CHARTS OF THE WEEK: How The Fed Backed Itself Into A Corner, And Is Doomed To Pumping Cheap Money Forever

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  • The 40-Year Hollowing Of American Industry
  • How The Fed Backed Itself Into A Corner, And Is Doomed To Pumping Cheap Money Forever
  • How ETFs Took The Gold Market Hostage And Won’t Let Go
  • Still Not Convinced Job Growth Is Coming? See This
  •   Why The Financial Industry Still Has WAY More To Shrink

The 40-Year Hollowing Of American Industry

Good news! This morning the Federal Reserve announced that capacity utilization is ticking back up, a sign our idle factories are starting to hum again.

The bad news: as shown by the blue line, even during boom times, peak capacity utilization continues to trend lower, and has been since the peak in the late 60s.

What's interesting is that capacity utilization and the employment rate used to be tightly correlated, but the employment rate during the last two peaks looked much stronger than what the capacity utilization rate might have predicted.

The last two peaks were also major bubbles (.com and real estate).

Bottom line, if historical trends stay in place, capacity utilization won't even rise to the last level of the last boom. So if we want anything approaching full employment, you better pray for another economy-distorting bubble.

How The Fed Backed Itself Into A Corner, And Is Doomed To Pumping Cheap Money Forever

How ETFs Took The Gold Market Hostage And Won't Let Go

Anyone who thinks gold isn't driven by momentum right now should take a hard look at this chart.

While the chart isn't complete proof, it is at least a strong indication that a substantial part of gold's price rise since 2002 has been due to the birth of exchange traded funds and the new gold demand they created by letting anybody trade gold as easily as a stock. It makes a strong case for the argument that gold's price has largely been driven by ETF fund flows. Note traditional forms of demand, such as jewelry, fell both in 2008 and 2009 according to the World Gold Council (not shown).

This is why today's gold market is nothing like that of the past.

ETFs have allowed speculative buyers to rapidly move in and out of the asset, which has changed the nature of the investor base driving the metal's marginal price. Trust us, the hate mail we receive just for debating gold makes this pretty clear.

See, the gold buyers of the past didn't have the hair-trigger trading capability of the present ETF group, and there was a time when gold was considered simply a store of value rather than a vehicle for making huge upside. Which is why some research firms have voiced concern about gold's suspected dependency on fund flows for price support. Note how 2009 ETF-driven gold demand soared. It might be hard for 2010 to repeat this performance, especially if recent investors who are in it for quick returns start to think gold might be boring.

Still Not Convinced Job Growth Is Coming? See This

This relationship makes complete sense yet is frequently forgotten -- There has been a simple long-term correlation between U.S. power production and job growth, going back decades, as shown below.

U.S. power production fell with the recent economic downturn, most likely because there was less economic activity (plus some belt tightening when it came to energy usage).

Yet now it is rebounding. Which unless this relationship has suddenly changed, means that new jobs are highly likely to be created in the coming quarters.

The chart here is also interesting as a validation of the U.S. recovery because, right now, many who doubt the validity of Chinese government statistics look to Chinese power usage numbers as a tangible check on the economic growth that the government claims.

Well the same works for the U.S. It has passed the 'China' test!

(Via Value Plays)

Why The Financial Industry Still Has WAY More To Shrink

Former Fed chief Alan Greenspan recently delivered a mea culpa of sorts in the form of a 60-page Brookings Institute paper about the financial crisis.

Among the charts he includes to explain the crisis is one that we've seen before, but never ceases to jar us.

It's the share of GDP* that come from finance and insurance, and though the number has begun to crest, we're still WAY above any reasonable historical norm. The bottom line is that the financial bubble still has a lot of bursting left to do (though if Bernanke and Geithner have anything to say about it, it may take a while).

*A note on the 'value added' part: that measure simply refers to the industry's contribution to GDP minus production that originated outside of the country. The distinction is obviously more meaningful when talking about vendors of physical products that are built outside our borders.

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