to being a gross failure at where it was supposed to be a success, namely keeping interest rates low, the Fed's policies have wiped out a quick 10% in consumer purchasing power due to a commensurate decline in home prices, the Fed has also succeeded in inverting the main drivers for hiring. In fact, it was up to the president yesterday to tell companies it is their duty to do the right thing for the public and hire. David Rosenberg skewered this argument earlier:

President Obama showed off his apparent lack of knowledge on how the economy works by openly pressuring businesses to start hiring more workers as a quid pro quo for all the government support that has been bestowed upon them. So let’s see — the way to have the economy operate efficiently and competitively is for companies to hire people they don’t think they need. Somehow that is the road to long-term prosperity. Adam Smith must be rolling …

And not only Adam Smith but certainly Milton Friedman. Because on his slash and burn path toward central planning, the President and the Fed Chairman are doing precisely the inverse of what they should be focusing on in order to actually generate organic economic growth. Instead, with everyone, small, medium and large corporations most certainly included, doing all in their power to get as close to the Fed's free money (alas, not everyone is a Primary Dealer), virtually all CFOs and Treasurers are now merely focused on generating the highest Return on Shareholder Capital, with hopes that the capital markets reward them promptly (and terminally) before the inflation game kicks in and EPS have to be slashed everywhere. It is no surprise that as we pointed out previously there has been for the first time years, a huge divergence between management team guidance and sell-side optimism.

And one last point: all those cheering the ongoing wave of M&A transactions should be far more concerned about the word that always accompanies such deals: synergies. Because if there is one thing that word never translates to, it is NFP gains... with or without the excuse of snow in January.



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Tue, 02/08/2011 - 16:57 | 944057 unwashedmass
unwashedmass's picture


how bout the simple thought that the inputs are rising, dramatically in some cases (energy) and Bennie Boy is sticking a dagger thru the heart of every single company...

small guys, please, like they are going to have the cash to hire as their margins compress to nothing? hello?

earth to Ben, you're wiley coyote now spinning above the abyss.....

Tue, 02/08/2011 - 17:30 | 944198 whatz that smell
whatz that smell's picture

the mother of all bubble-mother-bubbles, bitchez!...

Tue, 02/08/2011 - 17:01 | 944076 Ras Bongo
Ras Bongo's picture


Tue, 02/08/2011 - 17:28 | 944191 Sudden Debt
Sudden Debt's picture


Tue, 02/08/2011 - 17:02 | 944080 Mrmojorisin515
Mrmojorisin515's picture

Why is oil still at the same price it was when the dow was 1,000 points less?

Why is the ten year suddenly acting like someone used heart paddles on it?


Tue, 02/08/2011 - 17:42 | 944253 Panafrican Funk...
Panafrican Funktron Robot's picture

Gravity is a bitch.  At the end of the day, people still have to want to actually take delivery.  The commodity crash is going to be fucking epic.

Tue, 02/08/2011 - 17:03 | 944082 gwar5
gwar5's picture

My costs are going up due to higher prices and expectations of higher prices, so won't hire.

Tue, 02/08/2011 - 17:04 | 944089 dlsamg
dlsamg's picture

So when is someone going to actually do something to stop BB? Everyone including Congress talks but no one is stopping this unelected single man from destroying the dollar, bringing down governments and starving millions of people. These will only get worse as he continues.  The bottom line is they are all making money on the rise of the markets and just like everyone else they are looking out for #1 all the while knowing they can place the blame for any bad stuff that happens on Ben. Where are the real men? All we have now is a bunch of wimpy girly men who won't stand up to anything.

Tue, 02/08/2011 - 17:49 | 944289 MiddleMeThis
MiddleMeThis's picture

Because sadly none of the "real" men have any power or influence.  Those at the Fed and on Wall Street only care about themselves and how many vacations homes they can rack up.   Why would they change anything?  It's only the working class that suffers - not their problem.

Tue, 02/08/2011 - 21:25 | 944869 lesterbegood
lesterbegood's picture


You have already answered your first question.

What do you expect? The FED as well as the federal gov. are corporations.The Federal Reserve Corporation owns the United States Corp.

Corporations are only answerable to their shareholders, no?

So who are the shareholders?


Tue, 02/08/2011 - 17:04 | 944090 braveneweconomy
braveneweconomy's picture

That seems like a very naive and oversimplification of the Fed and employment. Margins will be hurt by input costs rising. This letter from your reader is really a stretch.

Tue, 02/08/2011 - 17:45 | 944269 Panafrican Funk...
Panafrican Funktron Robot's picture

"Margins will be hurt by input costs rising."

Now make the mental next step and tell us how you hit an EPS beat given this margin compression.

Seriously, not that hard to figure out, buddy.

Tue, 02/08/2011 - 17:06 | 944091 John Law Lives
John Law Lives's picture

Fed's Lockhart says inflation, properly defined, is too low:


<<<  Lockhart said he expects core inflation to rise gradually, to within the Fed's informal 2 percent target range by 2013. >>>

 Is there a genocidal maniac in the house?


Tue, 02/08/2011 - 17:06 | 944097 The Axe
The Axe's picture

It is so clear that the bond market sees the end of Q2 and the death od Q3, that it smells higher rates and inflation, confirmed by thee move in metals today..but why the equity market is moving-lead by the high beta(mult contraction coming) is beyond me..of course duh..

Tue, 02/08/2011 - 17:31 | 944202 Sudden Debt
Sudden Debt's picture

Wouldn't that be something if QE3 wouldn't pass.

All the efforts down the drain, markets down, commodities down...

But they will pass it. They don't have any other choice.

Tue, 02/08/2011 - 17:10 | 944109 system failure
system failure's picture

The end game is upon us. It does not make any difference at this stage. The Fed is simply doing all it can to keep the Ponzi going. Their mandates to adhere to steady prices and strong employment have been tossed out the window.

We are witnessing the last great market hooray of the century. Enjoy it while it lasts. We are watching what money creation out of thin air does, nothing but making digits go into oblivion. It is sure madness out of control and insane. Everyone knows what is going on and they keep stuffing the recovery, recovery, recovery, recovery, recovery, recovery, recovery, so many freaking times that I too am sick and tired of hearing about the said recovery. There is no recovery. What we have is digital madness to try and convince us of a recovery. I am so over it already. Let the mother fucker burn, burn mother fucker burn........ 

Tue, 02/08/2011 - 19:03 | 944541 sunny
sunny's picture

The end game is upon us.
I'll believe that when I see it.  I believe all indices were up a bunch today, sorta like yesterday...and the day before.


Tue, 02/08/2011 - 21:15 | 944853 Terminus C
Terminus C's picture

While I'd agree that the comment "end game is upon us" needs to be taken with a bit of skeptacism (because it has appeared to be upon us since 2008) I am suspect of your reasoning for discounting it.

Yes the markets are up but that has nothing to do with a fundamentally healthy economy.  The crash is coming and it will be ugly.

Tue, 02/08/2011 - 17:10 | 944113 BearOfNH
BearOfNH's picture

POMOs will continue until employment improves.

Tue, 02/08/2011 - 17:15 | 944135 system failure
system failure's picture

Employment won't recover until there is demand for goods. Only demand I see happening is for food. And look what food prices are doing. Flat screen tv's demand declined for the first time in 6 years. When cell phone demand declines then the shit has hit the fan.

Tue, 02/08/2011 - 17:26 | 944181 whatsinaname
whatsinaname's picture

Cell phone demand may soar for one more quarter (in the US) thanks to Verizon's Iphone but after that look for things to head downhill. Everybody I know and their mother-in-law already has a spanking new smart phone !!

Tue, 02/08/2011 - 17:13 | 944124 Scout6909
Scout6909's picture

For every homeowner that refinanced and saved $150 on his mortgage payment there are 4 people paying an extra $250 per month for food, gas, utilities. Statistically great for GDP (especially when adjusted less than 1% for inflation).

IF the US had properly adjusted GDP for inflation as they did in the U.K, our 4th quarter growth would have been much closer to 1% which would easily explain the NFP of 36,000. 

Lies. Lies. Lies. 

Tue, 02/08/2011 - 17:17 | 944146 RobotTrader
RobotTrader's picture

PigMen are getting fantastically rich while the common man with no money to speculate get more depressed.

Both financials and retail were strong today, I still don't see any negative signals on the market, except it is getting close to my 1360 "measured move" target.

My prediction is that the market will crack as soon as Tom O'Brien, Larry Pesavento, and David White at throw in the towel on their bearish outlook.

Tue, 02/08/2011 - 18:01 | 944345 lieutenantjohnchard
lieutenantjohnchard's picture

your predictions are meaningless. you don't even believe them. today you see no negatives. last week you saw the market rolling over. the week before you were a gold/silver bear at the bottom. now (yesterday) you are a gold/oil bull. it was barely two weeks ago you were spouting off that gold and silver had crashed below their support etc etc .... in fact, you said it was over, and lectured everybody to sell their silver and gold and face the reality of a crash. what a crock.

Tue, 02/08/2011 - 18:37 | 944461 ghostfaceinvestah
ghostfaceinvestah's picture

Agree, he/she is a typical momo trader, always on the edge of emotions, no thesis whatsoever.

I have said for well over a year now - the equity markets will continue to rise as long as the Fed balance sheet is growing.  There will be occassional hiccups, but the flood of liquidity will ultimately drive the markets well above fundamental value.

If/when the Fed stops growing their balance sheet, we will see an equity market crash to rival the 2000 Nasdaq crash.

Tue, 02/08/2011 - 19:41 | 944627 lieutenantjohnchard
lieutenantjohnchard's picture

agreed. 100%.

Tue, 02/08/2011 - 17:18 | 944150 LostWages
LostWages's picture

Bernank is fighting deflation.  Deflation will eventually win. 

Once the rising commodity prices chokes off the anemic growth we have, the bubble will pop again and everything will fall.  Of course things will be worse as the debt continues to pile up.

Unless wages go up with inflation, the increased costs won't be passed on, and the gears will grind to a halt.  Wages won't go up and employment won't improve.

The Bernank has painted himself into a corner and is firing his last bullet.  Main street will gladly give him one more bullet to do the honorable thing with!  Or a rope.

Tue, 02/08/2011 - 17:28 | 944188 Sudden Debt
Sudden Debt's picture

Bernank is fighting deflation.  Deflation will eventually win. 

How did you got passed the Captcha test?

Tue, 02/08/2011 - 17:33 | 944209 LostWages
LostWages's picture

Opinions are like assholes...everyone has one and I think you have two.

Tue, 02/08/2011 - 18:02 | 944352 Panafrican Funk...
Panafrican Funktron Robot's picture

Deleveraging and deflation are two different animals. 

Tue, 02/08/2011 - 17:24 | 944177 kaiserhoff
kaiserhoff's picture

Low interest rates are the primary reason commercial property prices have not adjusted to the depression in most areas.  Occupancy costs still impact hiring in many business plans.  The stand off between low bids and sky high asking prices in real estate is impressive, but reality will eventually intrude.

Tue, 02/08/2011 - 17:26 | 944182 Clayton Bigsby
Clayton Bigsby's picture

"Synerg"ies - "Redundanc"ies

Tue, 02/08/2011 - 17:32 | 944206 Thorny Xi
Thorny Xi's picture

Another piece of curveball thinking from the ZH community.  More expected results from my "Cash Out Generation."  

Tue, 02/08/2011 - 17:34 | 944208 Convolved Man
Convolved Man's picture

Ben has said the Fed's monetary policies cannot retrain workers, that is the Gov's responsibility through fiscal policies -- such as high speed rail, the latest $53 billion Win-the-Future (WTF) Work Progress Administration plan to stimulate the economy. 

According to Joe "Screaming Eagle Trans Am" Biden, there is a pressing need "to invest in a modern rail system that will help connect communities, reduce congestion and create quality, skilled manufacturing jobs that cannot be outsourced."

Ben provides the funds and Obama provides the plans, what could possibly go wrong?

Tue, 02/08/2011 - 19:53 | 944654 A Nanny Moose
A Nanny Moose's picture

Rail to nowhere, used by nobody. There is still hope based on the Bridge to Nowhere. Since it will be funded by government money, perhaps it will start in DC and NYC with the end of the line somewhere in middle of the Atlantic, and will have no brakes.

One can dream....

Tue, 02/08/2011 - 17:35 | 944214 Wags
Wags's picture

In the words of the former disgraced & disbarred DA of Durham County Mike Nifong, "We're F*cked!"

Tue, 02/08/2011 - 17:34 | 944215 MrBoompi
MrBoompi's picture

One man's synergy is another man's monopoly.  M&A's tend to lead to layoffs, so I would seriously consider a moratorium on them until we start to see improvements in employment. 

Tue, 02/08/2011 - 18:05 | 944360 Panafrican Funk...
Panafrican Funktron Robot's picture

"I would seriously consider a moratorium on them"

LOL.  Yeah, I'm sure they'll get right on that.

Tue, 02/08/2011 - 17:41 | 944250 daybyday
daybyday's picture

TBT to 80.00 1/2 way there. Bring on "QE infinity" drive bonds below par = endgame for Gen Ben.

Tue, 02/08/2011 - 18:17 | 944399 cunningtrader
cunningtrader's picture

The bottom line:

A chinese worker can build tv's/cars etc for 6 bucks a day.

A US worker can't.

China and other slave labour market countries rely on the ever dwindling wealth of he western world to buy what they manufacture under co-ops with large western world corporations.

These large corporations, are run by the elite, who use them as a means of getting massive salaries and golden parachutes via fraudulent options packages/USFED bailout money.

All to ensure the largest fibreglass tub in Monaco. They don't give a shit about US workers, accept when they won't buy. That time has arrived. So now they are still maintaining billionaire lifestyles on taxpayer funded handouts via the USFED.

They are laughing, all the way to the bank(pun intended) because they know the american people will not openly revolt, the corporation owned media, along with shit food, and Haarps pumping "good vibrations" ensures the masses remain compliant.

Tue, 02/08/2011 - 18:17 | 944400 Tense INDIAN
Tense INDIAN's picture

Short APPLE(?)  and surely SHORT (double SHORT ) INDIA:::

Tue, 02/08/2011 - 18:21 | 944407 Eric L. Prentis
Eric L. Prentis's picture

Bernanke is unwittingly killing jobs, in another way. The free money policy for banks, and by extension, big business, lasts only as long as US unemployment remains high. Along with record business profits, US companies love low interest rates. It is in capitalist companies’ best interest for Bernanke to extend quantitative easing, therefore, no new hiring. Once companies increase hiring, the free Fed money stops. Consequently, managers are using free money to improve technology, thus improving productivity, and letting go, now relatively, expensive labor. Bernanke, by monetizing the debt, is orchestrating an unfair, anti-labor policy, and as usual, President Obama is out to lunch.

Tue, 02/08/2011 - 18:31 | 944445 miker
miker's picture

Bernake has written off unemployment levels.  As above have indicated, he may actually be worsening the situation.  But he doesn't have a choice.  The whole system has been built on continuous inflation.  If deflation gets a foothold across a wide swath of the economy, everything goes to hell.  Think about all the financial products, debt, pensions, mortgages, and of course the federal debt. 

Deflation does exist out there and as indicated, basically screwing the little guy.  Corporate workers are still holding their own and the big dicks continue to make same pay or more.  Small businesses continue to suffer and are closing at a steady rate.  Take a look at CraigsList business category in your city.  Equipment, business, etc. for sale CHEAP and it just keeps coming. 

Bernake through QE is pushing up the market.  His ONLY hope is to get some good old fashion speculative mojo going and get all the scared money off the sidelines into the market.  Watching and playing the market (very limited) I wonder how long this can keep going.  Stock moves up then sells off.  Buyers step in and stock moves up again.  Seems like they are rotating the money around with some stocks going nowhere for awhile and then a big pop. 

So the QE is buying up the stock market and Wall Street is slopping at the trough.  A few others that understand what is going on are making money (really just trying to stay up with inflation).  The rest of the country is FUCKED.  I don't think this is going to end well.

Tue, 02/08/2011 - 18:31 | 944447 ghostfaceinvestah
ghostfaceinvestah's picture

No question the Fed's policies are hurting the economy.

The only question is, is this by design?

Tue, 02/08/2011 - 18:52 | 944509 redpill
redpill's picture

'Euthanize' is a way

to euphemize

the truth and lies

that are killing our working lives

so don't apologize

when we finally cut them down to size


Tue, 02/08/2011 - 19:56 | 944662 sushi
sushi's picture

Look on the positive side.

When Geno-Ben policies finally result in the complete collapse of the USD then corporate amerika will no longer be able to afford Chinese labour and all the $2 a day jobs will return to the USA

Tue, 02/08/2011 - 21:46 | 944920 ak_khanna
ak_khanna's picture

The only people who are feeling the economic recovery are the ones who are either direct or indirect beneficiar­ies of the bailouts or QE. They are the top few % of the population whereas the rest of the population are battered down with unemployme­nt, foreclosur­es and exhorbitan­t cost of living because of rising food and energy prices.

Hence it does not make sense for the companies to either hire people or expand their businesses as only the rich people on their own cannot create enough demand to replace the rest of the population­.


Tue, 02/08/2011 - 22:24 | 945048 penisouraus erecti
penisouraus erecti's picture

Ok, so riddle me this Batman. I know 3 people laid off during the recent mini-collapse and none of them have gotten jobs yet. One has found a full time - near minimum wage job that's about a third of what he was making. Plus, seeing the BLS, ADP, etc. and realizing the number of people dropping out of the workforce has doubled, it really doesn't seem like a lot of hiring is going on out there.

I have a daughter graduating from school with an engineering degree this spring, top grades, and very little interest by potential employers.

But, a guy I used to work for has a kid that works for CareerBuilder and he is claiming that CareerBuilder is doing record business and things couldn't be rosier from his sons perspective. I've never known this man to lie or embellish, so what is one to make of these conflicting scenarios?



Tue, 02/08/2011 - 22:35 | 945084 Village Smithy
Village Smithy's picture

I agree with your reader's letter, Cisco and BestBuy were both "crucified" late last year for projecting a less than perfect outlook. The consensus here at ZH is that the market doesn't even remotely represent the state of the real economy. There is almost unanimous agreement that sooner rather than later, unemployment and inflation are going to lower revenues and raise costs respectively and that in turn will compress margins at an almost geometric rate. In other words a crash back to reality is imminent. I share that opinion but one thing scares me. What if between the growing emerging market middleclass and the increasing wealth of America's "top ten percenters" corporate America doesn't need its embattled middleclass anymore? What if revenues can be replaced by billions of EM middleclass consumers and domestically by the growing American Uber-wealthy? The American middleclass then gets split in two. The bottom half become chronically poor and the top half become the working poor, condemned to work the rest of their lives paying off the massive debt we have incurred. We will become redundant, just like what happened during the industrial revolution in Europe. The only difference is that now no land of opportunity awaits us on the other side of the ocean. 

Wed, 02/09/2011 - 08:24 | 945876 Hephasteus
Hephasteus's picture

What if the fraud is simply growing and all these companies are lying.

These downturns are about corporate consolidation. EVERYBODY loses big money and big sales. But some are posting records. It's a lie. They simply lie while they buy out the people who tell the truth.

Apple sales suck.

They are reporting 43 million sales of iphones last year while AT&T reports 15 million connections. That leaves 28 million sales in europe and world. The 3rd biggest market in europe that sells iphones Orange reports 29 million customers total in 2009. Out of the 28 million sales europe has to report at least 24 million of those to make it believable. Becauase all the other markets are super small reporting on millions in revenue. Orange consolidated with t-mobile and I guarantee you they didn't sell no damn 24 million worth of iphones.

Microsoft sales suck.

They got 3.5 billion from bond market BEFORE the release of windows 7. They pumped 30 dollar and free copies to students to even BEGIN to get decent respectable market share. They had to borrow ANOTHER billion from bond market a year after the release of windows 7. They are making HUGE deals out of halo reach sales but not offering up any more sales numbers beyond opening weekend which was keywords for the fraud RECORD sales. They paid back the billion to bond market in q4 earnings report.

It's all a bunch of fraudulant bullshit accounting crap. When the first crash hit it raped state pension funds immediately put most of the states in big economic trouble. The game plan seems to be lie your ass off about sales and profitability while snatching up the non-liars. Hoping to screw your customers out of as much money as  you can once you dominate and price fix the market.

Intel's biggest channel supplier in asia-pacific market is eSys a fraudulant company being anally probed by lots of countries trying to figure out how big of a paper facade company they are.

IBM lays off lots of workers and reports record profits.

Apple and Intel are deeply partnered with Foxcon who is a gang run company who abuses migrant workers in china and mexico. One of their mexico plants was burned down to the ground by workers. Corporate Global is not financially, morally or any kind of healthy and vibrant at all.

America is a net importer of food. The Gulf of Mexico is dead and not feeding the huge percentage of population that is used to. And it looks like they are going to kill us with auag virus and enslave some and kill others in fema camps and Denver International Airport.

Wed, 02/09/2011 - 09:44 | 946008 Abe Froman the ...
Abe Froman the Sausage King's picture

Add today's FT article to the list of where the easy money "stimulus" is going:

Pace of US equity buy-backs picks up

US companies have announced share buy-backs at the fastest pace since the fall of Lehman Brothers as companies search for ways to put their record cash holdings to work in a still nascent economic recovery.

Buy-backs announced by 24 US groups were $27.3bn last week, topping $26.5bn the previous week and the most in any week since September 2008, according to figures compiled by TrimTabs Investment Research.

Volumes are typically higher during the quarterly results season but this is the busiest earnings period for buy-backs since the fourth quarter of 2007, according to TrimTabs.
