Friday, October 30, 2015
Capital Markets Update
By Louis S. Barnes Friday, October 30th, 2015
Long-term rates rose this week, not a lot, but since summer rates have not been able to penetrate the lows revisited in October. I would say that confusion about the future course deepened, but it can’t get any deeper.
Long rates rose a little after the Fed’s meeting broke on Wednesday and it issued another tortured statement, but the rate-spike was the next day, reacting to a third-quarter GDP report better than expected. Maybe it was.
In the old story, a person caught by a spouse in bed with someone other than the spouse says, “Are you going to believe me, or your lyin’ eyes?”
The “advance” Q3 number, to be revised: 1.5% growth, roughly as expected and unimpressive. However, consumer spending improved a good trend, up 3.2%, and had it not been for falling inventories overall GDP would have grown about 3.0%.
This inventory business should always be short-term back-averaged to find trend. Q2 GDP was 3.9%, inclusive of an inventory build which unwound in Q3, six-month net GDP running just above 2%. The same thing happens with trade figures: if consumers buy the products of other nations, our GDP looks soft but the economy itself is okay.
On Thursday the bond market was spooked by that strong consumer spending, and another internal element of the GDP report. The Bureau of Economic Analysis said that real disposable personal income in Q3 rose by 3.5% compared to a 1.2% gain in Q2. Uh-oh. The only reason the Fed has held back from liftoff has been dead incomes. If they are rising, the wolf really is at the door.
Today, from the same BEA: in Q3 wages grew by 0.2%, the lowest quarter since 1982. The Employment Cost Index, inclusive of labor costs beyond wages, rose only 0.6%, year-over-year 2.1%. September personal income decelerated to 0.1% growth. Where is the income to support this allegedly strong consumer?
Or the rising prices, if the consumer is spending beyond production? The Q3 personal consumption expenditure GDP deflator (apologies — the Fed’s favorite, “deflates” nominal GDP to an after-inflation figure) was 1.2%, and in September decelerated to 0.1% — not a hell of a lot more than half of the Fed’s target.
Confirmations from other data? Orders for durable goods tanked, September down .4%, and August revised down from zero to minus .9%, probably related to a strong dollar. Housing data is okay, but slowing in both volume and price gains. Housing data sources are unreliable, but there is no inflation to be feared from home prices rising somewhere between 3% and 5%, depending on the estimator. Rising prices and low inventory should encourage construction, but it’s still slow relative to pent-up demand, except for apartments.
Back to the Fed. Post-meeting statements began under Greenspan in February 1994, over his objection. Previously the Fed announced policy changes only by the actions of its traders — you figure out what we have in mind. That first post-meeting statement was 99 words; on Wednesday the Fed issued 515, murky and pointless rambling. Strunk & White, The Elements of Style: “Vigorous writing is concise. Remove unnecessary words.” I should send my Dad’s tattered copy to Yellen.
On Wednesday the Fed took out the only worthwhile sentence from the prior meeting’s statement: “Recent global economic and financial developments may restrain economic activity somewhat and are likely to put further downward pressure on inflation in the near term.” Any economic observer knows that the world outside the US is in trouble and exerting deflationary pressure here. What, that no longer matters?
I like Yellen, always have, and respect many of her colleagues. The Fed is divided into three camps, hawk, dove, and not sure — and the camps are farther apart than any time in my memory. They are on the edge of screwing this up. If the economy continues at its current pace, the risks of tightening far outweigh the risks of not. And if the economy decelerates as it appeared August-September, they and all of this “Wolf!” will look silly. And that’s unfortunate for all of us. Either way.
Long-term rates rose this week, not a lot, but since summer rates have not been able to penetrate the lows revisited in October. I would say that confusion about the future course deepened, but it can’t get any deeper.
Long rates rose a little after the Fed’s meeting broke on Wednesday and it issued another tortured statement, but the rate-spike was the next day, reacting to a third-quarter GDP report better than expected. Maybe it was.
In the old story, a person caught by a spouse in bed with someone other than the spouse says, “Are you going to believe me, or your lyin’ eyes?”
The “advance” Q3 number, to be revised: 1.5% growth, roughly as expected and unimpressive. However, consumer spending improved a good trend, up 3.2%, and had it not been for falling inventories overall GDP would have grown about 3.0%.
This inventory business should always be short-term back-averaged to find trend. Q2 GDP was 3.9%, inclusive of an inventory build which unwound in Q3, six-month net GDP running just above 2%. The same thing happens with trade figures: if consumers buy the products of other nations, our GDP looks soft but the economy itself is okay.
On Thursday the bond market was spooked by that strong consumer spending, and another internal element of the GDP report. The Bureau of Economic Analysis said that real disposable personal income in Q3 rose by 3.5% compared to a 1.2% gain in Q2. Uh-oh. The only reason the Fed has held back from liftoff has been dead incomes. If they are rising, the wolf really is at the door.
Today, from the same BEA: in Q3 wages grew by 0.2%, the lowest quarter since 1982. The Employment Cost Index, inclusive of labor costs beyond wages, rose only 0.6%, year-over-year 2.1%. September personal income decelerated to 0.1% growth. Where is the income to support this allegedly strong consumer?
Or the rising prices, if the consumer is spending beyond production? The Q3 personal consumption expenditure GDP deflator (apologies — the Fed’s favorite, “deflates” nominal GDP to an after-inflation figure) was 1.2%, and in September decelerated to 0.1% — not a hell of a lot more than half of the Fed’s target.
Confirmations from other data? Orders for durable goods tanked, September down .4%, and August revised down from zero to minus .9%, probably related to a strong dollar. Housing data is okay, but slowing in both volume and price gains. Housing data sources are unreliable, but there is no inflation to be feared from home prices rising somewhere between 3% and 5%, depending on the estimator. Rising prices and low inventory should encourage construction, but it’s still slow relative to pent-up demand, except for apartments.
Back to the Fed. Post-meeting statements began under Greenspan in February 1994, over his objection. Previously the Fed announced policy changes only by the actions of its traders — you figure out what we have in mind. That first post-meeting statement was 99 words; on Wednesday the Fed issued 515, murky and pointless rambling. Strunk & White, The Elements of Style: “Vigorous writing is concise. Remove unnecessary words.” I should send my Dad’s tattered copy to Yellen.
On Wednesday the Fed took out the only worthwhile sentence from the prior meeting’s statement: “Recent global economic and financial developments may restrain economic activity somewhat and are likely to put further downward pressure on inflation in the near term.” Any economic observer knows that the world outside the US is in trouble and exerting deflationary pressure here. What, that no longer matters?
I like Yellen, always have, and respect many of her colleagues. The Fed is divided into three camps, hawk, dove, and not sure — and the camps are farther apart than any time in my memory. They are on the edge of screwing this up. If the economy continues at its current pace, the risks of tightening far outweigh the risks of not. And if the economy decelerates as it appeared August-September, they and all of this “Wolf!” will look silly. And that’s unfortunate for all of us. Either way.
Friday, October 23, 2015
Capital Markets Update
By Louis S. Barnes Friday, October 23rd, 2015
In a week with little new US data (apartments hot, single family not), bonds and mortgages stayed the same — which is remarkable given the performance of stocks. The 10-year T-note could not break below 2.00%, mortgages just under 4.00%, but unchanged all through October while the Dow rocketed 500 points in the last two days.
These two markets usually trade opposite each other, stocks up on good economic news, bonds down in price and up in yield, and vice-versa on bad news. Good news should help corporate earnings and stocks, but any good news brings fear to bonds that the Fed will do something awful.
I have worked in or near credit markets for forty years, and like all colleagues regard the stock market as cognitively impaired and bi-polar, heavily overweighted to the manic side. Those people reciprocate, viewing us as depressed and void of imagination. How could these two pathologies join minds this week?
The first stock up-burst coincided with ECB chief Mario Draghi’s suggestion that he would expand its QE and perhaps drive euro-zone rates more deeply negative. The German 10-year fell in yield from 0.63% to 0.51%, pulling downward on US 10s. Meanwhile stocks interpreted more central bank easing as economic stimulus good for them. Then today, the People’s Bank of China cut by surprise its overnight and reserve rates — more glee for stocks, but bonds holding.
Who is right here? My bias declared, of course bonds are right, and stocks don’t get it. In a normal world, big central bank stimulus would be good news for stocks, but this world is not at all normal. Unprecedented, fantastic stimulus by the ECB, PBOC, and BOJ has done nothing more than to hold up the economic floor and to buy time.
Europe is caught in its own wire and trenches, the euro a proxy for the Western Front in 1917. Germany profiteers and the weak cannot recover while the ECB merely maintains the meat-grinder — a situation unique to Europe, but real recovery impossible no matter what the ECB does.
China is different. It has hit its head on the ceiling of investment-led growth, and reforms attempted in the last year have all backfired. On Monday it reported Q3 growth slipping below its imaginary 7%, to 6.9%. Other indicators suggest a far deeper slowdown: as of September, industrial production is down 5.7% year-over-year, and fixed investment is off 6.8%.
More to the story: unadjusted for inflation, reported China growth was only 6.2%. China is in deflation, an upside-down adjuster. Factory prices have fallen there for 43-straight months. As China in some desperation tries to keep the machine going, it holds its export volume (down only 3.7% YTD) by predatory pricing, exporting its deflation and unemployment to the world while constricting its imports. Double damage.
Stocks misinterpret China stimulus even more than European. The weaker China becomes internally, the more harm it can do to the rest of us. I do hope that more people will understand that ongoing global economic mire has far more to do with the rise of China and its misbehavior than the financial crisis.
Okay, if it’s that ugly, why didn’t bonds and mortgages do better instead of just holding? Because of the great disconnect of our time: were it not for the rest of the world’s self-entanglement, the US would be rocking. Fed-haters here include automatically in their screeds: “The Fed’s stimulus has failed to produce economic growth.” Horsefeathers. We have been growing so well that the Fed fears overheating, its leadership dying for an excuse to lift off, and might even be right.
Take some credit. No, not the Fed — take credit for US flexibility, and endurance of pain. We have recovered from the Great Recession as nowhere else, our government dysfunctional throughout, because we alone could inflict millions of foreclosures and job losses, adjust and move forward. The rest of the world is politically and culturally stuck.
Friday, October 16, 2015
Capital Markets Update
By Louis S. Barnes Friday, October 16th, 2015
Non-junkies find the Fed about as interesting as other non-junkies enjoy presidential debates, but I promise that Fed issues are vastly more important. And current. Long-term rates fell this week as a direct result of Fed disarray, the 10-year T-note below 2.00% briefly, and the prospect of Fed liftoff receding over the horizon.
Before the Fed whys and wherefores, some data. The US is not recessionary, but 3rd quarter GDP going into the 4th is far weaker than the 2nd. Consumer spending continues to cook along at 3% annual growth, but the soufflé is an unsustainable binge on cars, and other consumers forced to over-spend on rent and medical care.
Core CPI ticked up to 1.9% year-over-year, but driven by overweighted “cost of shelter” measured by rents running up at twice the pace of wages (that’s in part why the Fed prefers the PCE inflation measure, which is 1.2%). Too many Millennials can’t afford to buy homes, and face gouging in short-supplied rental markets.
Medical care datum: Medicare Part B charges for one-third of retirees may jump 52% next year, while their Social Security benefits receive no cost of living adjustment. That pattern is a proxy for at least three-quarters of Americans: wages rising 2% per year, medical care rising three times as fast. And ignored by our political leadership: Democrats are self-enthralled by Obamacare, and Republicans hate government so much that they refuse to intervene in predatory medical pricing.
Consumer spending is hollow also because we’re sucking up cheap imports and producing less here — that’s the gap between 3% consumer spending and fading GDP. The ordinary end to such a pattern in any economy is rising interest rates as it becomes necessary to borrow the money from overseas to fund the purchase of imports. Today, the world will buy any volume of US debt — good credit, strong dollar, Fed lifting off.
China’s trade surplus jumped to $60.3 billion in September, more than half with us. China’s imports from the world in 2015 have fallen 20.4%, overall exports also down, but only 3.7%. We can survive the hollowing damage for a while, but the rest of the world feels it now, acutely, and that damage feeds back to us also. The number of empty containers leaving Oakland and Long Beach — empty of exports, to be refilled with others’ production and sent back here — increased more than 20% in 2015.
Now the Fed. Usually there is a humorous approach, or wry, but the episode unfolding is not funny. Perhaps because the Fed has for years been the only functioning branch of government. Its deepening dysfunction has two sources: an economic situation without precedent and possibly beyond the Fed’s powers to manage or even meliorate, and second the appearance of internal failure by Chair Yellen.
The second is worse by far. In his two terms, Bernanke hardly missed a step, and his command was clear. The same was true for Greenspan, but his over-long stay (17 years) and excess of command led to his two policy errors, with which few dared to disagree: light overwatch of Wall Street, and the credit binge. The last time like this one: Volcker is a folk hero today, but by the end of his 1979-1987 tour his narrow, punishing, and imperious ways led to full-scale revolt inside the Fed and his resignation.
The Fed has become far too tolerant of voices dissenting in public, allowed in the name of transparency, and to let minor figures blow off steam, faculty-club style, usually presidents of regional Feds. More serious than dissent: throughout Yellen’s first year the Fed has looked silly by insisting on imminent liftoff based on bad forecasts.
Yellen on September 24 gave a definitive speech trying to assert control, but an awful one, far too long and void of insight. This week the rebellion. Two Fed governors, Daniel Tarullo and Lael Brainerd — presidential appointments confirmed by Congress, usually requiring alien invasion to disagree with the Chair — laid down blunt, even dismissive disagreement with Yellen and liftoff. Ms. Brainerd’s speech is as well-thought as anything out of the Fed in several years; Tarullo’s was rib-breaking direct.
This disarray is not about manners. Nor embarrassment for Yellen, backing away from a year of “Wolf!” Leadership failure dramatically increases the risk of policy error.
Non-junkies find the Fed about as interesting as other non-junkies enjoy presidential debates, but I promise that Fed issues are vastly more important. And current. Long-term rates fell this week as a direct result of Fed disarray, the 10-year T-note below 2.00% briefly, and the prospect of Fed liftoff receding over the horizon.
Before the Fed whys and wherefores, some data. The US is not recessionary, but 3rd quarter GDP going into the 4th is far weaker than the 2nd. Consumer spending continues to cook along at 3% annual growth, but the soufflé is an unsustainable binge on cars, and other consumers forced to over-spend on rent and medical care.
Core CPI ticked up to 1.9% year-over-year, but driven by overweighted “cost of shelter” measured by rents running up at twice the pace of wages (that’s in part why the Fed prefers the PCE inflation measure, which is 1.2%). Too many Millennials can’t afford to buy homes, and face gouging in short-supplied rental markets.
Medical care datum: Medicare Part B charges for one-third of retirees may jump 52% next year, while their Social Security benefits receive no cost of living adjustment. That pattern is a proxy for at least three-quarters of Americans: wages rising 2% per year, medical care rising three times as fast. And ignored by our political leadership: Democrats are self-enthralled by Obamacare, and Republicans hate government so much that they refuse to intervene in predatory medical pricing.
Consumer spending is hollow also because we’re sucking up cheap imports and producing less here — that’s the gap between 3% consumer spending and fading GDP. The ordinary end to such a pattern in any economy is rising interest rates as it becomes necessary to borrow the money from overseas to fund the purchase of imports. Today, the world will buy any volume of US debt — good credit, strong dollar, Fed lifting off.
China’s trade surplus jumped to $60.3 billion in September, more than half with us. China’s imports from the world in 2015 have fallen 20.4%, overall exports also down, but only 3.7%. We can survive the hollowing damage for a while, but the rest of the world feels it now, acutely, and that damage feeds back to us also. The number of empty containers leaving Oakland and Long Beach — empty of exports, to be refilled with others’ production and sent back here — increased more than 20% in 2015.
Now the Fed. Usually there is a humorous approach, or wry, but the episode unfolding is not funny. Perhaps because the Fed has for years been the only functioning branch of government. Its deepening dysfunction has two sources: an economic situation without precedent and possibly beyond the Fed’s powers to manage or even meliorate, and second the appearance of internal failure by Chair Yellen.
The second is worse by far. In his two terms, Bernanke hardly missed a step, and his command was clear. The same was true for Greenspan, but his over-long stay (17 years) and excess of command led to his two policy errors, with which few dared to disagree: light overwatch of Wall Street, and the credit binge. The last time like this one: Volcker is a folk hero today, but by the end of his 1979-1987 tour his narrow, punishing, and imperious ways led to full-scale revolt inside the Fed and his resignation.
The Fed has become far too tolerant of voices dissenting in public, allowed in the name of transparency, and to let minor figures blow off steam, faculty-club style, usually presidents of regional Feds. More serious than dissent: throughout Yellen’s first year the Fed has looked silly by insisting on imminent liftoff based on bad forecasts.
Yellen on September 24 gave a definitive speech trying to assert control, but an awful one, far too long and void of insight. This week the rebellion. Two Fed governors, Daniel Tarullo and Lael Brainerd — presidential appointments confirmed by Congress, usually requiring alien invasion to disagree with the Chair — laid down blunt, even dismissive disagreement with Yellen and liftoff. Ms. Brainerd’s speech is as well-thought as anything out of the Fed in several years; Tarullo’s was rib-breaking direct.
This disarray is not about manners. Nor embarrassment for Yellen, backing away from a year of “Wolf!” Leadership failure dramatically increases the risk of policy error.
Friday, October 9, 2015
Capital Markets Update
By Louis S. Barnes Friday, October 9th, 2015
Trying as always to grasp the present, it seems to me the financial markets today reflect a world wandering through an odd passage. Not aimless (plenty of people have aims… too many), but without direction in two senses: not headed anywhere in particular, and certainly not led by anybody greatly worth following.
The financial markets are preoccupied by Fed leadership in the absence of any other. Recent Treasury Secretaries have been a collective void (back to Rubin in 2000), while Congresses and White Houses have been committed to fruitless disagreement.
The Fed has been pressed forward too far, doing the best it can to describe its response to an estimated future economy. Today’s employment report is Fed-confounding. Job growth may have decelerated from the 200,000-monthly range to 150,000, or may be distorted by seasonal adjustments. Unemployment near 5% may soon produce wage-paying competition among employers, but has not — which should embarrass Fed forecasters into alternate thinking, but has not.
The stock market has no idea what to do, declining for months because earnings are falling. Early today the Dow went down 250 points because the jobs data says the economy has slowed, then back up 200 because the slowing may hold the Fed at bay.
The bond market has held in contempt all of the Fed’s threats, long-term rates herkily-jerkily dropping since July. The 10-year T-note is now below 2.00%, and mortgages back in the threes. But is that bond-buying because of US weakness, or overseas fear and foreign money coming here? Vladimir’s new adventure is disturbing, although it’s hard to see how even he can add to Middle East instability. Europe is giving new and transcendent meaning to “passive.” China? Who knows if they don’t? The emerging world is again submerging in debt as its exuberant horizon re-recedes.
Stick with the Fed. Last week I deconstructed Chair Yellen’s overlarge and defensive speech. This week it’s John Williams’ turn. He is Yellen’s replacement as president of the important San Francisco Fed (the regionals reflect 1912 America, the Frisco Fed the only one of twelve west of Dallas), a dove and in Yellen’s policy camp. He gave a speech last Monday, and was so impressed that he gave it again Thursday.
One part is fun, applicable to our directionless world: “British Prime Minister Harold Macmillan said when asked what worried him most: ‘Events, dear boy, events.’”
Williams’ concluding paragraphs are important, frightening, and overlooked (with all self-caution about allegedly unique discoveries). His thread follows similar lines from Rosengren (Boston), Dudley (NY), the Fed staff, and Yellen herself, but in stark and oblivious language. Relative to reasonable understanding of our economy today, professional and civilian alike, a complete, staggering Looney-Tune.
Williams is worried about a bubble: “…High asset prices, especially in real estate… the house price-to-rent ratio is where it was in 2003, and house prices are rapidly rising.” Sir, um… you are the only person in or out of authority to see this bubble.
Then, “…What we want to see is an economy that’s growing at a steady pace of around 2 percent. If jobs and growth kept the same pace as last year, we would seriously overshoot our mark… it’s actually desirable, that the pace is slowing.”
Last year’s economy was too hot? Really? The Fed’s theoretical speed limit is 2% — 1% population growth plus 1% productivity. Nice theory. But the game is reality.
“Looking to the future, we’re going to need at most 100,000 new jobs each month.”
Imagine in a current debate among presidential aspirants, either party, or next year for Congress, or a governorship, or County Coroner… a candidate saying that we need to cut job growth in half. That person would never be heard from again. But that’s what the Fed intends. Isolation does funny things to people.
The bond market is trading as though expecting the US to slow, and any “normalizing” by the Fed to knock it over. If the Fed internally — the doves! — is on Williams’ track, better they be silent, and after tightening go outside only when wearing Groucho Marx eyeglasses, eyebrows, and nose.
Friday, October 2, 2015
Capital Markets Update
By Louis S. Barnes Friday, October 2nd, 2015
Well, thank heavens that’s over.
Not. It’s never over. Which is a good place to begin. Start by sorting Wall Street propaganda and bad theories in general from clear thinking about what’s actually happening and ahead.
Bad idea number one is just silly, not damaging: the Fed’s September pass creates uncertainty. There is always a market crew perched in highchairs, hammering sippy-cups and rubber spoons and squalling, “Now! I wanna know NOW! When! How much!” Pay no attention to these overage toddlers. Uncertainty is the deal, markets and life. It’s not the Fed’s job to bring certitude. There isn’t any. Your Mommy and Daddy are the center of the universe when you are two, but even as teenagers most of us get the glimmer that we’re on our own.
Bad idea number two is corrosive. Now a semi-political issue found commonly right-side, among anti-government types but also from pure-market libertarians: we’re better off without the Fed. Or with a mechanical Fed.
Third is worse. Since all this QE and ZIRP (zero interest rate policy) has not brought a strong recovery, the Fed’s experiments have failed and never should have been tried in the first place. Reality: a strong recovery would have been nice, but the Fed’s objective was to prevent depression. I can’t prove that it did, but it’s evident that we didn’t have one (yet), and none of these arch critics can prove what would have happened if the Fed had been inert. I can testify to the Fall 2008 mass of soiled undies, and the great relief at the QE announcement in that Thanksgiving week.
Worst of all are the authoritative people in pinstripes who testify the economy would be better off with higher rates. This is financial creationism. The sort of people who think Fred Flintstone had a pet dinosaur. Yes, ZIRP has hurt savers and pension funds and others reliant on passive income, but the benefit of ZIRP to the rest of the economy far outweighs those sectors. Go further: find one case in any nation at any time in which a bad economy was rescued by higher interest rates.
To the heart of the matter: the Fed is peripheral, now. By the way, so is the stock market. Oh, if it crashed the Fed would intervene in some ways, as in 1987, but it’s not the center of the universe, either. Markets do matter to the Fed, but centrality changes from time to time. In 2008 it was the collapse of mortgage credit. Today you can bet that Fed staffers not used to the job are watching international credit and liquidity as never before.
You can bet because the Fed said so on Thursday: “Recent global economic and financial developments may restrain economic activity somewhat and are likely to put further downward pressure on inflation in the near term.” The Fed has not given such weight to overseas conditions in nearly 20 years, but during the 1997-98 Asian-Russian meltdown, Greenspan gave us this: “It is just not credible that the United States can remain an oasis of prosperity unaffected by a world that is experiencing greatly increased stress.” We dodged that bullet in part because the Fed eased. At the time, a bubbling stock market needed a dose of tightening. Welcome to life at the Fed: pick your poison, every day.
The stock market may be overbought; if so, by excessive faith in emerging economies. Cars are overbought. Student loans. Nothing else. Home mortgages outstanding grew in Q2 for the first time in a decade, by 0.004%. Total bank credit is growing at the slowest pace in two years. The Fed has been engaged in that time in some closet tightening, and the outside world has tightened a great deal for the Fed.
Stick with Clinton’s Law: “It’s the economy….” Unfortunately, no longer just ours. We must watch the whole world while its second-largest economy misrepresents its condition and pursues guaranteed-to-fail top-down control. Thus we’re all dependent on inferential sources about China, from Chair Yellen all the way to our own highchairs.
The Fed will follow, not lead.
Well, thank heavens that’s over.
Not. It’s never over. Which is a good place to begin. Start by sorting Wall Street propaganda and bad theories in general from clear thinking about what’s actually happening and ahead.
Bad idea number one is just silly, not damaging: the Fed’s September pass creates uncertainty. There is always a market crew perched in highchairs, hammering sippy-cups and rubber spoons and squalling, “Now! I wanna know NOW! When! How much!” Pay no attention to these overage toddlers. Uncertainty is the deal, markets and life. It’s not the Fed’s job to bring certitude. There isn’t any. Your Mommy and Daddy are the center of the universe when you are two, but even as teenagers most of us get the glimmer that we’re on our own.
Bad idea number two is corrosive. Now a semi-political issue found commonly right-side, among anti-government types but also from pure-market libertarians: we’re better off without the Fed. Or with a mechanical Fed.
Third is worse. Since all this QE and ZIRP (zero interest rate policy) has not brought a strong recovery, the Fed’s experiments have failed and never should have been tried in the first place. Reality: a strong recovery would have been nice, but the Fed’s objective was to prevent depression. I can’t prove that it did, but it’s evident that we didn’t have one (yet), and none of these arch critics can prove what would have happened if the Fed had been inert. I can testify to the Fall 2008 mass of soiled undies, and the great relief at the QE announcement in that Thanksgiving week.
Worst of all are the authoritative people in pinstripes who testify the economy would be better off with higher rates. This is financial creationism. The sort of people who think Fred Flintstone had a pet dinosaur. Yes, ZIRP has hurt savers and pension funds and others reliant on passive income, but the benefit of ZIRP to the rest of the economy far outweighs those sectors. Go further: find one case in any nation at any time in which a bad economy was rescued by higher interest rates.
To the heart of the matter: the Fed is peripheral, now. By the way, so is the stock market. Oh, if it crashed the Fed would intervene in some ways, as in 1987, but it’s not the center of the universe, either. Markets do matter to the Fed, but centrality changes from time to time. In 2008 it was the collapse of mortgage credit. Today you can bet that Fed staffers not used to the job are watching international credit and liquidity as never before.
You can bet because the Fed said so on Thursday: “Recent global economic and financial developments may restrain economic activity somewhat and are likely to put further downward pressure on inflation in the near term.” The Fed has not given such weight to overseas conditions in nearly 20 years, but during the 1997-98 Asian-Russian meltdown, Greenspan gave us this: “It is just not credible that the United States can remain an oasis of prosperity unaffected by a world that is experiencing greatly increased stress.” We dodged that bullet in part because the Fed eased. At the time, a bubbling stock market needed a dose of tightening. Welcome to life at the Fed: pick your poison, every day.
The stock market may be overbought; if so, by excessive faith in emerging economies. Cars are overbought. Student loans. Nothing else. Home mortgages outstanding grew in Q2 for the first time in a decade, by 0.004%. Total bank credit is growing at the slowest pace in two years. The Fed has been engaged in that time in some closet tightening, and the outside world has tightened a great deal for the Fed.
Stick with Clinton’s Law: “It’s the economy….” Unfortunately, no longer just ours. We must watch the whole world while its second-largest economy misrepresents its condition and pursues guaranteed-to-fail top-down control. Thus we’re all dependent on inferential sources about China, from Chair Yellen all the way to our own highchairs.
The Fed will follow, not lead.
Friday, September 25, 2015
Capital Markets Update
By Louis S. Barnes Friday, September 25th, 2015
Sunday evening… imagine 10,000 years ago on an open steppe, your tribe witness to the rising of an oversized full moon, colored burnt or bloody, then darkening altogether. What could it mean? Famine, drought, flood, sickness…?
It means the Fed’s going to tighten, that’s what. (I’ll miss the celestial show: the Broncos kick off at moonrise. No telling what it means for them.)
This week was thin for US economic data. From overseas, news of deepening slowdown in China, and emerging distress (Brazil), but we knew that. Markets jittered, waiting for next week’s flash reports of September’s economy. If weak, next Friday’s employment data will be our last chance for a stay of execution by Chair Yellen.
The biggest story of the week is the hardest to interpret: Chair Yellen spoke yesterday after markets had closed. Beware Fed Chairs speaking late! They do that to minimize damage to markets, giving them a sleepless night to think things over. But Yellen was the one who looked exhausted yesterday, nearly fainting during her speech, rather like a shaman struggling to explain to her tribe a dim and rusted moon.
Deciphering speeches by Fed Chairs is an art form. They all occasionally speak at length but intentionally saying nothing, and even when saying something we have to dig content from a mass of cherished academic filler.
“Massive” hardly describes Yellen’s speech (www.federalreserve.com). In 11-point type, the text is ten pages long, followed by eleven pages of bibliography and notes, and another nine of graphs. More than filler: Fed Chairs must lay out their reasoning to defend their ground not just for markets, but to keep under control other unruly Fed officials. This speech feels defensive. Trying to say, don’t argue with me. Her predecessors kept the Fed governors and regional presidents under control by force of personality — and more important, by sheer intellect. Volcker was longer on muscle, and ultimately faced a revolt hastening his departure. Why embarrass yourself arguing economics with Greenspan or Bernanke? (Too bad, in the case of the former.)
Yellen’s colleagues are clearly restive. Perhaps half of her colleagues are more eager to lift off than she, and have had far too much to say about their disagreement.
Boiled down, here is her content. “…Two key points: that inflation is now much more stable than it used to be, and that it is currently running at a very low level.” Right. So, where did the old-time inflation come from, and go? “… In the late 1960s and 1970s… chronically overheated labor and product markets, the effects of the energy and food price shocks, and the emergence of an “inflationary psychology….”
Where is the missing inflation now? “…The current near-zero rate of inflation can mostly be attributed to the temporary effects of falling prices for energy and non-energy imports… moving back to 2 percent, accompanied by a temporary decline in unemployment slightly below the median estimate expected to prevail in the longer run.” That is a declaration of war. The Fed will soon be in the business of raising the unemployment rate, no matter how gentle this line appears: “The precise timing of the first increase… should have only minor implications for financial conditions…What matters… is the entire trajectory of short-term interest rates.”
In those lines she dismisses all new-age concerns and sticks to orthodox faith: nothing here or overseas matters as much as the job market. Wish her and us luck. Come off zero, fine. Ignore a badly impaired half of US citizens suppressing demand, and profound change in the global economy at your peril and ours. Much as I respect Yellen, instead of this whale-speech, we could have used a discussion of recent Fed errors in forecasting, and market rates at huge variance from the Fed’s intentions.
Related to the Fed by our need for good leadership, this week we learned of VW’s ethical perfidy, and John Boehner’s resignation. In some ways unlikable, and anyone to the left disliking his politics, Boehner reached the one job he ever wanted, used it to preserve functioning government, and has resigned in disgust at extremists.
We must do better than this.
Sunday evening… imagine 10,000 years ago on an open steppe, your tribe witness to the rising of an oversized full moon, colored burnt or bloody, then darkening altogether. What could it mean? Famine, drought, flood, sickness…?
It means the Fed’s going to tighten, that’s what. (I’ll miss the celestial show: the Broncos kick off at moonrise. No telling what it means for them.)
This week was thin for US economic data. From overseas, news of deepening slowdown in China, and emerging distress (Brazil), but we knew that. Markets jittered, waiting for next week’s flash reports of September’s economy. If weak, next Friday’s employment data will be our last chance for a stay of execution by Chair Yellen.
The biggest story of the week is the hardest to interpret: Chair Yellen spoke yesterday after markets had closed. Beware Fed Chairs speaking late! They do that to minimize damage to markets, giving them a sleepless night to think things over. But Yellen was the one who looked exhausted yesterday, nearly fainting during her speech, rather like a shaman struggling to explain to her tribe a dim and rusted moon.
Deciphering speeches by Fed Chairs is an art form. They all occasionally speak at length but intentionally saying nothing, and even when saying something we have to dig content from a mass of cherished academic filler.
“Massive” hardly describes Yellen’s speech (www.federalreserve.com). In 11-point type, the text is ten pages long, followed by eleven pages of bibliography and notes, and another nine of graphs. More than filler: Fed Chairs must lay out their reasoning to defend their ground not just for markets, but to keep under control other unruly Fed officials. This speech feels defensive. Trying to say, don’t argue with me. Her predecessors kept the Fed governors and regional presidents under control by force of personality — and more important, by sheer intellect. Volcker was longer on muscle, and ultimately faced a revolt hastening his departure. Why embarrass yourself arguing economics with Greenspan or Bernanke? (Too bad, in the case of the former.)
Yellen’s colleagues are clearly restive. Perhaps half of her colleagues are more eager to lift off than she, and have had far too much to say about their disagreement.
Boiled down, here is her content. “…Two key points: that inflation is now much more stable than it used to be, and that it is currently running at a very low level.” Right. So, where did the old-time inflation come from, and go? “… In the late 1960s and 1970s… chronically overheated labor and product markets, the effects of the energy and food price shocks, and the emergence of an “inflationary psychology….”
Where is the missing inflation now? “…The current near-zero rate of inflation can mostly be attributed to the temporary effects of falling prices for energy and non-energy imports… moving back to 2 percent, accompanied by a temporary decline in unemployment slightly below the median estimate expected to prevail in the longer run.” That is a declaration of war. The Fed will soon be in the business of raising the unemployment rate, no matter how gentle this line appears: “The precise timing of the first increase… should have only minor implications for financial conditions…What matters… is the entire trajectory of short-term interest rates.”
In those lines she dismisses all new-age concerns and sticks to orthodox faith: nothing here or overseas matters as much as the job market. Wish her and us luck. Come off zero, fine. Ignore a badly impaired half of US citizens suppressing demand, and profound change in the global economy at your peril and ours. Much as I respect Yellen, instead of this whale-speech, we could have used a discussion of recent Fed errors in forecasting, and market rates at huge variance from the Fed’s intentions.
Related to the Fed by our need for good leadership, this week we learned of VW’s ethical perfidy, and John Boehner’s resignation. In some ways unlikable, and anyone to the left disliking his politics, Boehner reached the one job he ever wanted, used it to preserve functioning government, and has resigned in disgust at extremists.
We must do better than this.
Friday, September 18, 2015
Capital Markets Update
By Louis S. Barnes Friday, September 18th, 2015
Well, thank heavens that’s over.
Not. It’s never over. Which is a good place to begin. Start by sorting Wall Street propaganda and bad theories in general from clear thinking about what’s actually happening and ahead.
Bad idea number one is just silly, not damaging: the Fed’s September pass creates uncertainty. There is always a market crew perched in highchairs, hammering sippy-cups and rubber spoons and squalling, “Now! I wanna know NOW! When! How much!” Pay no attention to these overage toddlers. Uncertainty is the deal, markets and life. It’s not the Fed’s job to bring certitude. There isn’t any. Your Mommy and Daddy are the center of the universe when you are two, but even as teenagers most of us get the glimmer that we’re on our own.
Bad idea number two is corrosive. Now a semi-political issue found commonly right-side, among anti-government types but also from pure-market libertarians: we’re better off without the Fed. Or with a mechanical Fed.
Third is worse. Since all this QE and ZIRP (zero interest rate policy) has not brought a strong recovery, the Fed’s experiments have failed and never should have been tried in the first place. Reality: a strong recovery would have been nice, but the Fed’s objective was to prevent depression. I can’t prove that it did, but it’s evident that we didn’t have one (yet), and none of these arch critics can prove what would have happened if the Fed had been inert. I can testify to the Fall 2008 mass of soiled undies, and the great relief at the QE announcement in that Thanksgiving week.
Worst of all are the authoritative people in pinstripes who testify the economy would be better off with higher rates. This is financial creationism. The sort of people who think Fred Flintstone had a pet dinosaur. Yes, ZIRP has hurt savers and pension funds and others reliant on passive income, but the benefit of ZIRP to the rest of the economy far outweighs those sectors. Go further: find one case in any nation at any time in which a bad economy was rescued by higher interest rates.
To the heart of the matter: the Fed is peripheral, now. By the way, so is the stock market. Oh, if it crashed the Fed would intervene in some ways, as in 1987, but it’s not the center of the universe, either. Markets do matter to the Fed, but centrality changes from time to time. In 2008 it was the collapse of mortgage credit. Today you can bet that Fed staffers not used to the job are watching international credit and liquidity as never before.
You can bet because the Fed said so on Thursday: “Recent global economic and financial developments may restrain economic activity somewhat and are likely to put further downward pressure on inflation in the near term.” The Fed has not given such weight to overseas conditions in nearly 20 years, but during the 1997-98 Asian-Russian meltdown, Greenspan gave us this: “It is just not credible that the United States can remain an oasis of prosperity unaffected by a world that is experiencing greatly increased stress.” We dodged that bullet in part because the Fed eased. At the time, a bubbling stock market needed a dose of tightening. Welcome to life at the Fed: pick your poison, every day.
The stock market may be overbought; if so, by excessive faith in emerging economies. Cars are overbought. Student loans. Nothing else. Home mortgages outstanding grew in Q2 for the first time in a decade, by 0.004%. Total bank credit is growing at the slowest pace in two years. The Fed has been engaged in that time in some closet tightening, and the outside world has tightened a great deal for the Fed.
Stick with Clinton’s Law: “It’s the economy….” Unfortunately, no longer just ours. We must watch the whole world while its second-largest economy misrepresents its condition and pursues guaranteed-to-fail top-down control. Thus we’re all dependent on inferential sources about China, from Chair Yellen all the way to our own highchairs.
The Fed will follow, not lead.
Well, thank heavens that’s over.
Not. It’s never over. Which is a good place to begin. Start by sorting Wall Street propaganda and bad theories in general from clear thinking about what’s actually happening and ahead.
Bad idea number one is just silly, not damaging: the Fed’s September pass creates uncertainty. There is always a market crew perched in highchairs, hammering sippy-cups and rubber spoons and squalling, “Now! I wanna know NOW! When! How much!” Pay no attention to these overage toddlers. Uncertainty is the deal, markets and life. It’s not the Fed’s job to bring certitude. There isn’t any. Your Mommy and Daddy are the center of the universe when you are two, but even as teenagers most of us get the glimmer that we’re on our own.
Bad idea number two is corrosive. Now a semi-political issue found commonly right-side, among anti-government types but also from pure-market libertarians: we’re better off without the Fed. Or with a mechanical Fed.
Third is worse. Since all this QE and ZIRP (zero interest rate policy) has not brought a strong recovery, the Fed’s experiments have failed and never should have been tried in the first place. Reality: a strong recovery would have been nice, but the Fed’s objective was to prevent depression. I can’t prove that it did, but it’s evident that we didn’t have one (yet), and none of these arch critics can prove what would have happened if the Fed had been inert. I can testify to the Fall 2008 mass of soiled undies, and the great relief at the QE announcement in that Thanksgiving week.
Worst of all are the authoritative people in pinstripes who testify the economy would be better off with higher rates. This is financial creationism. The sort of people who think Fred Flintstone had a pet dinosaur. Yes, ZIRP has hurt savers and pension funds and others reliant on passive income, but the benefit of ZIRP to the rest of the economy far outweighs those sectors. Go further: find one case in any nation at any time in which a bad economy was rescued by higher interest rates.
To the heart of the matter: the Fed is peripheral, now. By the way, so is the stock market. Oh, if it crashed the Fed would intervene in some ways, as in 1987, but it’s not the center of the universe, either. Markets do matter to the Fed, but centrality changes from time to time. In 2008 it was the collapse of mortgage credit. Today you can bet that Fed staffers not used to the job are watching international credit and liquidity as never before.
You can bet because the Fed said so on Thursday: “Recent global economic and financial developments may restrain economic activity somewhat and are likely to put further downward pressure on inflation in the near term.” The Fed has not given such weight to overseas conditions in nearly 20 years, but during the 1997-98 Asian-Russian meltdown, Greenspan gave us this: “It is just not credible that the United States can remain an oasis of prosperity unaffected by a world that is experiencing greatly increased stress.” We dodged that bullet in part because the Fed eased. At the time, a bubbling stock market needed a dose of tightening. Welcome to life at the Fed: pick your poison, every day.
The stock market may be overbought; if so, by excessive faith in emerging economies. Cars are overbought. Student loans. Nothing else. Home mortgages outstanding grew in Q2 for the first time in a decade, by 0.004%. Total bank credit is growing at the slowest pace in two years. The Fed has been engaged in that time in some closet tightening, and the outside world has tightened a great deal for the Fed.
Stick with Clinton’s Law: “It’s the economy….” Unfortunately, no longer just ours. We must watch the whole world while its second-largest economy misrepresents its condition and pursues guaranteed-to-fail top-down control. Thus we’re all dependent on inferential sources about China, from Chair Yellen all the way to our own highchairs.
The Fed will follow, not lead.
Friday, September 11, 2015
Capital Markets Update
By Louis S. Barnes Friday, September 11th, 2015
The financial world is paralyzed, waiting for the Fed next Thursday.
At the outset, hang on tight to one thing: the US economy is doing so well that if it were not for the rest of the world the Fed would have begun liftoff months or even years ago. We are not growing fast, our new GDP speed limit only about 2%, but jobs are plentiful, housing is entering a growth phase beyond recovery, and only wages are sticky. Wages and therefore inflation may stay stuck, but with unemployment crossing below 5% a 0% Fed is inappropriate.
My vote for next Thursday: lift .25% and see what happens. This fitful go/no-go and Groundhog Day debate is distracting from important things, like football.
The Fed may hold off because inflation forces are all pulling downward, and because there is no reliable way to measure the future impact on the US of an outside world in trouble. In the 1997-1998 “Asian Contagion,” the Fed panicked about global recession, but it turned out that overseas trouble was a benefit here, and the Fed’s easing poured gasoline on a stock-market bonfire. This time is different.
Europe is so sick that the ECB this week guaranteed additional and extended QE.
Then the BRICS, the emerging darlings of finance, investment, and bond and stock huckstering. “B” for Brazil, which this week submerged to junk bond status. Its currency is worth about half its value two years ago. Its government and upper-crust leadership have been exposed as completely corrupt. Its over-reliance on commodity exports has produced a structural fracture with no prospect of cyclical recovery. At some point a dead-varmint bounce, and social unrest likely.
“R” for Russia. Czar Vladimir made a pact with Russia’s worst impulses, and the bill is due. A gangster state, in which any successful entrepreneur will pay protection until a goon steals the whole business. All the weakness of any petro-state, with an otherwise shriveled economy, petro production itself starved of investment, and petro prices less than half the level necessary to keep the gangs going. Belly-crawling to China has been fruitless. Oil under $50, Vladimir has a couple of years before… the knock at his door?
“I” for India. The bright spot. Still growing, but the rupee in bad trouble because markets for its exports are in trouble. Its deepest weakness: the caste system and corruption blockade any prospect of widespread modernization and population control. May get some cyclical rebound, but structural issues are intractable.
Skipping to “S” for South Africa. Another busted commodity state, little of export merit otherwise, the rand in free-fall. Unresolved social issues.
Then “C” for China. Everybody gets the black box: the world’s second-largest economy, 1.3 billion people, the focus and funnel of world trade, but so thoroughly deceitful about its data that the world can’t tell what’s going on inside. And that of course is what’s wrong inside. China is not a gangster state like Russia — it has its murky clans and the rotten Party, but its self-theft is for public good. China’s black-suit and shoe-polish-hair leadership is a collective control freak, perfectly understandable given China’s several-thousand-year tendency to fly apart. Its command economy is not Soviet-style incompetence — China truly intends a meritocracy.
Fatal for its plans: last week the lead reporter for a top China business journal was arrested and charged for the crime of “independent inquiry.” China is hitting the great wall of social capital. Markets cannot function without a free flow of information. In a healthy society, business conversations always overlap with government policy consideration and open political debate. No modern economy can function without a reliable, fair, and independent legal system. Command economies always fail: you cannot order people and businesses to be flexible while simultaneously forbidding flexibility. You can get only so far with the hammer, and then it’s the problem.
China is not likely to hard-land, but its supercharged leadership days are done.
So, if you’re Chair Yellen, you want to tighten into that?
Probably.
The financial world is paralyzed, waiting for the Fed next Thursday.
At the outset, hang on tight to one thing: the US economy is doing so well that if it were not for the rest of the world the Fed would have begun liftoff months or even years ago. We are not growing fast, our new GDP speed limit only about 2%, but jobs are plentiful, housing is entering a growth phase beyond recovery, and only wages are sticky. Wages and therefore inflation may stay stuck, but with unemployment crossing below 5% a 0% Fed is inappropriate.
My vote for next Thursday: lift .25% and see what happens. This fitful go/no-go and Groundhog Day debate is distracting from important things, like football.
The Fed may hold off because inflation forces are all pulling downward, and because there is no reliable way to measure the future impact on the US of an outside world in trouble. In the 1997-1998 “Asian Contagion,” the Fed panicked about global recession, but it turned out that overseas trouble was a benefit here, and the Fed’s easing poured gasoline on a stock-market bonfire. This time is different.
Europe is so sick that the ECB this week guaranteed additional and extended QE.
Then the BRICS, the emerging darlings of finance, investment, and bond and stock huckstering. “B” for Brazil, which this week submerged to junk bond status. Its currency is worth about half its value two years ago. Its government and upper-crust leadership have been exposed as completely corrupt. Its over-reliance on commodity exports has produced a structural fracture with no prospect of cyclical recovery. At some point a dead-varmint bounce, and social unrest likely.
“R” for Russia. Czar Vladimir made a pact with Russia’s worst impulses, and the bill is due. A gangster state, in which any successful entrepreneur will pay protection until a goon steals the whole business. All the weakness of any petro-state, with an otherwise shriveled economy, petro production itself starved of investment, and petro prices less than half the level necessary to keep the gangs going. Belly-crawling to China has been fruitless. Oil under $50, Vladimir has a couple of years before… the knock at his door?
“I” for India. The bright spot. Still growing, but the rupee in bad trouble because markets for its exports are in trouble. Its deepest weakness: the caste system and corruption blockade any prospect of widespread modernization and population control. May get some cyclical rebound, but structural issues are intractable.
Skipping to “S” for South Africa. Another busted commodity state, little of export merit otherwise, the rand in free-fall. Unresolved social issues.
Then “C” for China. Everybody gets the black box: the world’s second-largest economy, 1.3 billion people, the focus and funnel of world trade, but so thoroughly deceitful about its data that the world can’t tell what’s going on inside. And that of course is what’s wrong inside. China is not a gangster state like Russia — it has its murky clans and the rotten Party, but its self-theft is for public good. China’s black-suit and shoe-polish-hair leadership is a collective control freak, perfectly understandable given China’s several-thousand-year tendency to fly apart. Its command economy is not Soviet-style incompetence — China truly intends a meritocracy.
Fatal for its plans: last week the lead reporter for a top China business journal was arrested and charged for the crime of “independent inquiry.” China is hitting the great wall of social capital. Markets cannot function without a free flow of information. In a healthy society, business conversations always overlap with government policy consideration and open political debate. No modern economy can function without a reliable, fair, and independent legal system. Command economies always fail: you cannot order people and businesses to be flexible while simultaneously forbidding flexibility. You can get only so far with the hammer, and then it’s the problem.
China is not likely to hard-land, but its supercharged leadership days are done.
So, if you’re Chair Yellen, you want to tighten into that?
Probably.
Friday, September 4, 2015
Capital Markets Update
By Louis S. Barnes Friday, September 4th, 2015
I have many friends who hang on every word from rich guys on Wall Street: mutual and hedge fund managers, securities firm economists and pooh-bahs, and just plain rich guys who got rich by playing on the Street.
But these sources are either salespeople, or winners who have little to say about the role of good fortune in their fortunes.
The core of good information today is the central bankers themselves. For good or ill we are in an era — an epoch, not a transient moment — in which the central bankers matter more than markets. Yet, in the greatest oddity of our time the central bankers appear to be powerless to meet their own forecasts.
The Fed speaks with many voices, and most of those are egos with microphones. The Fed officials closest to the Chair and making up the governing majority speak rarely and carefully. Several regional Fed presidents would be better served not to speak at all (which was the case in the old days) — Bullard, George, Lacker, Mester, Plosser, Fisher, Kocherlakota…. A few of the regionals are extraordinary.
Eric Rosengren, Boston Fed, in August 2008 delivered the best single insight of the last decade. The Fed had been easing strongly both in rate and liquidity for a year, but credit markets seemed on a very dangerous path, falling out of the support by the Fed. Rosengren said that the deepening credit-market panic had “more than offset all Fed easing to date.” Nice call. Lehman and the economy failed the next month.
Rosengren spoke this week. He saw two conditions necessary for Fed liftoff: labor market improvement, which “has largely been met,” and second, “reasonable confidence that PCE inflation will move back to its 2% objective over the medium term.”
For that second condition, “the data have not been as clear cut.” Then, making him the first Fed official to acknowledge failure so plainly: “You might say the incoming data have not cooperated with the forecasts.”
He followed that with the zinger which tells us where we really are: “Nonetheless… we will reach 2% inflation if one sees the US economy as likely to continue growing above its potential.” Emphasis on continue is mine. Chair Yellen has used exactly the same phrase repeatedly. That’s the Fed saying current GDP growth in the 2-2.5% range is unsustainably too fast and the Fed intends to lean against it, the only question how soon and how hard. Everyone I know feels as though the US is just pooping along at stall speed, the economic quality of life improving for less than one-third of us.
But the Fed is utterly focused on the Phillips Curve — the inflationary effect of a too-low unemployment rate. Even if wages are growing too little now, upward tension is accumulating. Rosengren did recite his doubts about overheating, again the only Fed official to note “indications of a much weaker global economy.”
Rosengren’s conclusion gives us the first clear long-term forecast. The Fed’s 3.75% as the long-term target for fed funds is not normalized in the sense of open-ended stability, but the endpoint of a tightening cycle resulting in the recession necessary to raise the unemployment rate from the Phillips inflation danger zone. Rosengren’s analysis uses three years from the first tightening to the end, a historical pattern, although from 0% today a very low slope.
Whether the Fed lifts off next month is immaterial. Rosengren gave us the plan.
Here’s how crazy all of this is: I can’t tell if the markets care what the Fed does. The Fed has its plan, but markets are properly mesmerized by an outside world falling apart, not a mere cyclical deterioration soon to turn, but structural. Every central bank ex-US is hosing cash into local economies with all the effect of transfusing a patient who has an open artery in the other arm.
This holiday weekend take time to give thanks for the exceptional flexibility which has allowed the US the luxury of low-slope recovery and a threatening Fed, and thanks to the rest of the world for sending money here to keep our long-term rates low.
I have many friends who hang on every word from rich guys on Wall Street: mutual and hedge fund managers, securities firm economists and pooh-bahs, and just plain rich guys who got rich by playing on the Street.
But these sources are either salespeople, or winners who have little to say about the role of good fortune in their fortunes.
The core of good information today is the central bankers themselves. For good or ill we are in an era — an epoch, not a transient moment — in which the central bankers matter more than markets. Yet, in the greatest oddity of our time the central bankers appear to be powerless to meet their own forecasts.
The Fed speaks with many voices, and most of those are egos with microphones. The Fed officials closest to the Chair and making up the governing majority speak rarely and carefully. Several regional Fed presidents would be better served not to speak at all (which was the case in the old days) — Bullard, George, Lacker, Mester, Plosser, Fisher, Kocherlakota…. A few of the regionals are extraordinary.
Eric Rosengren, Boston Fed, in August 2008 delivered the best single insight of the last decade. The Fed had been easing strongly both in rate and liquidity for a year, but credit markets seemed on a very dangerous path, falling out of the support by the Fed. Rosengren said that the deepening credit-market panic had “more than offset all Fed easing to date.” Nice call. Lehman and the economy failed the next month.
Rosengren spoke this week. He saw two conditions necessary for Fed liftoff: labor market improvement, which “has largely been met,” and second, “reasonable confidence that PCE inflation will move back to its 2% objective over the medium term.”
For that second condition, “the data have not been as clear cut.” Then, making him the first Fed official to acknowledge failure so plainly: “You might say the incoming data have not cooperated with the forecasts.”
He followed that with the zinger which tells us where we really are: “Nonetheless… we will reach 2% inflation if one sees the US economy as likely to continue growing above its potential.” Emphasis on continue is mine. Chair Yellen has used exactly the same phrase repeatedly. That’s the Fed saying current GDP growth in the 2-2.5% range is unsustainably too fast and the Fed intends to lean against it, the only question how soon and how hard. Everyone I know feels as though the US is just pooping along at stall speed, the economic quality of life improving for less than one-third of us.
But the Fed is utterly focused on the Phillips Curve — the inflationary effect of a too-low unemployment rate. Even if wages are growing too little now, upward tension is accumulating. Rosengren did recite his doubts about overheating, again the only Fed official to note “indications of a much weaker global economy.”
Rosengren’s conclusion gives us the first clear long-term forecast. The Fed’s 3.75% as the long-term target for fed funds is not normalized in the sense of open-ended stability, but the endpoint of a tightening cycle resulting in the recession necessary to raise the unemployment rate from the Phillips inflation danger zone. Rosengren’s analysis uses three years from the first tightening to the end, a historical pattern, although from 0% today a very low slope.
Whether the Fed lifts off next month is immaterial. Rosengren gave us the plan.
Here’s how crazy all of this is: I can’t tell if the markets care what the Fed does. The Fed has its plan, but markets are properly mesmerized by an outside world falling apart, not a mere cyclical deterioration soon to turn, but structural. Every central bank ex-US is hosing cash into local economies with all the effect of transfusing a patient who has an open artery in the other arm.
This holiday weekend take time to give thanks for the exceptional flexibility which has allowed the US the luxury of low-slope recovery and a threatening Fed, and thanks to the rest of the world for sending money here to keep our long-term rates low.
Friday, August 28, 2015
Capital Markets Update
By Louis S. Barnes Friday, August 28th, 2015
We should assume the Fed lifts off soon. I hope in September, just to get the first step over with, and to make the Fed look like it knows what it’s doing. But I cannot imagine an inflation problem here or anywhere in a world like the preceding two paragraphs, and the Fed’s continuous rolling-over of its long-term Treasury and MBS holdings should keep mortgage rates low.
Whether markets are resolving some
of the uncertainties and frights leading to two weeks of chaos, or merely
fatigued, they are settling down. Quiet is good.
The US consistently shows more signs
of “self-sustaining” growth. In the last seven years a false hope, but apparent
now that the Fed can remove another set of its economic training wheels. The
net of GDP revisions for the first six months of 2015: we are grinding along at
2.2% annual growth, which is probably the centerline of future prospects. Not
accelerating, not fancy, but sustainable.
Housing is in a long, slow recovery,
unit sales rising about 6% annually, and prices perhaps 5%. Those numbers
cannot pick up until incomes do, especially among the young, but at those levels
would not contribute to inflationary overheating for several years. Or, given
mortgage credit over-tightening, maybe ever. There is nothing too hot about
this economy, with the possible exceptions of student and auto loans. Peanuts.
Inflation is the whole point of Fed
operations. Its job is to intercept inflation (or deflation) before it gets
going. The Fed’s models have over-predicted both GDP and inflation for
seven-straight years, but that stopped-clock may at last have the correct time.
Year-over-year core PCE inflation as of July had risen 1.2%, but in May plus
.3%, June .1% and July .2% — the last three months account for half of the last
year’s rise. If that’s a trend, the Fed has real reason to lift off, not just
the yips to get off unnatural, bubble-inflating zero.
As the US economy enters a normal
realm, it’s entirely appropriate for the Fed to remove emergency and
experimental ease. Two things hold it back: first the weird labor market
mismatch, unemployment falling off the low end of the scale but very little
growth in incomes. That’s relatively small potatoes, which will resolve
themselves. If incomes suddenly take off, then the Fed will come harder and
faster; if they stay low, the Fed can move very slowly.
The second Fed-retardant is huge. Or
maybe not. The outside world is a mess. In many ways, all of it badly screwed
up, and in important places — Europe and Japan — not at all clear how they get
out of the traps they are in, no matter how energetic their central banks.
China is especially upsetting because it’s in obvious economic difficulty, but
will not share honest numbers with the rest of us.
We tend to forget about slow-motion
trouble spots, like Japan and Europe. The NYT reported this week that Japan’s
declining population has resulted in 8 million abandoned homes. The BOJ’s QE
has for a year bought Japan’s government debt at twice the rate of new budget
deficit, which itself is half of Japan’s government spending. The BOJ now owns
27% of all Japanese government bonds. Here the Fed owns about 18% of marketable
Treasurys and agency MBS, but stopped buying more than a year ago; at the BOJ’s
current pace by 2020 it will own 65% of all JGBs. It will have to stop, but
when, and to what effect no one knows.
Aside from the slow-rollers… China. The
US is the least trade-dependent economy of any major nation, only about 12% of
GDP. Of that, China supplies 21% of our imports, and buys only 7% of our
exports. But we have terrible measurement trouble. Trade used to consist of
tangible goods, manufactured and raw, but “services” are the rapid growth
category in modern economies. That’s what Google does. Apple sells tangibles,
but implied sales of its intellectual property — innovation — are fantastically
more valuable. Global employment compensation is every day more linked to and
compressed by trade and instantaneous electronic price-discovery, brand new in
just the last two decades and in that time accelerating at the pace of Moore’s
Law.
We should assume the Fed lifts off soon. I hope in September, just to get the first step over with, and to make the Fed look like it knows what it’s doing. But I cannot imagine an inflation problem here or anywhere in a world like the preceding two paragraphs, and the Fed’s continuous rolling-over of its long-term Treasury and MBS holdings should keep mortgage rates low.
Whether
markets are resolving some of the uncertainties and frights leading to
two weeks of chaos, or merely fatigued, they are settling down. Quiet is
good.
The US consistently shows more signs of “self-sustaining” growth. In the last seven years a false hope, but apparent now that the Fed can remove another set of its economic training wheels. The net of GDP revisions for the first six months of 2015: we are grinding along at 2.2% annual growth, which is probably the centerline of future prospects. Not accelerating, not fancy, but sustainable.
Housing is in a long, slow recovery, unit sales rising about 6% annually, and prices perhaps 5%. Those numbers cannot pick up until incomes do, especially among the young, but at those levels would not contribute to inflationary overheating for several years. Or, given mortgage credit over-tightening, maybe ever. There is nothing too hot about this economy, with the possible exceptions of student and auto loans. Peanuts.
Inflation is the whole point of Fed operations. Its job is to intercept inflation (or deflation) before it gets going. The Fed’s models have over-predicted both GDP and inflation for seven-straight years, but that stopped-clock may at last have the correct time. Year-over-year core PCE inflation as of July had risen 1.2%, but in May plus .3%, June .1% and July .2% — the last three months account for half of the last year’s rise. If that’s a trend, the Fed has real reason to lift off, not just the yips to get off unnatural, bubble-inflating zero.
- See more at: http://pmglending.com/blog/market-commentary/credit-news-by-lou-barnes-august-28-2015#sthash.gadoxdV3.dpuf
The US consistently shows more signs of “self-sustaining” growth. In the last seven years a false hope, but apparent now that the Fed can remove another set of its economic training wheels. The net of GDP revisions for the first six months of 2015: we are grinding along at 2.2% annual growth, which is probably the centerline of future prospects. Not accelerating, not fancy, but sustainable.
Housing is in a long, slow recovery, unit sales rising about 6% annually, and prices perhaps 5%. Those numbers cannot pick up until incomes do, especially among the young, but at those levels would not contribute to inflationary overheating for several years. Or, given mortgage credit over-tightening, maybe ever. There is nothing too hot about this economy, with the possible exceptions of student and auto loans. Peanuts.
Inflation is the whole point of Fed operations. Its job is to intercept inflation (or deflation) before it gets going. The Fed’s models have over-predicted both GDP and inflation for seven-straight years, but that stopped-clock may at last have the correct time. Year-over-year core PCE inflation as of July had risen 1.2%, but in May plus .3%, June .1% and July .2% — the last three months account for half of the last year’s rise. If that’s a trend, the Fed has real reason to lift off, not just the yips to get off unnatural, bubble-inflating zero.
- See more at: http://pmglending.com/blog/market-commentary/credit-news-by-lou-barnes-august-28-2015#sthash.gadoxdV3.dpuf
Whether
markets are resolving some of the uncertainties and frights leading to
two weeks of chaos, or merely fatigued, they are settling down. Quiet is
good.
The US consistently shows more signs of “self-sustaining” growth. In the last seven years a false hope, but apparent now that the Fed can remove another set of its economic training wheels. The net of GDP revisions for the first six months of 2015: we are grinding along at 2.2% annual growth, which is probably the centerline of future prospects. Not accelerating, not fancy, but sustainable.
Housing is in a long, slow recovery, unit sales rising about 6% annually, and prices perhaps 5%. Those numbers cannot pick up until incomes do, especially among the young, but at those levels would not contribute to inflationary overheating for several years. Or, given mortgage credit over-tightening, maybe ever. There is nothing too hot about this economy, with the possible exceptions of student and auto loans. Peanuts.
Inflation is the whole point of Fed operations. Its job is to intercept inflation (or deflation) before it gets going. The Fed’s models have over-predicted both GDP and inflation for seven-straight years, but that stopped-clock may at last have the correct time. Year-over-year core PCE inflation as of July had risen 1.2%, but in May plus .3%, June .1% and July .2% — the last three months account for half of the last year’s rise. If that’s a trend, the Fed has real reason to lift off, not just the yips to get off unnatural, bubble-inflating zero.
As the US economy enters a normal realm, it’s entirely appropriate for the Fed to remove emergency and experimental ease. Two things hold it back: first the weird labor market mismatch, unemployment falling off the low end of the scale but very little growth in incomes. That’s relatively small potatoes, which will resolve themselves. If incomes suddenly take off, then the Fed will come harder and faster; if they stay low, the Fed can move very slowly.
The second Fed-retardant is huge. Or maybe not. The outside world is a mess. In many ways, all of it badly screwed up, and in important places — Europe and Japan — not at all clear how they get out of the traps they are in, no matter how energetic their central banks. China is especially upsetting because it’s in obvious economic difficulty, but will not share honest numbers with the rest of us.
We tend to forget about slow-motion trouble spots, like Japan and Europe. The NYT reported this week that Japan’s declining population has resulted in 8 million abandoned homes. The BOJ’s QE has for a year bought Japan’s government debt at twice the rate of new budget deficit, which itself is half of Japan’s government spending. The BOJ now owns 27% of all Japanese government bonds. Here the Fed owns about 18% of marketable Treasurys and agency MBS, but stopped buying more than a year ago; at the BOJ’s current pace by 2020 it will own 65% of all JGBs. It will have to stop, but when, and to what effect no one knows.
Aside from the slow-rollers… China. The US is the least trade-dependent economy of any major nation, only about 12% of GDP. Of that, China supplies 21% of our imports, and buys only 7% of our exports. But we have terrible measurement trouble. Trade used to consist of tangible goods, manufactured and raw, but “services” are the rapid growth category in modern economies. That’s what Google does. Apple sells tangibles, but implied sales of its intellectual property — innovation — are fantastically more valuable. Global employment compensation is every day more linked to and compressed by trade and instantaneous electronic price-discovery, brand new in just the last two decades and in that time accelerating at the pace of Moore’s Law.
We should assume the Fed lifts off soon. I hope in September, just to get the first step over with, and to make the Fed look like it knows what it’s doing. But I cannot imagine an inflation problem here or anywhere in a world like the preceding two paragraphs, and the Fed’s continuous rolling-over of its long-term Treasury and MBS holdings should keep mortgage rates low.
- See more at: http://pmglending.com/blog/market-commentary/credit-news-by-lou-barnes-august-28-2015#sthash.gadoxdV3.dpuf
The US consistently shows more signs of “self-sustaining” growth. In the last seven years a false hope, but apparent now that the Fed can remove another set of its economic training wheels. The net of GDP revisions for the first six months of 2015: we are grinding along at 2.2% annual growth, which is probably the centerline of future prospects. Not accelerating, not fancy, but sustainable.
Housing is in a long, slow recovery, unit sales rising about 6% annually, and prices perhaps 5%. Those numbers cannot pick up until incomes do, especially among the young, but at those levels would not contribute to inflationary overheating for several years. Or, given mortgage credit over-tightening, maybe ever. There is nothing too hot about this economy, with the possible exceptions of student and auto loans. Peanuts.
Inflation is the whole point of Fed operations. Its job is to intercept inflation (or deflation) before it gets going. The Fed’s models have over-predicted both GDP and inflation for seven-straight years, but that stopped-clock may at last have the correct time. Year-over-year core PCE inflation as of July had risen 1.2%, but in May plus .3%, June .1% and July .2% — the last three months account for half of the last year’s rise. If that’s a trend, the Fed has real reason to lift off, not just the yips to get off unnatural, bubble-inflating zero.
As the US economy enters a normal realm, it’s entirely appropriate for the Fed to remove emergency and experimental ease. Two things hold it back: first the weird labor market mismatch, unemployment falling off the low end of the scale but very little growth in incomes. That’s relatively small potatoes, which will resolve themselves. If incomes suddenly take off, then the Fed will come harder and faster; if they stay low, the Fed can move very slowly.
The second Fed-retardant is huge. Or maybe not. The outside world is a mess. In many ways, all of it badly screwed up, and in important places — Europe and Japan — not at all clear how they get out of the traps they are in, no matter how energetic their central banks. China is especially upsetting because it’s in obvious economic difficulty, but will not share honest numbers with the rest of us.
We tend to forget about slow-motion trouble spots, like Japan and Europe. The NYT reported this week that Japan’s declining population has resulted in 8 million abandoned homes. The BOJ’s QE has for a year bought Japan’s government debt at twice the rate of new budget deficit, which itself is half of Japan’s government spending. The BOJ now owns 27% of all Japanese government bonds. Here the Fed owns about 18% of marketable Treasurys and agency MBS, but stopped buying more than a year ago; at the BOJ’s current pace by 2020 it will own 65% of all JGBs. It will have to stop, but when, and to what effect no one knows.
Aside from the slow-rollers… China. The US is the least trade-dependent economy of any major nation, only about 12% of GDP. Of that, China supplies 21% of our imports, and buys only 7% of our exports. But we have terrible measurement trouble. Trade used to consist of tangible goods, manufactured and raw, but “services” are the rapid growth category in modern economies. That’s what Google does. Apple sells tangibles, but implied sales of its intellectual property — innovation — are fantastically more valuable. Global employment compensation is every day more linked to and compressed by trade and instantaneous electronic price-discovery, brand new in just the last two decades and in that time accelerating at the pace of Moore’s Law.
We should assume the Fed lifts off soon. I hope in September, just to get the first step over with, and to make the Fed look like it knows what it’s doing. But I cannot imagine an inflation problem here or anywhere in a world like the preceding two paragraphs, and the Fed’s continuous rolling-over of its long-term Treasury and MBS holdings should keep mortgage rates low.
- See more at: http://pmglending.com/blog/market-commentary/credit-news-by-lou-barnes-august-28-2015#sthash.gadoxdV3.dpuf
Whether
markets are resolving some of the uncertainties and frights leading to
two weeks of chaos, or merely fatigued, they are settling down. Quiet is
good.
The US consistently shows more signs of “self-sustaining” growth. In the last seven years a false hope, but apparent now that the Fed can remove another set of its economic training wheels. The net of GDP revisions for the first six months of 2015: we are grinding along at 2.2% annual growth, which is probably the centerline of future prospects. Not accelerating, not fancy, but sustainable.
Housing is in a long, slow recovery, unit sales rising about 6% annually, and prices perhaps 5%. Those numbers cannot pick up until incomes do, especially among the young, but at those levels would not contribute to inflationary overheating for several years. Or, given mortgage credit over-tightening, maybe ever. There is nothing too hot about this economy, with the possible exceptions of student and auto loans. Peanuts.
Inflation is the whole point of Fed operations. Its job is to intercept inflation (or deflation) before it gets going. The Fed’s models have over-predicted both GDP and inflation for seven-straight years, but that stopped-clock may at last have the correct time. Year-over-year core PCE inflation as of July had risen 1.2%, but in May plus .3%, June .1% and July .2% — the last three months account for half of the last year’s rise. If that’s a trend, the Fed has real reason to lift off, not just the yips to get off unnatural, bubble-inflating zero.
As the US economy enters a normal realm, it’s entirely appropriate for the Fed to remove emergency and experimental ease. Two things hold it back: first the weird labor market mismatch, unemployment falling off the low end of the scale but very little growth in incomes. That’s relatively small potatoes, which will resolve themselves. If incomes suddenly take off, then the Fed will come harder and faster; if they stay low, the Fed can move very slowly.
The second Fed-retardant is huge. Or maybe not. The outside world is a mess. In many ways, all of it badly screwed up, and in important places — Europe and Japan — not at all clear how they get out of the traps they are in, no matter how energetic their central banks. China is especially upsetting because it’s in obvious economic difficulty, but will not share honest numbers with the rest of us.
We tend to forget about slow-motion trouble spots, like Japan and Europe. The NYT reported this week that Japan’s declining population has resulted in 8 million abandoned homes. The BOJ’s QE has for a year bought Japan’s government debt at twice the rate of new budget deficit, which itself is half of Japan’s government spending. The BOJ now owns 27% of all Japanese government bonds. Here the Fed owns about 18% of marketable Treasurys and agency MBS, but stopped buying more than a year ago; at the BOJ’s current pace by 2020 it will own 65% of all JGBs. It will have to stop, but when, and to what effect no one knows.
Aside from the slow-rollers… China. The US is the least trade-dependent economy of any major nation, only about 12% of GDP. Of that, China supplies 21% of our imports, and buys only 7% of our exports. But we have terrible measurement trouble. Trade used to consist of tangible goods, manufactured and raw, but “services” are the rapid growth category in modern economies. That’s what Google does. Apple sells tangibles, but implied sales of its intellectual property — innovation — are fantastically more valuable. Global employment compensation is every day more linked to and compressed by trade and instantaneous electronic price-discovery, brand new in just the last two decades and in that time accelerating at the pace of Moore’s Law.
We should assume the Fed lifts off soon. I hope in September, just to get the first step over with, and to make the Fed look like it knows what it’s doing. But I cannot imagine an inflation problem here or anywhere in a world like the preceding two paragraphs, and the Fed’s continuous rolling-over of its long-term Treasury and MBS holdings should keep mortgage rates low.
- See more at: http://pmglending.com/blog/market-commentary/credit-news-by-lou-barnes-august-28-2015#sthash.gadoxdV3.dpuf
The US consistently shows more signs of “self-sustaining” growth. In the last seven years a false hope, but apparent now that the Fed can remove another set of its economic training wheels. The net of GDP revisions for the first six months of 2015: we are grinding along at 2.2% annual growth, which is probably the centerline of future prospects. Not accelerating, not fancy, but sustainable.
Housing is in a long, slow recovery, unit sales rising about 6% annually, and prices perhaps 5%. Those numbers cannot pick up until incomes do, especially among the young, but at those levels would not contribute to inflationary overheating for several years. Or, given mortgage credit over-tightening, maybe ever. There is nothing too hot about this economy, with the possible exceptions of student and auto loans. Peanuts.
Inflation is the whole point of Fed operations. Its job is to intercept inflation (or deflation) before it gets going. The Fed’s models have over-predicted both GDP and inflation for seven-straight years, but that stopped-clock may at last have the correct time. Year-over-year core PCE inflation as of July had risen 1.2%, but in May plus .3%, June .1% and July .2% — the last three months account for half of the last year’s rise. If that’s a trend, the Fed has real reason to lift off, not just the yips to get off unnatural, bubble-inflating zero.
As the US economy enters a normal realm, it’s entirely appropriate for the Fed to remove emergency and experimental ease. Two things hold it back: first the weird labor market mismatch, unemployment falling off the low end of the scale but very little growth in incomes. That’s relatively small potatoes, which will resolve themselves. If incomes suddenly take off, then the Fed will come harder and faster; if they stay low, the Fed can move very slowly.
The second Fed-retardant is huge. Or maybe not. The outside world is a mess. In many ways, all of it badly screwed up, and in important places — Europe and Japan — not at all clear how they get out of the traps they are in, no matter how energetic their central banks. China is especially upsetting because it’s in obvious economic difficulty, but will not share honest numbers with the rest of us.
We tend to forget about slow-motion trouble spots, like Japan and Europe. The NYT reported this week that Japan’s declining population has resulted in 8 million abandoned homes. The BOJ’s QE has for a year bought Japan’s government debt at twice the rate of new budget deficit, which itself is half of Japan’s government spending. The BOJ now owns 27% of all Japanese government bonds. Here the Fed owns about 18% of marketable Treasurys and agency MBS, but stopped buying more than a year ago; at the BOJ’s current pace by 2020 it will own 65% of all JGBs. It will have to stop, but when, and to what effect no one knows.
Aside from the slow-rollers… China. The US is the least trade-dependent economy of any major nation, only about 12% of GDP. Of that, China supplies 21% of our imports, and buys only 7% of our exports. But we have terrible measurement trouble. Trade used to consist of tangible goods, manufactured and raw, but “services” are the rapid growth category in modern economies. That’s what Google does. Apple sells tangibles, but implied sales of its intellectual property — innovation — are fantastically more valuable. Global employment compensation is every day more linked to and compressed by trade and instantaneous electronic price-discovery, brand new in just the last two decades and in that time accelerating at the pace of Moore’s Law.
We should assume the Fed lifts off soon. I hope in September, just to get the first step over with, and to make the Fed look like it knows what it’s doing. But I cannot imagine an inflation problem here or anywhere in a world like the preceding two paragraphs, and the Fed’s continuous rolling-over of its long-term Treasury and MBS holdings should keep mortgage rates low.
- See more at: http://pmglending.com/blog/market-commentary/credit-news-by-lou-barnes-august-28-2015#sthash.gadoxdV3.dpuf
Whether
markets are resolving some of the uncertainties and frights leading to
two weeks of chaos, or merely fatigued, they are settling down. Quiet is
good.
The US consistently shows more signs of “self-sustaining” growth. In the last seven years a false hope, but apparent now that the Fed can remove another set of its economic training wheels. The net of GDP revisions for the first six months of 2015: we are grinding along at 2.2% annual growth, which is probably the centerline of future prospects. Not accelerating, not fancy, but sustainable.
Housing is in a long, slow recovery, unit sales rising about 6% annually, and prices perhaps 5%. Those numbers cannot pick up until incomes do, especially among the young, but at those levels would not contribute to inflationary overheating for several years. Or, given mortgage credit over-tightening, maybe ever. There is nothing too hot about this economy, with the possible exceptions of student and auto loans. Peanuts.
Inflation is the whole point of Fed operations. Its job is to intercept inflation (or deflation) before it gets going. The Fed’s models have over-predicted both GDP and inflation for seven-straight years, but that stopped-clock may at last have the correct time. Year-over-year core PCE inflation as of July had risen 1.2%, but in May plus .3%, June .1% and July .2% — the last three months account for half of the last year’s rise. If that’s a trend, the Fed has real reason to lift off, not just the yips to get off unnatural, bubble-inflating zero.
As the US economy enters a normal realm, it’s entirely appropriate for the Fed to remove emergency and experimental ease. Two things hold it back: first the weird labor market mismatch, unemployment falling off the low end of the scale but very little growth in incomes. That’s relatively small potatoes, which will resolve themselves. If incomes suddenly take off, then the Fed will come harder and faster; if they stay low, the Fed can move very slowly.
The second Fed-retardant is huge. Or maybe not. The outside world is a mess. In many ways, all of it badly screwed up, and in important places — Europe and Japan — not at all clear how they get out of the traps they are in, no matter how energetic their central banks. China is especially upsetting because it’s in obvious economic difficulty, but will not share honest numbers with the rest of us.
We tend to forget about slow-motion trouble spots, like Japan and Europe. The NYT reported this week that Japan’s declining population has resulted in 8 million abandoned homes. The BOJ’s QE has for a year bought Japan’s government debt at twice the rate of new budget deficit, which itself is half of Japan’s government spending. The BOJ now owns 27% of all Japanese government bonds. Here the Fed owns about 18% of marketable Treasurys and agency MBS, but stopped buying more than a year ago; at the BOJ’s current pace by 2020 it will own 65% of all JGBs. It will have to stop, but when, and to what effect no one knows.
Aside from the slow-rollers… China. The US is the least trade-dependent economy of any major nation, only about 12% of GDP. Of that, China supplies 21% of our imports, and buys only 7% of our exports. But we have terrible measurement trouble. Trade used to consist of tangible goods, manufactured and raw, but “services” are the rapid growth category in modern economies. That’s what Google does. Apple sells tangibles, but implied sales of its intellectual property — innovation — are fantastically more valuable. Global employment compensation is every day more linked to and compressed by trade and instantaneous electronic price-discovery, brand new in just the last two decades and in that time accelerating at the pace of Moore’s Law.
We should assume the Fed lifts off soon. I hope in September, just to get the first step over with, and to make the Fed look like it knows what it’s doing. But I cannot imagine an inflation problem here or anywhere in a world like the preceding two paragraphs, and the Fed’s continuous rolling-over of its long-term Treasury and MBS holdings should keep mortgage rates low.
- See more at: http://pmglending.com/blog/market-commentary/credit-news-by-lou-barnes-august-28-2015#sthash.gadoxdV3.dpuf
The US consistently shows more signs of “self-sustaining” growth. In the last seven years a false hope, but apparent now that the Fed can remove another set of its economic training wheels. The net of GDP revisions for the first six months of 2015: we are grinding along at 2.2% annual growth, which is probably the centerline of future prospects. Not accelerating, not fancy, but sustainable.
Housing is in a long, slow recovery, unit sales rising about 6% annually, and prices perhaps 5%. Those numbers cannot pick up until incomes do, especially among the young, but at those levels would not contribute to inflationary overheating for several years. Or, given mortgage credit over-tightening, maybe ever. There is nothing too hot about this economy, with the possible exceptions of student and auto loans. Peanuts.
Inflation is the whole point of Fed operations. Its job is to intercept inflation (or deflation) before it gets going. The Fed’s models have over-predicted both GDP and inflation for seven-straight years, but that stopped-clock may at last have the correct time. Year-over-year core PCE inflation as of July had risen 1.2%, but in May plus .3%, June .1% and July .2% — the last three months account for half of the last year’s rise. If that’s a trend, the Fed has real reason to lift off, not just the yips to get off unnatural, bubble-inflating zero.
As the US economy enters a normal realm, it’s entirely appropriate for the Fed to remove emergency and experimental ease. Two things hold it back: first the weird labor market mismatch, unemployment falling off the low end of the scale but very little growth in incomes. That’s relatively small potatoes, which will resolve themselves. If incomes suddenly take off, then the Fed will come harder and faster; if they stay low, the Fed can move very slowly.
The second Fed-retardant is huge. Or maybe not. The outside world is a mess. In many ways, all of it badly screwed up, and in important places — Europe and Japan — not at all clear how they get out of the traps they are in, no matter how energetic their central banks. China is especially upsetting because it’s in obvious economic difficulty, but will not share honest numbers with the rest of us.
We tend to forget about slow-motion trouble spots, like Japan and Europe. The NYT reported this week that Japan’s declining population has resulted in 8 million abandoned homes. The BOJ’s QE has for a year bought Japan’s government debt at twice the rate of new budget deficit, which itself is half of Japan’s government spending. The BOJ now owns 27% of all Japanese government bonds. Here the Fed owns about 18% of marketable Treasurys and agency MBS, but stopped buying more than a year ago; at the BOJ’s current pace by 2020 it will own 65% of all JGBs. It will have to stop, but when, and to what effect no one knows.
Aside from the slow-rollers… China. The US is the least trade-dependent economy of any major nation, only about 12% of GDP. Of that, China supplies 21% of our imports, and buys only 7% of our exports. But we have terrible measurement trouble. Trade used to consist of tangible goods, manufactured and raw, but “services” are the rapid growth category in modern economies. That’s what Google does. Apple sells tangibles, but implied sales of its intellectual property — innovation — are fantastically more valuable. Global employment compensation is every day more linked to and compressed by trade and instantaneous electronic price-discovery, brand new in just the last two decades and in that time accelerating at the pace of Moore’s Law.
We should assume the Fed lifts off soon. I hope in September, just to get the first step over with, and to make the Fed look like it knows what it’s doing. But I cannot imagine an inflation problem here or anywhere in a world like the preceding two paragraphs, and the Fed’s continuous rolling-over of its long-term Treasury and MBS holdings should keep mortgage rates low.
- See more at: http://pmglending.com/blog/market-commentary/credit-news-by-lou-barnes-august-28-2015#sthash.gadoxdV3.dpuf
Friday, August 21, 2015
Capital Market Updates
By Louis S. Barnes Friday, August 21st, 2015
Calm
down. Think it over, figure it out. Just because we see confusion and panic out
there doesn’t mean we have to sign up.
The
media focus is on the stock market. If for no other reason than that, don’t pay
much attention to the stock market. If it goes nuts in either direction, the
authorities have to get involved, but we’re miles from that.
However,
there is one useful hint from the stock market this week: for many months
stocks have traded up on bad economic news, thinking that would mean the Fed
staying on hold. This week’s news has been awful — so bad that even if the Fed
does lift off in September it will likely be an immaterial one-and-done. Now,
the benefit of Fed on hold has been overwhelmed by something else, worse than
Fed tightening.
We
have several choices for that honor: Europe has entered a new, German-driven
Greek deal which is ridiculous on its face. Greece will have new elections, but
not really a government (or an economy). Pyongyang’s Fat Boy threatens war.
Japan’s GDP “unexpectedly” shrank 1.6% in the 2nd quarter despite fantastic QE
by the BOJ. A new, modest tsunami of currency devaluations ripple from Asia,
too many to count.
At
the center: China, of course. China drives everybody crazy because it’s the
Saturday Night Live Liar of economic data. The economic/market upset underway
would not be so troublesome if we had straight data and clear government
intentions. Best I can figure, China began last year a multi-pronged effort to
rebalance its economy toward consumption and open markets and away from
state-driven investment and credit — and every effort has failed and left each
sector in worse shape than to begin with. China used to have a stock market;
now it doesn’t. Weaning from state credit has left it with more state credit
outstanding and deeper reliance on it. The reputation of the leadership and
Party has suffered accordingly.
China
is not likely to land hard. If we’ve learned anything in the last decade, it’s
that central banks can create relatively stable mountains of IOUs under their
carpets. But the chain of events leading to broad market and economic upsets is
in play anyway, China’s devaluation the immediate signal that global trade may
be in trouble.
China’s
consumption of commodities has crested, but the emerging-nation supply chain
was calibrated for further increase. The emerging nations are also customers of
China, and will buy less, increasing pressure on China. China is a customer of
Europe and the US, and will buy less; hence so will they. In the last 25 years
global trade has grown faster than GDP, everyone now everyone else’s customer.
That global trade conveyor has made everybody rich, especially big corporations
with global turnstiles enjoying unimaginable profit margins.
Ordinary
cyclical oops-a-daisies are not a big deal, and that’s what this is likely to
be. However, markets have the screaming bejabbers at the moment for fear of a
reinforcing spiral driven by an incipient trade war becoming a currency race to
the bottom. Even that is recurrent and recoverable. The part that’s not: we’ve
never gone though an adjustment like this with so much debt outstanding, and
deflation nearby.
Back
to the Fed. Minutes of its meeting only three weeks ago were released Wednesday,
and reveal the Fed properly uncertain then. Today, I assume jaw-dropped.
Exclusion
is one way to get close to the heart of the matter. Things about the Fed that
are not true: it did not miss its chance to lift off last fall, winter,
or spring; if the world is too shaky now for liftoff, then lifting off earlier
would leave it too tight now. The Fed’s zero-percent policy and QE did not
cause current difficulty — without its heroics 2008-9 we’d be living in caves.
Nor the goofy plan to hike now so it can cut later.
The
Fed does not have to lift off now, although it might just to shut up the
irresponsible jackdaws and their financial creationism. The only element of the
US economy flashing red is apparent “full employment,” and the need for pre-emptive
liftoff. Nothing else is even amber. Keep it simple: the Fed doesn’t matter
now.
The
risk to the global trade conveyor exceeds all other risk combined.
Calm down. Think it over, figure it out. Just because we see confusion and panic out there doesn’t mean we have to sign up.
The
media focus is on the stock market. If for no other reason than that,
don’t pay much attention to the stock market. If it goes nuts in either
direction, the authorities have to get involved, but we’re miles from
that.
However,
there is one useful hint from the stock market this week: for many
months stocks have traded up on bad economic news, thinking that would
mean the Fed staying on hold. This week’s news has been awful — so bad
that even if the Fed does lift off in September it will likely be an
immaterial one-and-done. Now, the benefit of Fed on hold has been
overwhelmed by something else, worse than Fed tightening.
We
have several choices for that honor: Europe has entered a new,
German-driven Greek deal which is ridiculous on its face. Greece will
have new elections, but not really a government (or an economy).
Pyongyang’s Fat Boy threatens war. Japan’s GDP “unexpectedly” shrank
1.6% in the 2nd quarter despite fantastic QE by the BOJ. A new, modest
tsunami of currency devaluations ripple from Asia, too many to count.
At
the center: China, of course. China drives everybody crazy because it’s
the Saturday Night Live Liar of economic data. The economic/market
upset underway would not be so troublesome if we had straight data and
clear government intentions. Best I can figure, China began last year a
multi-pronged effort to rebalance its economy toward consumption and
open markets and away from state-driven investment and credit — and
every effort has failed and left each sector in worse shape than to
begin with. China used to have a stock market; now it doesn’t. Weaning
from state credit has left it with more state credit outstanding and
deeper reliance on it. The reputation of the leadership and Party has
suffered accordingly.
China
is not likely to land hard. If we’ve learned anything in the last
decade, it’s that central banks can create relatively stable mountains
of IOUs under their carpets. But the chain of events leading to broad
market and economic upsets is in play anyway, China’s devaluation the
immediate signal that global trade may be in trouble.
China’s
consumption of commodities has crested, but the emerging-nation supply
chain was calibrated for further increase. The emerging nations are also
customers of China, and will buy less, increasing pressure on China.
China is a customer of Europe and the US, and will buy less; hence so
will they. In the last 25 years global trade has grown faster than GDP,
everyone now everyone else’s customer. That global trade conveyor has
made everybody rich, especially big corporations with global turnstiles
enjoying unimaginable profit margins.
Ordinary
cyclical oops-a-daisies are not a big deal, and that’s what this is
likely to be. However, markets have the screaming bejabbers at the
moment for fear of a reinforcing spiral driven by an incipient trade war
becoming a currency race to the bottom. Even that is recurrent and
recoverable. The part that’s not: we’ve never gone though an adjustment
like this with so much debt outstanding, and deflation nearby.
Back
to the Fed. Minutes of its meeting only three weeks ago were released
Wednesday, and reveal the Fed properly uncertain then. Today, I assume
jaw-dropped.
Exclusion is one way to get close to the heart of the matter. Things about the Fed that are not
true: it did not miss its chance to lift off last fall, winter, or
spring; if the world is too shaky now for liftoff, then lifting off
earlier would leave it too tight now. The Fed’s zero-percent policy and
QE did not cause current difficulty — without its heroics 2008-9 we’d be
living in caves. Nor the goofy plan to hike now so it can cut later.
The Fed does not
have to lift off now, although it might just to shut up the
irresponsible jackdaws and their financial creationism. The only element
of the US economy flashing red is apparent “full employment,” and the
need for pre-emptive liftoff. Nothing else is even amber. Keep it
simple: the Fed doesn’t matter now.
The risk to the global trade conveyor exceeds all other risk combined.
- See more at: http://pmglending.com/blog/market-commentary/credit-news-by-lou-barnes-august-21-2015#sthash.nvaZrQ6n.dpuf
Calm down. Think it over, figure it out. Just because we see confusion and panic out there doesn’t mean we have to sign up.
The
media focus is on the stock market. If for no other reason than that,
don’t pay much attention to the stock market. If it goes nuts in either
direction, the authorities have to get involved, but we’re miles from
that.
However,
there is one useful hint from the stock market this week: for many
months stocks have traded up on bad economic news, thinking that would
mean the Fed staying on hold. This week’s news has been awful — so bad
that even if the Fed does lift off in September it will likely be an
immaterial one-and-done. Now, the benefit of Fed on hold has been
overwhelmed by something else, worse than Fed tightening.
We
have several choices for that honor: Europe has entered a new,
German-driven Greek deal which is ridiculous on its face. Greece will
have new elections, but not really a government (or an economy).
Pyongyang’s Fat Boy threatens war. Japan’s GDP “unexpectedly” shrank
1.6% in the 2nd quarter despite fantastic QE by the BOJ. A new, modest
tsunami of currency devaluations ripple from Asia, too many to count.
At
the center: China, of course. China drives everybody crazy because it’s
the Saturday Night Live Liar of economic data. The economic/market
upset underway would not be so troublesome if we had straight data and
clear government intentions. Best I can figure, China began last year a
multi-pronged effort to rebalance its economy toward consumption and
open markets and away from state-driven investment and credit — and
every effort has failed and left each sector in worse shape than to
begin with. China used to have a stock market; now it doesn’t. Weaning
from state credit has left it with more state credit outstanding and
deeper reliance on it. The reputation of the leadership and Party has
suffered accordingly.
China
is not likely to land hard. If we’ve learned anything in the last
decade, it’s that central banks can create relatively stable mountains
of IOUs under their carpets. But the chain of events leading to broad
market and economic upsets is in play anyway, China’s devaluation the
immediate signal that global trade may be in trouble.
China’s
consumption of commodities has crested, but the emerging-nation supply
chain was calibrated for further increase. The emerging nations are also
customers of China, and will buy less, increasing pressure on China.
China is a customer of Europe and the US, and will buy less; hence so
will they. In the last 25 years global trade has grown faster than GDP,
everyone now everyone else’s customer. That global trade conveyor has
made everybody rich, especially big corporations with global turnstiles
enjoying unimaginable profit margins.
Ordinary
cyclical oops-a-daisies are not a big deal, and that’s what this is
likely to be. However, markets have the screaming bejabbers at the
moment for fear of a reinforcing spiral driven by an incipient trade war
becoming a currency race to the bottom. Even that is recurrent and
recoverable. The part that’s not: we’ve never gone though an adjustment
like this with so much debt outstanding, and deflation nearby.
Back
to the Fed. Minutes of its meeting only three weeks ago were released
Wednesday, and reveal the Fed properly uncertain then. Today, I assume
jaw-dropped.
Exclusion is one way to get close to the heart of the matter. Things about the Fed that are not
true: it did not miss its chance to lift off last fall, winter, or
spring; if the world is too shaky now for liftoff, then lifting off
earlier would leave it too tight now. The Fed’s zero-percent policy and
QE did not cause current difficulty — without its heroics 2008-9 we’d be
living in caves. Nor the goofy plan to hike now so it can cut later.
The Fed does not
have to lift off now, although it might just to shut up the
irresponsible jackdaws and their financial creationism. The only element
of the US economy flashing red is apparent “full employment,” and the
need for pre-emptive liftoff. Nothing else is even amber. Keep it
simple: the Fed doesn’t matter now.
The risk to the global trade conveyor exceeds all other risk combined.
- See more at: http://pmglending.com/blog/market-commentary/credit-news-by-lou-barnes-august-21-2015#sthash.nvaZrQ6n.dpuf
Calm down. Think it over, figure it out. Just because we see confusion and panic out there doesn’t mean we have to sign up.
The
media focus is on the stock market. If for no other reason than that,
don’t pay much attention to the stock market. If it goes nuts in either
direction, the authorities have to get involved, but we’re miles from
that.
However,
there is one useful hint from the stock market this week: for many
months stocks have traded up on bad economic news, thinking that would
mean the Fed staying on hold. This week’s news has been awful — so bad
that even if the Fed does lift off in September it will likely be an
immaterial one-and-done. Now, the benefit of Fed on hold has been
overwhelmed by something else, worse than Fed tightening.
We
have several choices for that honor: Europe has entered a new,
German-driven Greek deal which is ridiculous on its face. Greece will
have new elections, but not really a government (or an economy).
Pyongyang’s Fat Boy threatens war. Japan’s GDP “unexpectedly” shrank
1.6% in the 2nd quarter despite fantastic QE by the BOJ. A new, modest
tsunami of currency devaluations ripple from Asia, too many to count.
At
the center: China, of course. China drives everybody crazy because it’s
the Saturday Night Live Liar of economic data. The economic/market
upset underway would not be so troublesome if we had straight data and
clear government intentions. Best I can figure, China began last year a
multi-pronged effort to rebalance its economy toward consumption and
open markets and away from state-driven investment and credit — and
every effort has failed and left each sector in worse shape than to
begin with. China used to have a stock market; now it doesn’t. Weaning
from state credit has left it with more state credit outstanding and
deeper reliance on it. The reputation of the leadership and Party has
suffered accordingly.
China
is not likely to land hard. If we’ve learned anything in the last
decade, it’s that central banks can create relatively stable mountains
of IOUs under their carpets. But the chain of events leading to broad
market and economic upsets is in play anyway, China’s devaluation the
immediate signal that global trade may be in trouble.
China’s
consumption of commodities has crested, but the emerging-nation supply
chain was calibrated for further increase. The emerging nations are also
customers of China, and will buy less, increasing pressure on China.
China is a customer of Europe and the US, and will buy less; hence so
will they. In the last 25 years global trade has grown faster than GDP,
everyone now everyone else’s customer. That global trade conveyor has
made everybody rich, especially big corporations with global turnstiles
enjoying unimaginable profit margins.
Ordinary
cyclical oops-a-daisies are not a big deal, and that’s what this is
likely to be. However, markets have the screaming bejabbers at the
moment for fear of a reinforcing spiral driven by an incipient trade war
becoming a currency race to the bottom. Even that is recurrent and
recoverable. The part that’s not: we’ve never gone though an adjustment
like this with so much debt outstanding, and deflation nearby.
Back
to the Fed. Minutes of its meeting only three weeks ago were released
Wednesday, and reveal the Fed properly uncertain then. Today, I assume
jaw-dropped.
Exclusion is one way to get close to the heart of the matter. Things about the Fed that are not
true: it did not miss its chance to lift off last fall, winter, or
spring; if the world is too shaky now for liftoff, then lifting off
earlier would leave it too tight now. The Fed’s zero-percent policy and
QE did not cause current difficulty — without its heroics 2008-9 we’d be
living in caves. Nor the goofy plan to hike now so it can cut later.
The Fed does not
have to lift off now, although it might just to shut up the
irresponsible jackdaws and their financial creationism. The only element
of the US economy flashing red is apparent “full employment,” and the
need for pre-emptive liftoff. Nothing else is even amber. Keep it
simple: the Fed doesn’t matter now.
The risk to the global trade conveyor exceeds all other risk combined.
- See more at: http://pmglending.com/blog/market-commentary/credit-news-by-lou-barnes-august-21-2015#sthash.nvaZrQ6n.dpuf
Calm down. Think it over, figure it out. Just because we see confusion and panic out there doesn’t mean we have to sign up.
The
media focus is on the stock market. If for no other reason than that,
don’t pay much attention to the stock market. If it goes nuts in either
direction, the authorities have to get involved, but we’re miles from
that.
However,
there is one useful hint from the stock market this week: for many
months stocks have traded up on bad economic news, thinking that would
mean the Fed staying on hold. This week’s news has been awful — so bad
that even if the Fed does lift off in September it will likely be an
immaterial one-and-done. Now, the benefit of Fed on hold has been
overwhelmed by something else, worse than Fed tightening.
We
have several choices for that honor: Europe has entered a new,
German-driven Greek deal which is ridiculous on its face. Greece will
have new elections, but not really a government (or an economy).
Pyongyang’s Fat Boy threatens war. Japan’s GDP “unexpectedly” shrank
1.6% in the 2nd quarter despite fantastic QE by the BOJ. A new, modest
tsunami of currency devaluations ripple from Asia, too many to count.
At
the center: China, of course. China drives everybody crazy because it’s
the Saturday Night Live Liar of economic data. The economic/market
upset underway would not be so troublesome if we had straight data and
clear government intentions. Best I can figure, China began last year a
multi-pronged effort to rebalance its economy toward consumption and
open markets and away from state-driven investment and credit — and
every effort has failed and left each sector in worse shape than to
begin with. China used to have a stock market; now it doesn’t. Weaning
from state credit has left it with more state credit outstanding and
deeper reliance on it. The reputation of the leadership and Party has
suffered accordingly.
China
is not likely to land hard. If we’ve learned anything in the last
decade, it’s that central banks can create relatively stable mountains
of IOUs under their carpets. But the chain of events leading to broad
market and economic upsets is in play anyway, China’s devaluation the
immediate signal that global trade may be in trouble.
China’s
consumption of commodities has crested, but the emerging-nation supply
chain was calibrated for further increase. The emerging nations are also
customers of China, and will buy less, increasing pressure on China.
China is a customer of Europe and the US, and will buy less; hence so
will they. In the last 25 years global trade has grown faster than GDP,
everyone now everyone else’s customer. That global trade conveyor has
made everybody rich, especially big corporations with global turnstiles
enjoying unimaginable profit margins.
Ordinary
cyclical oops-a-daisies are not a big deal, and that’s what this is
likely to be. However, markets have the screaming bejabbers at the
moment for fear of a reinforcing spiral driven by an incipient trade war
becoming a currency race to the bottom. Even that is recurrent and
recoverable. The part that’s not: we’ve never gone though an adjustment
like this with so much debt outstanding, and deflation nearby.
Back
to the Fed. Minutes of its meeting only three weeks ago were released
Wednesday, and reveal the Fed properly uncertain then. Today, I assume
jaw-dropped.
Exclusion is one way to get close to the heart of the matter. Things about the Fed that are not
true: it did not miss its chance to lift off last fall, winter, or
spring; if the world is too shaky now for liftoff, then lifting off
earlier would leave it too tight now. The Fed’s zero-percent policy and
QE did not cause current difficulty — without its heroics 2008-9 we’d be
living in caves. Nor the goofy plan to hike now so it can cut later.
The Fed does not
have to lift off now, although it might just to shut up the
irresponsible jackdaws and their financial creationism. The only element
of the US economy flashing red is apparent “full employment,” and the
need for pre-emptive liftoff. Nothing else is even amber. Keep it
simple: the Fed doesn’t matter now.
The risk to the global trade conveyor exceeds all other risk combined.
- See more at: http://pmglending.com/blog/market-commentary/credit-news-by-lou-barnes-august-21-2015#sthash.nvaZrQ6n.dpuf
Calm down. Think it over, figure it out. Just because we see confusion and panic out there doesn’t mean we have to sign up.
The
media focus is on the stock market. If for no other reason than that,
don’t pay much attention to the stock market. If it goes nuts in either
direction, the authorities have to get involved, but we’re miles from
that.
However,
there is one useful hint from the stock market this week: for many
months stocks have traded up on bad economic news, thinking that would
mean the Fed staying on hold. This week’s news has been awful — so bad
that even if the Fed does lift off in September it will likely be an
immaterial one-and-done. Now, the benefit of Fed on hold has been
overwhelmed by something else, worse than Fed tightening.
We
have several choices for that honor: Europe has entered a new,
German-driven Greek deal which is ridiculous on its face. Greece will
have new elections, but not really a government (or an economy).
Pyongyang’s Fat Boy threatens war. Japan’s GDP “unexpectedly” shrank
1.6% in the 2nd quarter despite fantastic QE by the BOJ. A new, modest
tsunami of currency devaluations ripple from Asia, too many to count.
At
the center: China, of course. China drives everybody crazy because it’s
the Saturday Night Live Liar of economic data. The economic/market
upset underway would not be so troublesome if we had straight data and
clear government intentions. Best I can figure, China began last year a
multi-pronged effort to rebalance its economy toward consumption and
open markets and away from state-driven investment and credit — and
every effort has failed and left each sector in worse shape than to
begin with. China used to have a stock market; now it doesn’t. Weaning
from state credit has left it with more state credit outstanding and
deeper reliance on it. The reputation of the leadership and Party has
suffered accordingly.
China
is not likely to land hard. If we’ve learned anything in the last
decade, it’s that central banks can create relatively stable mountains
of IOUs under their carpets. But the chain of events leading to broad
market and economic upsets is in play anyway, China’s devaluation the
immediate signal that global trade may be in trouble.
China’s
consumption of commodities has crested, but the emerging-nation supply
chain was calibrated for further increase. The emerging nations are also
customers of China, and will buy less, increasing pressure on China.
China is a customer of Europe and the US, and will buy less; hence so
will they. In the last 25 years global trade has grown faster than GDP,
everyone now everyone else’s customer. That global trade conveyor has
made everybody rich, especially big corporations with global turnstiles
enjoying unimaginable profit margins.
Ordinary
cyclical oops-a-daisies are not a big deal, and that’s what this is
likely to be. However, markets have the screaming bejabbers at the
moment for fear of a reinforcing spiral driven by an incipient trade war
becoming a currency race to the bottom. Even that is recurrent and
recoverable. The part that’s not: we’ve never gone though an adjustment
like this with so much debt outstanding, and deflation nearby.
Back
to the Fed. Minutes of its meeting only three weeks ago were released
Wednesday, and reveal the Fed properly uncertain then. Today, I assume
jaw-dropped.
Exclusion is one way to get close to the heart of the matter. Things about the Fed that are not
true: it did not miss its chance to lift off last fall, winter, or
spring; if the world is too shaky now for liftoff, then lifting off
earlier would leave it too tight now. The Fed’s zero-percent policy and
QE did not cause current difficulty — without its heroics 2008-9 we’d be
living in caves. Nor the goofy plan to hike now so it can cut later.
The Fed does not
have to lift off now, although it might just to shut up the
irresponsible jackdaws and their financial creationism. The only element
of the US economy flashing red is apparent “full employment,” and the
need for pre-emptive liftoff. Nothing else is even amber. Keep it
simple: the Fed doesn’t matter now.
The risk to the global trade conveyor exceeds all other risk combined.
- See more at: http://pmglending.com/blog/market-commentary/credit-news-by-lou-barnes-august-21-2015#sthash.nvaZrQ6n.dpuf
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