- The unemployment target set by the FED for terminating QE leaves room for market manipulation.
- If the unemployment rate rises, more QE is guaranteed and a continuation of the bull market.
- Massive layoffs are a sufficient condition for a continuation of the equity bull market.
It appears that the easiest thing CEOs can do at this point to keep the price of their stock going up and their salaries growing is to engage in massive layoffs. That can push the unemployment rate above 6.5% and also help contain inflationary pressures with the personal consumption expenditures index increasing below 2%.
The most important thing here is that they (the CEOs) did not have to figure this out; The FED told them what to do. The FED target for inflation is 2% based on the personal consumption expenditures index and the unemployment rate target is set at 6.5%.
The unemployment rate in April fell to 6.3%, below the 6.5% target, and that coincided with investors selling small caps (NYSEARCA:IWM) and technology stocks (NASDAQ:QQQ) and moving to low volatility stocks and bonds (NYSEARCA:TLT). The personal consumption expenditure index remains below 2% for the first quarter of this year but recent increases in some key inflation gauges point to a rise:
An increase of this index by the third quarter above 2% with a parallel decrease in the unemployment rate could mean no more free money for stocks and an end to the exchange of toxic paper with fresh money to invest in stocks. One way for the market to defeat a known policy is to avoid its targets. By starting massive layoffs, CEOs could secure rising stock prices for much longer. The massive layoffs may have started already, yesterday.
Apparently, the twin FED mandate can be manipulated because of its known boundaries. The FED may be a sincere player but key market agents will act in ways that maximize their own utility. I do not think there is a way out other than a FED policy with undisclosed targets.