"Regime Change": The Critical Message In Today's FOMC Announcement

It will take the market some time to figure it out, but there were two main parts to the Fed's announcement: the actual breakdown of the $85 billion/month QE4EVA which were priced in as far back as the day QE3 was announced and were not a surprise at all; and the employment and inflation hard-targeting part, the so-called Evans Rule, which is, or at least should be, a shock to the market, only it hasn't quite realized it yet. Why shock? Because starting today, every incremental economic data point that is materially better, brings us closer to an explicit end of Fed intervention. Because at least before the Fed's calendar target was as soft as it gets; now the Fed will have no choice but to terminate its monetization once the unemployment rate plunges (be it entirely due to part-time jobs or 68 year old workers, as has been the case lately). It also means that as the economy continues along an "improving" glideslope, whether real, manufactured or doctored, the market will start pricing in its own "flow"-based demise. Because once the Fed's $85 billion/month in new Flows ends, it's game over.

Indicatively, using a simple forecast, based on LTM trends across all key employment metrics reveals something very troubling, for the Fed and stocks that is: the 6.5% unemployment rate will be breached in July 2013! Now granted that is simply idiotic, and there is no way that the US economy could possibly recover that fast, but that is precisely what is implied based on the ongoing collapse in the Labor Force Participation, and the concurrent plunge in the Labor Force Participation rate, which has been the biggest marginal driver for the unemployment rate, far more than the number of people who have jobs, or are unemployed (readers can recreate our calculation on their own in 10 minutes with excel).

The yellow arrow in the chart below shows at what point in the future the US Unemployment Rate is projected to dip below 6.5% assuming the current ongoing rate of contraction in the labor force participation rate.

Which then brings up the question: will the participation rate mysteriously start soaring beginning with the December data, as mysteriously all those people who had left the work force - supposedly all of the retirees if one listens to the "expert pundits" - start rushing back into the work force?

And if so, how will these same pundits reconcile their demographic based explanation that had justified the unemployment rate sliding so far, with the oposite trend which however has no demographic explanation?

After all, hitting the 6.5% unemployment threshold rapidly now is the wordst possible thing that can happen to stocks!

Perhaps, the best news of the day is that, finally, the narrative will be one where bad news are no longer both bad news and good news in the eyes of the market trading algos, but where good news, going forward, will be decidedly bad news for the stock market.

And after 4 years of benefits accruing only to stockholders even as the economy constantly suffered, this sounds like a very equitable trade off.