As of last Fridays jobs report, there is likely no further public support for any version of QE3 or other liquidity injection that would equate to a prolonging of the Keynesian Experiment that Americans have become all too accustomed to. 


Nevertheless, the Indefinitely Dovish nature of the professional politician of 2011 means that, before long, horror stories of “the alternative” will be circulated in a desperate bid to bring QE3 back to the table.  For now, though, it seems that we are quite a ways off QE3.  Knowing what we know now, it should not come as a surprise that Peter A. Diamond announced in the NY Times over the weekend, that he was withdrawing his nomination to serve on the board of the Federal Reserve.  While the title was somewhat off-putting; “When a Nobel Prize Isn’t Enough”, Professor Diamond’s op-ed offered a valuable insight into how many academics think about the current state of the economy and how best to go about bringing about an improvement. 


The nomination of Diamond to serve as one of the seven governors of the Fed was bound to spark controversy.  Partisan politics certainly played a role as Senator Richard Shelby called the Nobel laureate “an old-fashioned, big government Keynesian” at his nomination hearing.  However, the reality of the slowing GDP and Jobless Stagflation has also played a significant role.  The notion of growth slowing and inflation accelerating has been at the forefront of our macro view for several months and, as things have played out recently, that call seems to have been a prescient one.  Oftentimes amongst academic circles, there is a view that accelerating inflation and slowing growth cannot coincide.  While wage inflation has been benign, there is significant inflation in other areas of the economy and it is impacting the ability of businesses to hire.  The uncertainty around the cost structure – from healthcare to raw materials – is weighing on business sentiment.  That has been Hedgeye’s view and we are now seeing it play out as GDP estimates continue to roll over and management teams highlight inflation as a concern plaguing the near-term outlook. 


As Professor Diamond penned on Sunday, “concern about the (seemingly low) current risk of future inflation should not erase concern about the large costs of continuing unemployment.”  As we see it, the two economic ills are not necessarily mutually exclusive.  It is convenient for some to assume so, but both the 1970’s and the present day tell us that Jobless Stagflation is a real problem for economies that are seeing growth impaired by limitless debt and overly dovish monetary policy.  Small businesses, the engine of job growth in this economy, need confidence and not uncertainty.


For some time, in the Early Look, Keith has been outlining the how and the why of the futility of the Keynesian experiment.  In late March, I wrote a note on the consumer and Bernanke’s Sisyphean fight to centrally plan the American recovery, titled, “BERNANKE – PEEING INTO THE WIND”.  Despite the unfortunate title, last Friday’s jobs report corroborated with the thesis I laid out in that otherwise apropos piece.  Confidence is not being lifted by QG and without it we can’t expect the jobs picture to improve materially.


Data released by the BLS pertaining to employment through the month of May shows that the percentage of the unemployed that have been jobless for more than 27 weeks is now at 45.1%.  As the debt ceiling debate heats up and cuts to the budget are inevitably made, it will be more and more difficult to offer support to the consumer from the federal coffers.


While it is valuable to have people like Professor Diamond taking part in the debate, it is my humble opinion that the data is refuting his stance and will likely continue to do so.  Confidence is far too fragile to support growth and inflation is only further undermining what little confidence exists among small business owners and consumers.  While the unverifiable argument will be made, time and again, that “the alternative would have been far, far worse”, I’m not sure the 45% of unemployed people in the U.S. that are facing an increasingly desperate situation are seeing any benefit from the Keynesian Experiment.


PROBLEMS THAT QG CAN NOT FIX  - long term unemployment


Howard Penney

Managing Director

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