Notes From Underground: Some Things to Ponder For the Second Quarter

As I was reading Zbigniew Brzezinski’s book, The Grand Chessboard (1997), this insight into the Russian desire to resurrect its political stature struck me for its prescience about the significance of present developments in the Eurasian heartland. Brzezinski writes, “However, if Moscow regains control over Ukraine, with its 52 million people and major resources as well as its access to the Black sea, Russia automatically again regains the wherewithal to become a powerful imperial state, spanning Europe and Asia. Ukraine’s loss of independence would have immediate consequences for Central Europe, transforming Poland into the geopolitical pivot on the eastern frontier of a united Europe.”

It is important to understand that the moves by Vladimir Putin have deeper meaning and importance the superficial analysis offered up on the network and financial news channels. This situation is going to be with the markets for a long while and its possible impact on the global financial scene should not be undervalued by the daily movements in the world’s equity markets. Putin seems to be timing his adventure on the basis of a U.S. president who has little desire to entangle itself in any foreign adventures and a Europe so is militarily weak and financially fragile. It seems that Putin has picked a propitious time to test the waters of global fortitude against Russian designs for a resurrection of its influence in the mapping out the future of the Eurasian land mass. Oh, by the way, the Russian rouble closed much stronger for the month after making all-time lows at 36.85 roubles to the dollar on March 3. The rouble ended the day at 35.03 to the dollar. Just putting perspective to overcome much of the noise.

***Today, Janet Yellen delivered a speech to the National Interagency Community Reinvestment Conference in Chicago. The subject of the speech  was “What the Federal Reserve  is Doing to  Promote a Stronger Job Market.” LET ME MINCE NO WORDS HERE: THIS SPEECH WAS BELOW THE DIGNITY OF A WORLD CLASS CENTRAL BANKER. Why? I have blogged many times about the leanings of Janet Yellen on the labor issue. I have no problem with a Fed president taking a moral stand on the societal importance of jobs but as Fed Chair it is important to keep a perspective on the importance of the office and its stature in the global financial system. Calling out names and personalizing monetary policy to denote slack in the labor market is contemptible. Fed policy is all about hiding behind reams of data, from the massive matrix that serves the backdrop of its flawed models. The FED’S DUAL MANDATE IS AN EXERCISE OF LYING THROUGH STATISTICS, which is certainly proved by Ms. Yellen’s entire speech and recent efforts at distancing Fed policy from its recent beloved forward guidance.

Well enough of Dorine, Jermaine and Vicki. Let’s get to the substance of today’s speech. It was all about SLACK IN THE ECONOMY AND EVEN THOUGH THE UNEMPLOYMENT RATE HAS DROPPED, THE FED BELIEVES THAT THE OUTPUT GAP IS STILL LARGE AND THE FED WILL NOT BE TIGHTENING UNTIL THE GAP IS CLOSED. The problem for investors is that the FED will keep moving the goal posts. As Yellen said, “Most of my colleagues on the FOMC and I estimate that the unemployment rate consistent with maximum sustainable employment is now between 5.2 percent and 5.6 percent, well below the 6.7 percent rate in February.” If the Fed has become so flexible in its reading of its own data what reliability can we expect on its inflation target? The 2 percent inflation threshold can always be explained away by one-off events. Chairwoman Yellen also reiterated a point she has stressed before: The concern over the failure of wages to keep pace. She cites low wage growth as further indication of slack in the labor markets. While she acknowledges that globalization has played a role in wage stagnation she points out that “labor market slack has also surely been a factor holding down compensation.”

My opinion on this is that the weakness in private sector unions has been more detrimental to the slow wage growth over the last  few decades. Capital has prevailed over labor. My confidence in the Yellen Fed was greatly undermined in today’s speech, which seemed more appropriate for a Presidential State of the Union rather than the reiteration of policy from the world’s most powerful central banker.

***As we enter the second quarter, the main issue to ponder is the interest rates of European sovereign debt. Two-year yields on Irish, Spanish, Italian and Portuguese notes are at all-time lows–Italy 0.83%; Spain 0.69%; Ireland 0.56%; and Portugal 1.28%. In July 2012 it was the yields on European two-year sovereign notes that prompted ECB President Draghi to proclaim he would do whatever it takes to save the euro currency. Since then the rates of the listed countries have dropped from 7-plus percent to today’s record lows. Many investors have purchased this debt and even though the crisis is past, the dark economic clouds remain. Unemployment in Europe is unsustainably high and the budget deficits of many nations remain too large to put forward the needed tax cuts and stimulus programs. Worse, the countries in economic stress can not depreciate their currencies as they have surrendered effective control in joining the EURO.

There is a group of institutions sitting on massive amounts of European sovereign debt;the buyers have certainly been rewarded as the yields have dropped, bonds have risen in value and the currency has gained against most of the major reserve currencies. As Keynes so wonderfully stated: “Markets can remain irrational longer than you and I can remain solvent.” Mario Draghi has achieved great results with mere rhetoric let’s see how long the magician of Frankfurt can keep the game going. Thursday brings another ECB meeting and a Draghi press conference. It seems that with recent comments from Bundesbank President Jens Weidmann, Draghi has been given the green light to proceed with some genuine quantitative easing program. Recent euro weakness seems to reflect it. Will the failure to satisfy market demands for ECB action lead to new upward pressure on the EURO?


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10 Responses to “Notes From Underground: Some Things to Ponder For the Second Quarter”

  1. Richard H Papp Says:

    Perhaps with all the worldwide people uprisings, the powers to be in the USA want to present a more benevolent image to the masses.
    Hey, i from the Government and i am here to help you!

  2. kevinwaspi Says:

    Excellent commentary on the Yellen presentation. The haunting words of Hayek, delivered in his “Pretence of Knowledge” lecture should be required reading of all FOMC members, and mandatory that Fed Chairs have it memorized.

  3. Shocked to Find Gambling Says:

    Yra- Good post.

    From Wikepedia

    In a 2005 speech in San Francisco, Yellen argued against deflating the housing bubble because “arguments against trying to deflate a bubble outweigh those in favor of it” and predicted that the housing bubble “could be large enough to feel like a good-sized bump in the road, but the economy would likely be able to absorb the shock.”

    The failure of the FED to understand and address what was going on in the housing market and the associated CDO scams are what almost lead to a total collapse of the economy.

  4. Shocked to Find Gambling Says:

    I believe that Putin will cause the world major problems for the next 10 years (at least). He will seize land, negotiate, extract concessions and cash from the West, go quiet for a while, and then start the whole process over again.

    Why not…. with our and Europe’s weakening military, and Europe’s dependence on Russian energy, this is a low risk strategy for him to resurrect the Empire.

  5. Matt Says:

    Ira – good piece, but you missed one major point. The reason why wage growth has slowed is because of massive unchecked third world immigration which of course is a transfer of wealth from labor to capital. You must know this, but for some reason, don’t mention it. It is no coincidence that wage growth started slowing in 1968, three years after Teddy Kennedy’s 1965 Immigration Bill.

  6. yra Says:

    Matt–I don’t look at that for the simple fact I am ignorant about it.But globalization and other factors including immigration have impacted as well.The death of private sector unions has caused problems but the strength of public sector and their dramatic increase in pay has wreaked havoc on the middle class–just look at any graph of public sector wages versus private sector–it is also a problem.Now throw in the inability of wages to keep up with inflation causes a further drag on the consumer demand the fed so widely watches

  7. Shocked to Find Gambling Says:

    My take is that a major reason that wage growth has slowed is that we have become a high-tech, two-tier economy, where the majority of workers are less needed and therefore have less value in the market place (immigration and less domestic manufacturing have exacerbated this trend). The opportunities for even the typical kid coming out of college today are pretty limited (unless they are exceptional, have connections, or can tomahawk dunk).

    Poor Teddy Kennedy- still getting blamed after all these years.

  8. kevinwaspi Says:

    Income and wage growth over the past 20 years has followed a pretty demographically based, predictable pattern, no doubt influenced by the move to an economy that more rewards capital and “technology educated labor” as opposed to “brute force labor”. Unionization is declining because of the graying of the workforce, and by this shift of technology. For example of technology’s influence, look around; evidence is everywhere. Your new car was designed, machined, stamped, and assembled predominantly by technology, not human hands. When it needs maintenance & repair, the person performing it cannot turn a wrench until she connects its CPU to the laptop with diagnostic software. At the end of its useful life, that vehicle will be sorted, shredded and recycled to the extent never seen before.
    As for demographics, the U.S. and most developed countries have seen the lump in the snake’s belly move a majority of the population into the part of the cycle where incomes have peaked, or are peaking. Add to that, the dismal job skills capabilities/needs mismatch in today’s educational systems, and the goose is cooked.
    For interesting reading and statistics on the demographic influence on incomes, see

  9. Chicken Says:

    The FED just can’t inflate as rapidly as they need, given wage growth cannot keep pace.

    Financial news media is the epitome of superficial.

  10. Chicken Says:

    Right on the wage issues, in the rear view mirror, I guess. So the logical question remains: “Where to now?”

    “The U.S. played a major role in turning China into the coal-fired workshop of the world.

    At the heart of that story are figures both familiar and beloved by American environmentalists, former President Bill Clinton and Vice President Al Gore. It was Clinton who greased the skids through trade deals in the 1990s for the whole U.S. economy to become dependent upon goods made in China with rock bottom wages for labor and cheap, dirty energy. Walk through a big box retail store today and read where products are made and most likely it’s in China.

    Ironically, Clinton championed free trade while doing much to clean up the air in America. Clinton’s former U.S. Trade Representative Mickey Kantor, who helped broker free trade deals with China, today admits that the U.S. should have worked harder to include environmental conditions in the agreements. Meanwhile, while Clinton, Kantor and others worked to stoke up trade with China, Gore lectured the central government in Beijing on the need to control greenhouse gases. In 1997, he showed China’s leaders the hockey stick graph he later made famous in the movie “An Inconvenient Truth.””

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