“To support a stronger economic recovery the Committee will continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per month [and] longer-term Treasury securities at a pace of $45 billion per month . . . To support continued progress toward maximum employment, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends. The target range for the federal funds rate [is] 0 to 1/4 percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent . . .”

-Federal Open Market Committee, December 12, 2012


Despite a variety of disappointing economic indicators, including a negative GDP read in Q4 2012, and an earnings picture that looks potentially worrisome, markets continue to power higher.

The reason for this is simple: In the battle for economic growth, credit stability, and investment assets, it is the Fed versus the world.

And the Fed is winning.

The question I am forced to ask myself on a daily basis is simply what force is powerful enough to derail the post credit-crisis growth spurt the Fed — and most Central Banks around the world — has engineered.

Yes, I am aware this inorganic artificial growth. It is a suboptimal approach, a high risk trade. There is a significant likelihood that it ends badly. But the fire hose of liquidity is the simple reality on the ground.

As we have previously discussed, it is not my prime job to to debate policy, but rather, to manage assets. I am not interested in a romanticized justification for a money losing posture while the Fed continues this policy that has been driving equities ever higher. If you choose to mount Rocinante so as to tilt at windmills, the predictable results shall be all your own. Best of luck explaining them to your clients.

Which brings us to today’s NFP: Where we used to look at the new hires to give us a sense of the investment landscape, that is now less important than the U3 Unemployment data, currently 7.8%. So long as it remains above 6.5%, equity owners can expect the Fed to remain accommodative.

To get to those levels today requires approximately 2 million net new jobs. Barring a 2 million NFP print today, we need to account for population growth. My pal David Rosenberg, (Gluskin Sheff’s chief economist) estimates the US economy needs 5 million jobs — consistently reading 200,000 per month– to hit that bogey before 2015. Federal Reserve Bank of Richmond President Jeffrey Lacker opined in December 2012 that this process could take as til 2016.

There are several ways U3 can tick below 6.5%. The circumstances surrounding precisely how that might occur is an important question for investors. Consider the following possibilities:

A. Robustly growing economy that reduces unemployment, increases wages and spending and likely drives profits higher;

B. Slowly, modest economic expansion where jobs come back very slowly, U3 decrease gradually, and an ongoing deleveraging helps to slowly clean up consumer balance sheets;

C. Flat to contracting environment where Unemployment falls primarily as a function of a falling labor force participation.

We currently are experiencing option “B.”

The key question for investors is whether economic growth will accelerate towards a more robust, self-sustaining growth cycle (A), or whether it will fall into a weaker growth cycle (C). How this resolves will ultimately determine what your investor posture should move towards.

Estimates for today’s NFP are for January Unemployment rate to hold steady at 7.8% — where it has been since November 2012. Flat U3 works to risk assets benefits. If we see too fast a drop, it might raise fears of the Fed becoming less generous with their liquidity. If it ticks appreciably higher, the concern becomes that negative Q4 GDP print was not a one off oddity, and we are at increasing risk of sliding into a recession.

While we wait for that situation to resolve, investors’ motto seems to be: “Praise the Fed and keep buying equities . . .



Employment situation report released at 8:30am


Where Sea Monsters Live (May 2012)

NFP: The Most Over-Analyzed, Over-Emphasized, Least-Understood Data Point (February 2011)

Contextualizing the NFP Data (April 2011)

Situational Awareness  (September 2012)

Category: Employment, Federal Reserve, Investing

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

39 Responses to “Investors: When Will US Hit 6.5% Unemployment?”

  1. DocP says:

    Doesn’t the Fed’s criterion reward keeping unemployment (and people living in poverty as a result) high so that the shrinking “investor class” can continue to enjoy stock market gains? IMHO, this is the most evil incentive ever.

  2. danm says:

    So here is my question:

    - A client is 72 and now forced to take a minimum annual withdrawal of 40K out of his RRIF. Let’s say his asset allocation is a very conservative 75/25.

    - Let’s say credit spreads/yields shoot up and bonds tank by 5%. And equities drop by 20%. This means his portfolio goes from 500K to 410K in 1. single. year.

    How can I push this client into more equities even if there is no more juice in bonds? Everyone is saying to go in equities because of the printing… but I can not wrap my brain around this thinking when people are retired…. How many out there are telling them to start downsizing their lives instead of telling them to jump into more equities?

  3. Concerned Neighbour says:

    The answer is probably never. And if by some chance it ever does reach 6.5%, I very much suspect they’ll just lower the target to 6 or 5.5%. They’re all in now.

  4. Conan says:

    There are many estimates of what Job growth is needed to keep up with population growth. Let’s say in the for this post 125,000 per month. At this number we are mostly breaking even to slightly positive as the average job growth for 2012 was approximately 150,000 per month.

    So my projection in a muddle through economy is a continued slight gain of job growth vs population increase and a continued DECREASE in the Labor Participation rate which is currently at 69.3% and still trending down. So the convergence of these two would project a lower unemployment rate eventually.

    However if the economy improves we may actually go up in the unemployment rate as the people that dropped out as reflected in the Participation Rate will most likely come back.

    Thus the unemployment number maybe deceiving as in the muddle through number it may get better, but really is such a good feat. But in the improved economy scenario it might actually get worse, but it is more of a sign of improvement.

  5. dctodd27 says:

    As a money manager, should you be asking yourself what SHOULD you do? or what feels good? Hopefully your clients hired you to intelligently allocate their capital, not to chase the market higher because of the fed. They can do that on their own. Like you said, there is a good chance this ends badly. Unless you can figure out exactly when that is going to occur, your job as a money manager should be to continue to prudently allocate your clients assets based on their needs. If that means underperforming the “market” for a while so be it.


    BR: You disagree with the Fed policy, so on behalf of your clients you prefer to underperform because it feels better? Sorry, thats a #FAIL

  6. Conan says:

    Sorry I have a cold today and got dyslexic on the Participation Rate it is 63.6 now and here is a good article from Doug Short about this:


  7. Mike in Nola says:

    While the Fed is powerful, it is places like China and Europe that will likely determine the outcome. We export a lot more than we think and a crash in a trading partner can hurt a lot.

    Much of the big earnings over the past few years has been selling to the Chinese bubble, e.g. Caterpillar who is being more pessimistic now.

    Additionally, there is talk of currency wars, much like in the early 1930′s. Everyone is trying to lower the value of their currency relative to others. Japan is going on a massive printing spree. Ben has pushed the Euro back up to 1.35 where it is continuing to kill EU exports. And the Chinese are complaining about the exchange rate since their whole trade policy revolves around lowballing their currency to obtain advantage. The Fed’s policies are causing inflation in foodstuffs over their, which could lead to social instability.

    No free lunch.

    I agree with danm on the big downside of all this to the non-elites.

  8. rd says:

    Three to five years.

    1. It will take that long for the older baby boomers to start to leave the work force in large numbers due to health as much as anything else so that the younger generations can approach full employment.

    2. It will take that long for people currently 55 and older to have worked extra years and/or repositioned their portfolios to start to make up for some of the lost interest and dividend income because of the Fed’s actions so that they will be able to retire instead of working in full-time jobs.

    3. It will take that long for interest rates and dividend rates to rise back to the low end of normal so that people can actually get income from their assets instead of having to sell the assets themeselves to get income. That will allow for people in their late 50s and early 60s to retire without large income supplements from working.

    BTW – I do believe it to be unconscionable on Bernanke’s part to be essentially forcing seniors into equities, junk bonds, and long bond durations in order to get an income stream that they could have gotten from a money market or passbook savings account a few years ago. Saving the financiers is not the same as saving the population. ZIRP and QE1 & 2 made sense as interim measures, but I think they are going to do long-term damage as semi-permanent measures.

  9. Mike in Nola says:

    The Global Macro Monitor article the Think Tank has some figures on Treasuries pooh-poohing the bond vigilantes.


    When the EU, China or Japan hit their next crisis, I expect yields on Treasuries to plunge again, or at worst not to change a lot. The real danger spot is junk bonds which depend on earnings.

  10. Concerned Neighbour says:

    danm hits the nail on the head. Your average citizen can’t risk their life savings chasing the Fed to DOW 36K and beyond. Only those that can speculate – because that’s exactly what you’re doing when putting money in at these levels – are benefiting from Fed largesse. Mom & Pop nearing retirement need to stay in fixed income or a still decent equity investment if they can find one. Meanwhile Fed pumping is hitting them in asset prices for things they buy everyday, like gas and groceries.

    QE is a rescue policy for the banks and other fat cats, nothing more.

  11. mad97123 says:

    I appreciate the point you are making about fighting the Fed, something the bond rotation meme has not absorbed.

    As a baby boomer nearing retirement I can’t shake this idea that when this bad end comes it will be swift and out of nowhere.

    As Reinhart and Rogoff wrote: “Highly indebted governments, banks, or corporations can seem to be merrily rolling along for an extended period, when bang! – confidence collapses, lenders disappear, and a crisis hits.”

    “Perhaps more than anything else, failure to recognize the precariousness and fickleness of confidence-especially in cases in which large short-term debts need to be rolled over continuously-is the key factor that gives rise to the this-time-is-different syndrome. Highly indebted governments, banks, or corporations can seem to be merrily rolling along for an extended period, when bang!-confidence collapses, lenders disappear, and a crisis hits.

    “Economic theory tells us that it is precisely the fickle nature of confidence, including its dependence on the public’s expectation of future events, that makes it so difficult to predict the timing of debt crises. High debt levels lead, in many mathematical economics models, to “multiple equilibria” in which the debt level might be sustained – or might not be. Economists do not have a terribly good idea of what kinds of events shift confidence and of how to concretely assess confidence vulnerability. What one does see, again and again, in the history of financial crises is that when an accident is waiting to happen, it eventually does. When countries become too deeply indebted, they are headed for trouble. When debt-fueled asset price explosions seem too good to be true, they probably are. But the exact timing can be very difficult to guess, and a crisis that seems imminent can sometimes take years to ignite.”

    Good luck being one of the guys who finds a chair.

  12. td says:

    danm when rates were 20% in the 80′s could you wrap your mind around the fact that the CD rates retired clients were living on would collapse eventually? Did you steer your clients into equities as a result? The Fed doesn’t owe anyone a rate of return….

  13. dctodd27 says:

    Underperforming doesn’t feel better, chasing the market does. I thought that was pretty clear. My point was that doing whats right and doing what feels good are rarely the same thing.


    BR: We agree as to the latter — but I think it can be a value judgement. Its easier to hide under the desk and say it all ends badly cause the Fed is printing, and runaway. Being bullish most of these past 4 years has not been easy — but in hindsight, it sure looks that way.

  14. Pantmaker says:

    Danm asks a great question (I hope it was tongue in cheek) …this is exactly the question that Bernanke has been gunning for…Allocate 100% of your money into cash…Bernanke’s train cars will start piling up on the track . This idea that there are two mandatoy asset classes for savings is the stuff of children’s story books. 6.5 % unemloyment as a target for QE termination is as rediculous as the program itself.

  15. danm says:

    When the rates were 20%, I was in high school. My father was an engineer who had to keep on reinventing himself every few years because the economy kept on tanking and hitting industrials…. since he was young and always the last one in, he was always the first one cut. I learned that free lunches end up getting paid by someone else because there is no free lunch.

    Since we North Americans have been an entitled bunch living off the labor of emerging markets, I keep on wondering when the gravy train will leave.

    I am a rare North American who believes that luck in life is more important than anything else. That sh*t happens whether you work hard or not. However, you work hard to get some sort of satisfaction out of life and to increase your luck.

    I also believe that nothing good will come out of this money printing until the top 20% gets squeezed because it is just more malinvestment.

    I’ve filled my head with as much data as I can, and my brain is telling me that equities will not save my retired 500K clients as much as them shrinking their lifestyles.

    The thing is I know my brain is heuristically challenged and I am looking for arguments that would prove me wrong.

  16. RW says:

    If the Fed efforts been matched with something like normal fiscal policy rather than state and federal government austerity WRT purchases we probably would be at a 6.5% unemployment rate already.

    Our Incredible Shrinking Government

    Transfer payments like Medicare and Social Security are rising (although unemployment benefits are falling), but government purchases of stuff — mostly at the state and local level, where the stuff in question includes hiring schoolteachers — has been in fairly rapid decline.

    [comparing] the relevant numbers in the current business cycle and during the Bush-era recession and aftermath [BEA graph]: By this measure, the era since the Great Recession began has been marked by unprecedented fiscal austerity.

    Those who forget history are doomed to repeat it and, apparently, all the Very Serious People have decided there are no real lessons in the Great Depression and, even if there are, as long as they and their friends still have jobs there can’t really be a problem anyway, can there.

  17. danm,

    show your Clients, this Idea..


    if they, then, can’t catch a clue, you may want to recommend “Professional Advice”..

    or, they can ‘see it this way’..


  18. danm says:

    Pantmaker Says:
    It’s partly tongue in cheek and partly my real life dilemma.

    My mind tells me don’t fight the Fed but I am not convinced it will be smooth sailing. And I don’t know if my clients will be able to tolerate the fluctuations.

  19. td says:

    My point would be that 20% rates that favored savers were just as *artificial* as low rates today yet people did not perceive them as such I believe because those rates tended to support the morality bias that so many people bring to the market. In the short term I see no qualitative difference between parking money in a CD that is soaking up rates based on temporarily tight money or parking money in equities that are benefiting from easy money. Both scenarios are exposed to particular risks,neither will last forever and will require that investors adjust accordingly. If you want to influence policy run for office, don’t manage other people’s money based on your preferred outcomes.

  20. dctodd27 says:

    Then how do you justify your recommendations to readers of the Washington Post that investors make sure they keep an eye on valuation? Your own blog pointed out that the indicator with the highest correlation to forward market returns is the Shiller PE, which indicates pretty significant overvaluation here. Look, no one is recommending hiding under desks or buying canned goods and shotgun shells, but buying beta just to keep up with the market seems a mistake here. IMHO.


    BR: Good question:

    1. Lower rates over a longer time period makes it easier for companies to be more profitable
    2. What individuals should do themselves is different from what pros do
    3. I did not say “highest correlation” to forward returns, I said strong correlation
    4. We are not buying beta, we are buying broad risk assets (equity) — a subtle distinction

  21. danm says:

    In the short term I see no qualitative difference between parking money in a CD that is soaking up rates based on temporarily tight money or parking money in equities that are benefiting from easy money.
    IMO, there is no difference fundamentally, but qualitatively, one has more chance of triggering a heart attack than the other in a mean reversion.

  22. mad97123 says:

    BR, why did you risk your professional reputation being early calling the Fed suppoted housing bubble?

    I know your smarter, have great instincts, and do this for a living, but this seems similar, just a question of timing.

  23. danm says:

    Mark E Hoffer Says

    Great links! I’m in Canada and Canadians still can’t imagine the value of their homes going down. They think the US is a disaster and that Canada is an bastion of safety.

  24. td says:

    IMO, there is no difference fundamentally, but qualitatively, one has more chance of triggering a heart attack than the other in a mean reversion.

    Ha! Fair enough

  25. danm says:

    Lower rates over a longer time period makes it easier for companies to be more profitable
    In the short term yes…

    but over the mid to long term, I’d argue that rates that are kept low for too long are helping zombie firms stay alive. Zombie firms that are eating other companies’ lunches. Malinvestments makes us lazy. Reduces productivity.

  26. cognos says:

    Most of you guys are just BROKEN CLOCKS on this issue…

    Fed seems to be doing the right stuff, has done it TOO PATIENTLY… and that has real human consequences.

    Continuing to scream (or fret) about “hyper-inflation” in year 5 (or 10 for some of you!) is a huge, huge FAIL.

    Seems like a typical recovery. (BTW, US job growth averaged what 180k+ last year… not far off your #1 and that with major problems in China and Europe. Both look to be getting back to a better footing. Especially China.). Take a step back… This will end in a nice boom. (See Tepper, he’s smarter than you.)

  27. Concerned Neighbour says:

    BTW BR, the way this market is continuing its non-stop up journey, perhaps your next post should be when will the DOW hit 36K. A related question could be whether Siegel will ever become bearish.


    BR: Siegel has never been bearish. If 2000 and 2008 didnt make you bearish, what will?

  28. Pantmaker says:

    BR said, “You disagree with the Fed policy, so on behalf of your clients you prefer to underperform because it feels better? Sorry, thats a #FAIL”

    I don’t share your same optimism that this Fed policy will prove to be the risk-free magical portfolio expander. It is loaded with downside risk. Every equity transaction today has a real live buyer and seller. The sellers are sitting in cash and the buyers are newly minted members of the Federal reserve Faith and Prayer Club.


    BR: Yes, I have heard people repeating that for 3 years and 108% now. At what point do we disregard them, and call out THEIR comfort level with being wrong?

    And this is coming from someone who in late 2007 and 2008 was called a Permabear . . .

  29. MikeNY says:

    Typical recovery? 4 years out, and we have a $1 trillion Federal budget deficit, ZIRP and QE Infinity?

    Doesn’t seem typical to me.

  30. Vivian Darkbloom says:

    Barry Ritholz is unfortunately helping to perpetuate the myth that the FOMC promised to continue its “highly accomodative monetary policy” until such time as the unemployment rate falls below 6.5 percent. He wrote “So long as it (the U3 unemployment rate) remains above 6.5%, equity owners can expect the Fed to remain accommodative.”

    This line has been repeated quite a number of times in the media; however, that’s not what the full FOMC statement says. Ritholz cut off the FOMC statement right after the mention of the unemployment rate consideration, but the statement he quotes at the top of his post continues as follows after the ellipse:

    “… inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee’s 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored. The Committee views these thresholds as consistent with its earlier date-based guidance. In determining how long to maintain a highly accommodative stance of monetary policy, the Committee will also consider other information, including additional measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent.”



    BR: Yes, I have discussed that repeatedly, including on Bloomberg TV — the Fed bases the inflation component in part ON ITS OWN “longer-term inflation expectations” — its not a BLS measure, its a FED DETERMINED EXPECTATION! In other words, it is whatever they want it to be (so we ignore it)

    PS: The ellipses are standard editing shorthand for “text removed” or “text continues.” That’s why I always include the full link.

  31. AHodge says:

    US jobs n economy moving slowly up
    true its on heart paddles adrenaline steroids and debt
    we might cross that U rate line at end next year with a wide bellcurve around that.

    assuming our intl creditors dont pull plug-
    probably one of these decades
    but maybe not before end 2014.

    growth and lower u rate– plus the bigtime fed money is boosting markets
    that adrenaline etc aint fundamentals, but ask your portfolio if it cares?

    still on the whole i rather be, and am, short europe and long somewhere besides US Europe.

  32. mad97123 says:

    Echoes of Chuck Prince’s infamous comment “As long as the music is playing, you’ve got to get up and dance,” he said. “We’re still dancing.”

    Do you want to make money or by right?


    BR: Those are two different issues

  33. mad97123 says:

    Not following (not unusual for me).

    I thought you were saying as a Pro you had to dance. You are going to dance regadless of whether you think policy is right or wrong.

  34. mad97123 — Its more nuanced than that:

    Read: Where Sea Monsters Live (May 2012)

  35. mad97123 says:

    Thanks, I appreciate your response and the link. I do appreciate your site and all your efforts to educate.

    I wish I could change my Curmudgeonly nature. The leg-up I had on the Market by avoiding the crash and catching a piece of the rally is quickly evaporating and now I’m faced with having to get back into a market I don’t understand or trust.

  36. ToNYC says:

    The Fed acts like the USSR central planning agency. They have pumped while the compliance with essential regulations against the little guy which is by far the most regressive tax and a bonus to corporate rule by raising the bar. This continues to discourage individual initiative rather than specially rewarding the green shoots that no will longer need or deserve any job to make a phony 6.5% rate.

  37. gman says:

    1. Globalization..lots of cheap labor our there
    2. Unlimited immigration..”a bipartisan policy”..lots of cheap labor coming in here
    3. Automation..Robots and computers eliminating even “white collar jobs”.

    US workers are redundant and will continue to be so.


    Fed foot on the gas until SP 2500!.. until wait?…no demand from real customers from wages? Then Crash…unless the robots get some credit cards to spend! HAHA !

  38. Icouldabenacontendah says:

    Krugman in today’s blog said we would already have hit 6.5% unemployment or lower if we had carried out policies that would have sustained the Bush era’s increasing levels of government spending. And keep in mind, that period included a recovery from a recession. Most of that spending was by state and local governments and above all represented the outlays for hiring teachers.

    “The era since the Great Recession began has been marked by unprecedented fiscal austerity.

    “How big a deal is this? Government consumption and investment is about $3 trillion; if it had grown as fast this time as it did in the Bush years, it would be 12 percent, or $360 billion, higher. Given a multiplier of more than one, which is what the IMF among others now thinks reasonable under current conditions, that ends up meaning GDP something like $450 billion higher, which is 3 percent — and an unemployment rate 1.5 points lower.

    “So fiscal austerity is the difference between where we are now and an unemployment rate not much above 6 percent. It’s a policy disaster.”

    Krugman did not mention QE this time, but the point is that we would be at about the point where the Fed says it would end QE, had we not been waylaid by the austerity mind warp.