By Erwan Mahe on Seekingalpha.com

As the Federal Reserve has kindly revealed the keys to a future tightening of its monetary policy in the wake of its latest FOMC meeting:

The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period.

And Ms Yellen asserted again yesterday afternoon that:

U.S. inflation will remain subdued “for several years” given the slack in the economy

Fed had to cut rates to avoid ‘Black Hole’ of deflation.

Aside from the pleasure it gives me to see one of our regular themes in these Thaler’s reports, the black hole of deflation, taken up by this central bank dove, we still have to keep a close watch on these “keys”, like the Core PPI, out today, at -0.6% for October, vs an estimated +0.1% (+0.7% on an annual basis vs an estimated +1.4%), which show that you never know what type of unpleasant surprises index prices have in store for us…

I will just attach two graphs today: they often speak louder than words.

The first provides us with a measure of this renowned Output Gap which has the Fed so worried, given:

* U-3 unemployment at 10.20%, which is very close to its previous modern-day record of 10.80% in 1982, i.e. within reach of surpassing it.

* U-6 unemployment at 17.50%, which includes (among others) “forced” temporary employees and “discouraged” job seekers.

It is also worth noting the significant widening of the gap between U-3 and U-6.

This gap, which usually hovers around 4%, is now at 7.30%.

This implies that, in case of a real economic recovery, corporate efforts to hire on a full-time basis (after having cut the average number of hours worked per week to a record low of 33) and the return to the labour market of “discouraged” workers will prevent the official U-3 index from declining for some time to come…

As such, it is easier to understand Mr Lacker of the Richmond Fed, who is nonetheless a super hawk:

Net Job creation to be ‘particulary slow’ this time!

And if we factor in the natural growth of the active population…

Resource utilisation rates came to 70.70% (and not 70.50%, as in my graph!).

Despite its rebound from the abyss of 68.30% in June, this rate remains below the lows of the second leg of the W of the 1982-83 recession, which illustrates the still colossal margin of manoeuvre existing with respect to this measure of “slack”.

Unemployment in US — U-3 and U-6 — and utilsation rates

A whole lot of margin for manoeuvre goin on…

The second graph traces the course of copper prices, the so-called precursor of economic activity, given its many industrial usages.

As you can see, this metal, which was going for about $1,500 per tonne in the early 2000s, has since skyrocketed (the first metal lighter than air!) in the period 2003-2008 during the advent of China), surging by an average of 55% per annum (+555 % at its peak!).

Following a steep fall (-69%), which was logical in the autumn of 2008 when world demand collapsed, it began climbing again this spring to hits its yearly high of $6,850 yesterday evening.

Some accuse Chinese stimulus infrastructure spending of being responsible for this price surge, which, in principles, is de-correlated from the world economy.

Others put the blame on speculation (China’s Pig Farmers Amass Copper) and the weakness of the dollar which makes any commodity a safe haven investment when to carry cost is practically nil.$

Whatever the case, this type of commodity price behaviour constitutes the main risk to our optimistic bond market scenarios.

Copper, copper and more copper!

I must humbly confess that my knowledge base does not allow me to guess which is the above-mentioned reasons are responsible for this situation, but as Keynes said:

The market can stay irrational longer than you can stay solvent.

I therefore no reason to neglect fixed-rate instruments — quite the contrary — especially since this segment is doing quite well, but who can assure us that a new attack from the clan of celebrity hedge fund managers, cited in yesterday’s note, may lead to a hike in long-term rates and precipitate the economy into a double-dip as per 1937?

Then leading to a new collapse in long-term rates?

Not to mention the ensuing roller coaster ride in risky assets…

A bit complicated, all that.