Friday, February 28, 2014
Capital Markets
A rational week. What a relief. The steep drops in interest rates and stocks stopped just where charts said they should, and both rebounded in predictable perfection, now dead neutral. US snowboarders should land so well.
Janet Yellen gave her first formal testimony as Fed… Chairman? Chairwoman? Chairperson? Madame Chairman? None of the above. In the self-effacing dignity and directness which will mark her years on the job, she has chosen officially… Chair.
A run of weak economic data is still dismissed as just another weather report, especially by Eastern-centric media. Atlanta has had a tough stretch, true. And it’s been cold in the upper Midwest, but ice-fishing is a hobby oop der. Philly’s all-time record four, six-inch snowstorms? Please. Wimps.
So, a .4% decline in January retail sales? Just the weather. Today the worst factory production report since 2009, despite a surge in utility output? NOAA says this has been the coldest winter since way back in 2011.
So if all is in balance, waiting for spring, no technical lean in markets, when and what will tip them over? Nobody ever knows when, but “what” has some clarity. The US economy in the near term is not likely to surprise. Odds are big that we plod and wobble on a 2.5% GDP centerline. If we’re going to get a near-term surprise, odds favor overseas, but there is no handicapping those contestants. The inability to see one of those coming is the main reason they have so much effect.
One source of surprise stands out above all others. One of Chair Yellen’s most important forecasting tools is MIA: the rate of unemployment in this cycle will not give advance notice of rising incomes. Fed success always depends on pre-emption, and in a normal cycle it always begins to tighten as unemployment falls to NAIRU.
Hah. Tricked the kids. We have not had to deal with these terms since the ’90s. The Non-Accelerating Inflation Rate of Unemployment — go below, get inflation. Great concept, although nobody knows how to nail the threshold exactly. Related to the Phillips Curve, the inescapable inverse relationship between incomes and inflation.
Less than a year ago the Fed identified 6.5% as the rate of unemployment at which it would consider raising the Fed funds rate from zero for the first time since 2008, intending to reassure markets that it would not tighten for a long time. Unemployment then dropped faster than anyone thought possible, inducing fear of Fed action, and an embarrassing retreat by the Fed. Chair Yellen quietly cancelled the concept in her testimony, pointing to broader measures of the labor market.
In previously reliable theory, as unemployment falls workers become scarce and employers begin to bid up wages. Initial stages of bidding-up are okay, part of recovery, but if bidding intensifies and wages rise beyond increases in productivity, that defines dangerous inflation. Hence the Fed’s wish to tighten just enough in early stages to prevent premature overheating.
Anybody out there see aggressive bidding up of wages? Specialized IT. ObamaCare programmers. The Seahawks’ defense. Health care invoicers. Snow removal.
Several common theories offer common explanations. The ‘Boomers are mailing it in, many early. Skills mismatch: we don’t need wrench-turners on the line, we do need robot repairmen. Automation. The 1% has all the chips and won’t play. Too much government, or not enough.
Look elsewhere, and look long-term. Automation is tempting, but it has been feared as a job-killer ever since the industrial revolution began 250 years ago. Stick with this: today’s unprecedented suppression of US wages has been caused by a wave of excess labor hitting global markets at the end of the Cold War, and a second wave of excessive investment in productive capacity, especially in China.
Chair Yellen’s top problem: the labor imbalance will stabilize without warning, global wages rising. Working-age populations are shrinking in all the developed world and China, and the emerging world does not have the social capital to replace them.
Janet Yellen gave her first formal testimony as Fed… Chairman? Chairwoman? Chairperson? Madame Chairman? None of the above. In the self-effacing dignity and directness which will mark her years on the job, she has chosen officially… Chair.
A run of weak economic data is still dismissed as just another weather report, especially by Eastern-centric media. Atlanta has had a tough stretch, true. And it’s been cold in the upper Midwest, but ice-fishing is a hobby oop der. Philly’s all-time record four, six-inch snowstorms? Please. Wimps.
So, a .4% decline in January retail sales? Just the weather. Today the worst factory production report since 2009, despite a surge in utility output? NOAA says this has been the coldest winter since way back in 2011.
So if all is in balance, waiting for spring, no technical lean in markets, when and what will tip them over? Nobody ever knows when, but “what” has some clarity. The US economy in the near term is not likely to surprise. Odds are big that we plod and wobble on a 2.5% GDP centerline. If we’re going to get a near-term surprise, odds favor overseas, but there is no handicapping those contestants. The inability to see one of those coming is the main reason they have so much effect.
One source of surprise stands out above all others. One of Chair Yellen’s most important forecasting tools is MIA: the rate of unemployment in this cycle will not give advance notice of rising incomes. Fed success always depends on pre-emption, and in a normal cycle it always begins to tighten as unemployment falls to NAIRU.
Hah. Tricked the kids. We have not had to deal with these terms since the ’90s. The Non-Accelerating Inflation Rate of Unemployment — go below, get inflation. Great concept, although nobody knows how to nail the threshold exactly. Related to the Phillips Curve, the inescapable inverse relationship between incomes and inflation.
Less than a year ago the Fed identified 6.5% as the rate of unemployment at which it would consider raising the Fed funds rate from zero for the first time since 2008, intending to reassure markets that it would not tighten for a long time. Unemployment then dropped faster than anyone thought possible, inducing fear of Fed action, and an embarrassing retreat by the Fed. Chair Yellen quietly cancelled the concept in her testimony, pointing to broader measures of the labor market.
In previously reliable theory, as unemployment falls workers become scarce and employers begin to bid up wages. Initial stages of bidding-up are okay, part of recovery, but if bidding intensifies and wages rise beyond increases in productivity, that defines dangerous inflation. Hence the Fed’s wish to tighten just enough in early stages to prevent premature overheating.
Anybody out there see aggressive bidding up of wages? Specialized IT. ObamaCare programmers. The Seahawks’ defense. Health care invoicers. Snow removal.
Several common theories offer common explanations. The ‘Boomers are mailing it in, many early. Skills mismatch: we don’t need wrench-turners on the line, we do need robot repairmen. Automation. The 1% has all the chips and won’t play. Too much government, or not enough.
Look elsewhere, and look long-term. Automation is tempting, but it has been feared as a job-killer ever since the industrial revolution began 250 years ago. Stick with this: today’s unprecedented suppression of US wages has been caused by a wave of excess labor hitting global markets at the end of the Cold War, and a second wave of excessive investment in productive capacity, especially in China.
Chair Yellen’s top problem: the labor imbalance will stabilize without warning, global wages rising. Working-age populations are shrinking in all the developed world and China, and the emerging world does not have the social capital to replace them.
Friday, February 21, 2014
Capital Markets
By Louis S. Barnes Friday, February 21st, 2014
Here in the US, market participants are fidgeting and annoyed by the weather distortion of incoming data. Three housing reports of January-February activity were of course weak, but meaningless, the same for snapshots of manufacturing activity in New York and Philly-Fed. The longer we go without good information, the larger the market movement when the ear muffs and fogged goggles come off.
On Wednesday afternoon the Fed released minutes of its January meeting, and this line stopped hearts for a couple of hours: “A few participants raised the possibility that it might be appropriate to increase the federal funds rate relatively soon.” By nightfall everyone understood that “the few” were presidents of Regional Feds (Plosser, George, Fisher…) not in the majority, and the dimmest group in modern memory.
Wednesday’s sale of WhatsApp — 55 employees, $8 million invested in the startup, negligible revenue — for $19 billion begs the old question. If I had paid attention in school, might I have amounted to something?
Dominant public commentary has the economy doing steadily better, and those thinkers seized on the NYFed’s quarterly report of consumer credit. Deleveraging complete! Consumers borrowing again!
I am not one of the bears, just an agnostic made skeptical by the drumbeat of failed optimism in the last five years. And grumpy about poor analysis. The growth in consumer credit is in three places. Car loans, in which the subprime share has tripled from 2009, back over $150 billion per year. People will default on mortgages before the car, and cars are easier to repo than houses. Then student loans, balances doubling in the same five years, in the aggregate over $1 trillion, but inherently defensive. Tuition has risen like nothing except the cost of health care, and every student loan borrower by definition does not have the money, nor an asset to secure with a better loan (any mortgage is better — lower rate, longer term, deductible).
The third category: mortgage balances grew by a hair in the first quarter since 2008 Doomsday. However, the $9.5 trillion outstanding is a high-variety laundry basket. Deleveraging? The $1.5 trillion reduction in outstandings has been due entirely to foreclosure, not reflective of households still with loans. In the refi frenzies past, some estimates had almost half of refis switching from thirty to fifteen-year term. That is legitimate deleveraging, a steady reduction of principal owed. The minor increase in net-new loans is not sufficient to fund healthy housing markets, and tens of millions of households are still under water, or credit-wrecked altogether.
Until we get some springtime data, the economic-growth argument is a standoff. The 10-year T-note’s hold near 2.75% says it’s wary, if not about overall growth underway, certainly the persistent flirt with deflation. And overseas….
Japan’s last-ditch money-printing is not going as expected. In the 4th quarter of 2013 its economy grew 0.3%, one-tenth the forecast. Its trade has swung to huge deficit, $25 billion last month, which ordinarily would require foreign financing to balance accounts. Since no one outside will buy rice-paper JGBs, the BOJ must print to finance, which should drive the yen to new lows, helping Japan’s exports at the expense of everybody else. Japan in the next month plans another large fiscal stimulus simultaneous with a contrary increase in sales taxes from 5% to 8%. The world’s third-largest economy in counterproductive chaos is more than unsettling.
In China, just three things: the HSBC index of its manufacturing, kin to our PMI indices, at 48.3 fell farther into contraction in a seven-month slide. Forecasters still call for a 7% GDP increase this year. Third, despite emphasis in limiting credit the PBOC said credit in January had risen at an 18% annual pace.
Kiev is a two-day drive from Sochi, the all-time Potemkin Village. Ukraine is aflame because Tsar Vladimir saw in its economic weakness a chance to snatch back an escaped province. In the old days, dangerous for us all. Now, the toothless decadence of both Russia and Europe leaves it a shabby, bloody, shadow-play of empires gone.
Here in the US, market participants are fidgeting and annoyed by the weather distortion of incoming data. Three housing reports of January-February activity were of course weak, but meaningless, the same for snapshots of manufacturing activity in New York and Philly-Fed. The longer we go without good information, the larger the market movement when the ear muffs and fogged goggles come off.
On Wednesday afternoon the Fed released minutes of its January meeting, and this line stopped hearts for a couple of hours: “A few participants raised the possibility that it might be appropriate to increase the federal funds rate relatively soon.” By nightfall everyone understood that “the few” were presidents of Regional Feds (Plosser, George, Fisher…) not in the majority, and the dimmest group in modern memory.
Wednesday’s sale of WhatsApp — 55 employees, $8 million invested in the startup, negligible revenue — for $19 billion begs the old question. If I had paid attention in school, might I have amounted to something?
Dominant public commentary has the economy doing steadily better, and those thinkers seized on the NYFed’s quarterly report of consumer credit. Deleveraging complete! Consumers borrowing again!
I am not one of the bears, just an agnostic made skeptical by the drumbeat of failed optimism in the last five years. And grumpy about poor analysis. The growth in consumer credit is in three places. Car loans, in which the subprime share has tripled from 2009, back over $150 billion per year. People will default on mortgages before the car, and cars are easier to repo than houses. Then student loans, balances doubling in the same five years, in the aggregate over $1 trillion, but inherently defensive. Tuition has risen like nothing except the cost of health care, and every student loan borrower by definition does not have the money, nor an asset to secure with a better loan (any mortgage is better — lower rate, longer term, deductible).
The third category: mortgage balances grew by a hair in the first quarter since 2008 Doomsday. However, the $9.5 trillion outstanding is a high-variety laundry basket. Deleveraging? The $1.5 trillion reduction in outstandings has been due entirely to foreclosure, not reflective of households still with loans. In the refi frenzies past, some estimates had almost half of refis switching from thirty to fifteen-year term. That is legitimate deleveraging, a steady reduction of principal owed. The minor increase in net-new loans is not sufficient to fund healthy housing markets, and tens of millions of households are still under water, or credit-wrecked altogether.
Until we get some springtime data, the economic-growth argument is a standoff. The 10-year T-note’s hold near 2.75% says it’s wary, if not about overall growth underway, certainly the persistent flirt with deflation. And overseas….
Japan’s last-ditch money-printing is not going as expected. In the 4th quarter of 2013 its economy grew 0.3%, one-tenth the forecast. Its trade has swung to huge deficit, $25 billion last month, which ordinarily would require foreign financing to balance accounts. Since no one outside will buy rice-paper JGBs, the BOJ must print to finance, which should drive the yen to new lows, helping Japan’s exports at the expense of everybody else. Japan in the next month plans another large fiscal stimulus simultaneous with a contrary increase in sales taxes from 5% to 8%. The world’s third-largest economy in counterproductive chaos is more than unsettling.
In China, just three things: the HSBC index of its manufacturing, kin to our PMI indices, at 48.3 fell farther into contraction in a seven-month slide. Forecasters still call for a 7% GDP increase this year. Third, despite emphasis in limiting credit the PBOC said credit in January had risen at an 18% annual pace.
Kiev is a two-day drive from Sochi, the all-time Potemkin Village. Ukraine is aflame because Tsar Vladimir saw in its economic weakness a chance to snatch back an escaped province. In the old days, dangerous for us all. Now, the toothless decadence of both Russia and Europe leaves it a shabby, bloody, shadow-play of empires gone.
Friday, February 14, 2014
Capital Markets
By Louis S. Barnes Friday, February 14th, 2014
A rational week. What a relief. The steep drops in interest rates and stocks stopped just where charts said they should, and both rebounded in predictable perfection, now dead neutral. US snowboarders should land so well.
Janet Yellen gave her first formal testimony as Fed… Chairman? Chairwoman? Chairperson? Madame Chairman? None of the above. In the self-effacing dignity and directness which will mark her years on the job, she has chosen officially… Chair.
A run of weak economic data is still dismissed as just another weather report, especially by Eastern-centric media. Atlanta has had a tough stretch, true. And it’s been cold in the upper Midwest, but ice-fishing is a hobby oop der. Philly’s all-time record four, six-inch snowstorms? Please. Wimps.
So, a .4% decline in January retail sales? Just the weather. Today the worst factory production report since 2009, despite a surge in utility output? NOAA says this has been the coldest winter since way back in 2011.
So if all is in balance, waiting for spring, no technical lean in markets, when and what will tip them over? Nobody ever knows when, but “what” has some clarity. The US economy in the near term is not likely to surprise. Odds are big that we plod and wobble on a 2.5% GDP centerline. If we’re going to get a near-term surprise, odds favor overseas, but there is no handicapping those contestants. The inability to see one of those coming is the main reason they have so much effect.
One source of surprise stands out above all others. One of Chair Yellen’s most important forecasting tools is MIA: the rate of unemployment in this cycle will not give advance notice of rising incomes. Fed success always depends on pre-emption, and in a normal cycle it always begins to tighten as unemployment falls to NAIRU.
Hah. Tricked the kids. We have not had to deal with these terms since the ’90s. The Non-Accelerating Inflation Rate of Unemployment — go below, get inflation. Great concept, although nobody knows how to nail the threshold exactly. Related to the Phillips Curve, the inescapable inverse relationship between incomes and inflation.
Less than a year ago the Fed identified 6.5% as the rate of unemployment at which it would consider raising the Fed funds rate from zero for the first time since 2008, intending to reassure markets that it would not tighten for a long time. Unemployment then dropped faster than anyone thought possible, inducing fear of Fed action, and an embarrassing retreat by the Fed. Chair Yellen quietly cancelled the concept in her testimony, pointing to broader measures of the labor market.
In previously reliable theory, as unemployment falls workers become scarce and employers begin to bid up wages. Initial stages of bidding-up are okay, part of recovery, but if bidding intensifies and wages rise beyond increases in productivity, that defines dangerous inflation. Hence the Fed’s wish to tighten just enough in early stages to prevent premature overheating.
Anybody out there see aggressive bidding up of wages? Specialized IT. ObamaCare programmers. The Seahawks’ defense. Health care invoicers. Snow removal.
Several common theories offer common explanations. The ‘Boomers are mailing it in, many early. Skills mismatch: we don’t need wrench-turners on the line, we do need robot repairmen. Automation. The 1% has all the chips and won’t play. Too much government, or not enough.
Look elsewhere, and look long-term. Automation is tempting, but it has been feared as a job-killer ever since the industrial revolution began 250 years ago. Stick with this: today’s unprecedented suppression of US wages has been caused by a wave of excess labor hitting global markets at the end of the Cold War, and a second wave of excessive investment in productive capacity, especially in China.
Chair Yellen’s top problem: the labor imbalance will stabilize without warning, global wages rising. Working-age populations are shrinking in all the developed world and China, and the emerging world does not have the social capital to replace them.
A rational week. What a relief. The steep drops in interest rates and stocks stopped just where charts said they should, and both rebounded in predictable perfection, now dead neutral. US snowboarders should land so well.
Janet Yellen gave her first formal testimony as Fed… Chairman? Chairwoman? Chairperson? Madame Chairman? None of the above. In the self-effacing dignity and directness which will mark her years on the job, she has chosen officially… Chair.
A run of weak economic data is still dismissed as just another weather report, especially by Eastern-centric media. Atlanta has had a tough stretch, true. And it’s been cold in the upper Midwest, but ice-fishing is a hobby oop der. Philly’s all-time record four, six-inch snowstorms? Please. Wimps.
So, a .4% decline in January retail sales? Just the weather. Today the worst factory production report since 2009, despite a surge in utility output? NOAA says this has been the coldest winter since way back in 2011.
So if all is in balance, waiting for spring, no technical lean in markets, when and what will tip them over? Nobody ever knows when, but “what” has some clarity. The US economy in the near term is not likely to surprise. Odds are big that we plod and wobble on a 2.5% GDP centerline. If we’re going to get a near-term surprise, odds favor overseas, but there is no handicapping those contestants. The inability to see one of those coming is the main reason they have so much effect.
One source of surprise stands out above all others. One of Chair Yellen’s most important forecasting tools is MIA: the rate of unemployment in this cycle will not give advance notice of rising incomes. Fed success always depends on pre-emption, and in a normal cycle it always begins to tighten as unemployment falls to NAIRU.
Hah. Tricked the kids. We have not had to deal with these terms since the ’90s. The Non-Accelerating Inflation Rate of Unemployment — go below, get inflation. Great concept, although nobody knows how to nail the threshold exactly. Related to the Phillips Curve, the inescapable inverse relationship between incomes and inflation.
Less than a year ago the Fed identified 6.5% as the rate of unemployment at which it would consider raising the Fed funds rate from zero for the first time since 2008, intending to reassure markets that it would not tighten for a long time. Unemployment then dropped faster than anyone thought possible, inducing fear of Fed action, and an embarrassing retreat by the Fed. Chair Yellen quietly cancelled the concept in her testimony, pointing to broader measures of the labor market.
In previously reliable theory, as unemployment falls workers become scarce and employers begin to bid up wages. Initial stages of bidding-up are okay, part of recovery, but if bidding intensifies and wages rise beyond increases in productivity, that defines dangerous inflation. Hence the Fed’s wish to tighten just enough in early stages to prevent premature overheating.
Anybody out there see aggressive bidding up of wages? Specialized IT. ObamaCare programmers. The Seahawks’ defense. Health care invoicers. Snow removal.
Several common theories offer common explanations. The ‘Boomers are mailing it in, many early. Skills mismatch: we don’t need wrench-turners on the line, we do need robot repairmen. Automation. The 1% has all the chips and won’t play. Too much government, or not enough.
Look elsewhere, and look long-term. Automation is tempting, but it has been feared as a job-killer ever since the industrial revolution began 250 years ago. Stick with this: today’s unprecedented suppression of US wages has been caused by a wave of excess labor hitting global markets at the end of the Cold War, and a second wave of excessive investment in productive capacity, especially in China.
Chair Yellen’s top problem: the labor imbalance will stabilize without warning, global wages rising. Working-age populations are shrinking in all the developed world and China, and the emerging world does not have the social capital to replace them.
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