Feed the Fed

Alright, it’s been way too long since I brewed something… So... Let’s get to work.

The Context:

October Jobs Report.  It seems that companies have added about 271,000 jobs in October. This sudden surge in the number of jobs added has been the fastest rate change yet and as an effect has sent the unemployment rate to 5% which is the lowest level since April 2008.

Ok, what does that mean?

Well, according to Economics, inflation rises as unemployment goes down. I know sounds strange at first because we are used to associating negatives with negatives… but Economics thinks otherwise.. for every good, there is bad. Hence, as more and more people get employed, they have money to spend, and as their spending ability increases, so does the demand for things and hence price rise or inflation. Tada!

All right ok we understood that employment increases inflation, what’s next?

Coming to that; USA’s central bank rate has been practically 0% for almost a decade now... 8-8.5 years actually. So now they want to increase that. Now maybe you’re thinking, wait increase bank rate or as its popularly called Fed rate in USA, wouldn't it increase the cost of loans? That would make it harder for people to get their hands on more money, that’s bad, why does USA want to do that??

Weeeelllll…. Inflation in USA has also come to about 0% and now that there’s a sudden drop in unemployment, this inflation will go up and they don’t want that to happen. Simple right? Wrong! Nothing is ever simple!

 Think about it, if inflation goes from 0 to 0.5 or even 1% what’s the big deal? Growth and inflation are directly proportional, so if inflation rises (up to a certain extent, not like Zimbabwe) it means somewhere you are making growth. So the story of wanting to keep inflation under check is bogus.

Wow, ok boss, so what does all this mean then? Why do they really want to increase the fed rate?

I’ll tell you… because they want to look good.

For a stable economy, the Bank rate needs to be respectable, well at least not 0. Japan’s central bank rate has been at zero for almost 15 years, and everyone knows Japan is a saturated economy. They don’t want the same to happen to USA.

Alright… We get it now... so they want to give the Fed rate a hike because they want to look good and look like they made a recovery from the 2008-09 crash. But if this make believe stunt is what they want to do, then why didn’t they do this earlier?

Good question. Frankly, I believe they are doing this because of the presidential elections. However, this post is about a conspiracy theory. Now, where’s the theory??

The Theory

We know what the context is, how Recession, Recovery, Fed Rate, Inflation, Growth and Unemployment are related to each other. And we also know that unless Obama and his govt. show some proof of recovery, it will be really hard to get a third term for the Democrats. So, there’s but one option to show this for sure, increase the fed rate.

This might choke cash flow in the system but! And I mean a serious But! This fed cut is not to choke or pour money into the common man of USA, but it is to show the outsiders that USA is on track for recovery. We must note that people are really wry of the situation. Japan is in a recession, China is looking unstable, and India is still volatile. Everyone else is anyway insignificant. So investors will put their money into USA.

But sir, what about the employment? The govt. can’t simply cook it up, how did nearly 200 thousand new jobs come up within a month??

Ask yourself that question again! How did nearly 200 thousand jobs come up within a month?? Come on!!

I looked it up; the October jobs report a little and I found and I quote

“White-collar businesses added 78,000 profession jobs. Health care added 45,000 positions. Retailers took on 44,000 new workers, and restaurants hired 42,000 people.”

I’m not chasing after everyone, but I got curious at the restaurants and so did a little more digging. About three companies did 80% of this 42000. And surprisingly, these three are Pizza Hut, Taco Bell and KFC. All three belong to the same parent organization of Yum Brands, Inc.

Now about this Yum Brands, Inc.

Yum Brands stock tanked 11% in October. They said it’s because the company didn’t meet the analyst's expected quarterly revenue... seriously? 11% because it missed “analyst estimates”?? Ok I'll believe even that… But listen… The quarterly revenue actually grew by 2.2% and increased the "adjusted earnings" by 14%.

Now the stock, even after recovery is at 5% below last year’s price, but the earnings are high and they just hired 42000 people!!

Here’s where I come in... US wanted to hike the fed rate so bad... But they couldn’t just do it.. Neither could they leave it at 0 and be another Japan... sooo.. They called some of the big guys... like Yum and a few others… and said, look guys, you need to hire more people.

We just saw, that the sales revenue of Yum isn’t that great, the stocks tanked 11% but still its profits are awesome. How?? Think! Universities and Hospitals are known all too well for Govt. indulgence... Sooo… I’m just thinking… somehow someone made a big donation or an “adjustment” leading to a growth in numbers, then the hiring boom and hence creating a clean, unsuspecting and natual green signal for the fed rate hike.

But the question is … will you buy this natural green signal??? Is it all that natural in the first place? Will you invest in USA after knowing this??? Or is Obama really looking for investment in America and the American people or is it all just to get money for a short term till the elections are over??