Excerpt from the Hussman Funds' Weekly Market Comment (4/9/12):
On Friday, the Department of Labor reported that March non-farm payrolls increased by 120,000, falling well short of consensus expectations in excess of 200,000. For our part, we continue to expect a deterioration in observable economic variables, with weakness that emerges gradually and then accelerates toward mid-year. On the payroll front, our present expectation is that April job creation will deteriorate toward zero or negative levels.
Immediately after the payroll number was released, CNBC shot out a news story titled "Disappointing Jobs Report Revives Talk of Fed Easing." Of course it does, because this remains a market dependent on sugar. And with little doubt the Fed will eventually deliver it - perhaps following a market plunge of 25% or more - but with little doubt nonetheless, because like the indulgent parent of a spoiled toddler, the FOMC can't stand to see Wall Street throw a tantrum without reaching for a lollipop.
Keep in mind that the U.S. banking system has trillions of dollars sitting in idle deposits with the Fed already. Quantitative easing simply does not relieve any constraint that is binding on the economy. Rather, QE is a method by which the Fed hoards longer-duration, higher-yielding securities like U.S. Treasury bonds and replaces them with cash that bears zero interest. At every moment in time, somebody has to hold that paper. The only way for the holder to seek a higher return is to trade it for a more speculative asset, in which case whoever sells the speculative asset then has to hold the cash. The process stops when all speculative assets are finally priced so richly and precariously that the people holding the cash have no further incentive to chase the speculative assets, and are simply willing to hold idle, zero-interest cash balances.
Why does the Fed want this? Simple. Chairman Bernanke believes that by creating a bubble in speculative assets, people will "feel" wealthier and keep consuming - regardless of the fact that real incomes are stagnant and debt burdens are already intolerable, and despite the fact that there is extremely weak evidence for any such "wealth effect" in the historical record. Undoubtedly, it would be difficult for Bernanke to refrain from these reckless policies when everyone is crying "do something!" But the willingness to tolerate short-term criticism in the interest of long-term benefit is part of what separates leadership from cowardice.
In short, what we've observed in the employment figures is not recovery, but desperation. Having starved savers of interest income, and having repeatedly subjected investors to Fed-induced financial bubbles that create volatility without durable returns, the Fed has successfully provoked job growth of the obligatory, low-wage variety. Over the past year, the majority of this growth has been in the 55-and-over cohort, while growth has turned down among other workers. Meanwhile, overall labor force participation continues to fall as discouraged workers leave the labor force entirely, which is the primary reason the unemployment rate has declined. All of this reflects not health, but despair, and explains why real disposable income has grown by only 0.3% over the past year.