I believe we are very close to the world realizing that the Fed is trapped: Its policies don’t work, yet it can’t stop pursuing them. The only question is when will people realize it and understand the consequences? –Bill Fleckenstein


Today’s jobs report was bad news all around. The headline number was clearly a disappointment but the numbers below the surface tell a more somber story. The labor force participation rate, the share of Americans either working or looking for work, fell to its lowest level since 1978. June and July employment numbers were revised sharply downward, as well.

If this doesn’t prove Mr. Fleckenstein’s point that quantitative easing doesn’t work I don’t know what will. The Fed is currently buying up over $85 billion per month of treasuries and mortgage-backed securities; that’s an annual rate of over $1 trillion. And what has been the result? Higher bond prices (until very recently), higher stock prices and higher real estate prices but no meaningful change in unemployment, which has been the Fed’s stated target. In fact, it looks as if the unemployment situation may be actually worsening even in the midst of this unprecedented money printing.

It’s also important to note that interest rates have more than doubled over the past year and the majority of that rise has come over just the past couple of months. This has great implications for all kinds of asset classes and financial institutions and we have yet to see all of the consequences. This is one reason why, earlier in the week, I noted the chart below is now “the most important chart in the world.”


Traders have pushed rates up right to the downtrend that dates back to the very early stages of the financial crisis. A break of this downtrend would mark a major turning point, especially if the Fed determines it can’t afford to taper or that it must increase the size or scope of its quantitative easing program.

It would be technical evidence, in addition to the fundamental evidence already presented, that the Fed has neither the power to support the economy through stimulating employment nor the power to support financial markets. Today’s jobs report goes a long way in making the case for the former. The jury is still out on the latter but the bond market is making a very compelling case right now that the Fed is not only ineffectual but impotent.

As I’ve been writing for months, if other markets follow suit we may soon see the virtual cycle of quantitative easing inspiring higher asset prices morph into a vicious cycle of Fed impotence inspiring investor retreat and even eventually despair.