Employment

Who has been the biggest employer over the las century. It is the government at all levels. That is going to be put to a test over the next few years-particularly at the state and local level. The latest Case-Shiller home price index shows a 12.7% decrease in home prices. As home prices decline and foreclosures go home, revenues to the state and local governments are going to decline. To date, governments are not laying people off, but with budget deficits starting to pile up-we know which way the trend is. The next surprise for the mkt is going to be job growth or more importantly lack of job growth. Longer term I am constructive on the US employment situation as the lower USD is going to bring some companies back to the US and also the lack of quality in certain Asian products is going to create a back lash. However, in the short term, government hiring is going to drop and that coupled with the financial and real estate layoffs is going to push the unemployment rate to 6% and above IMO.

As for the Fed-does it really matter anymore what their rate is. The Shadow Financial system circumvents the Fed anyhow and it will be years before the FED regains control. Over the last 3 weeks, 2 yr USTs have moved from 1.85 to 2.35 %. The mkt has alreaady priced in no more rate cuts. The Fed is going to play the probabilities game of seeing the US economy level off from the plunge and thus allow the FF rate to remain at 2%. (of course that is after tomorrows 25 bps cut). Real estate is still heading south as the oversupply of homes and lack of income from the bottom 75% of the population keeps the affordability index from reaching the proper levels.