Notes From Underground: Nineteen Ways To Leave Your Lover

The reference of 19 ways to leave your lover is a reference to Janet Yellen’s Labor Market Condition Index (LMCI), which is what the Fed chair noted as the most important “dashboard” for measuring SLACK in the labor market. To achieve a true measure of labor market slack it is important for the Fed to dig deep into the statistical data of the unemployment report giving the Fed latitude in its decision-making. Remember, the Fed has twice moved the parameters of the jobs data as the different thresholds established by the Fed were breached quicker than anticipated. First it was an unemployment rate of 7 percent and then moved again to 6.5 percent. The threshold was then moved lower again as slack and its impact on WAGE PRICES was deemed to be the best measure of the health of the jobs market. If the Fed’s focus is wages then the FOMC statement tomorrow should be unchanged as the recent data has continued to reflect that wage gains are stagnant.

I AM GOING ON THE RECORD: Today, Jon Hilsenrath released a webcast and suggested that Chair Yellen will announce that the FOMC will continue its use of forward guidance and its key phrase of CONSIDERABLE TIME . Upon the release of Hilsenrath’s piece, all risk assets RALLIED in sync with the DOLLAR SOLD OFF. The market seemed to be relieved that the continued use of CONSIDERABLE TIME would mean the Fed would keep interest rates lower for longer. I AM GOING TO OPINE THAT THE FOMC WILL REMOVE THE CONSIDERABLE TIME PHRASE AND LEAVE THE PHRASE “SIGNIFICANT UNDERUTILIZATION OF LABOR RESOURCES” in the FOMC statement. It was only at the last meeting that the Fed introduced us to the underutilization phrase.

The underutilzation of labor resources provides the Fed with more flexibility in its timing of when to move rates. A considerable period is to constraining and confusing for the market so it is time to say goodbye to FORWARD GUIDANCE. Recently, Fed hawks and doves have been critical of the “considerable time” phrase and it was Fed President Plosser who was opposed at the previous meeting because of the rigid nature of forward guidance.

More importantly, Vice Chairman Stanley Fischer has long been critical of forward guidance and he is the mentor of most of the world’s  key central bankers. In a Wall Street Journal piece from September 23, 2013 (prior to his nomination for Vice-Chair), Fischer said: “You can’t expect the Fed to spell out what it’s going to do. Why? Because it doesn’t know.” We don’t know what we’ll be doing a year from now. It’s a mistake to try and get too precise. Further, Fischer noted, “If you give too much forward guidance you do take away flexibility.” SO IT IS TIME FOR THE YELLEN FED TO REMOVE THE MOST INEFFICIENT TOOL IN ITS TOOL BOX. BY REMOVING THE CONSIDERABLE TIME phrase YELLEN CAN BE A LITTLE HAWKISH WHILE REMAINING FULLY COMMITTED TO PROVIDING THE BACKDROP FOR A LIFT IN WAGES. A SIGNIFICANT UNDERUTILIZATION OF LABOR RESOURCES is a much more powerful policy framework than just a considerable time period.

The problem from a trading perspective is that Hilsenrath moved the markets for a no change from forward guidance so be prepared for increased volatility, if Notes From Underground is correct. Be patient though as there is a Yellen press conference 30 minutes after the FOMC release. If forward guidance is removed it should get Chair Yellen a unanimous vote on policy and even the HAWKS will be able to live with the “underutilization” phraseology.

     “You just slip out the back,Jack
       make a new plan, STAN
      you don’t need to be coy, Roy
       just get yourself free,
       Hop on the bus, Gus
       You don’t need to discuss much
       Just drop off the key, Lee
      And get yourself free.”
See, Janet, 19 ways to leave your lover. Line them up and then you can let go on monetary policy at the zero bound.
***The Scottish referendum on Thursday will have great market-moving potential. I will have more to say tomorrow night but if the London bookmakers are to be respected, the NO vote will prevail. But for us the media is more entranced with POLLS so that is what has been moving the markets. Will Scotland leave the union? It would be an act of lunacy for the cost/benefit is heavily weighted toward a NO vote on independence from England. Unfortunately, this is an argument of the heart and that makes the outcome much harder to predict. We have two potential wild days ahead of us. Maybe more important will be the election results that have shown in Germany.
More on that tomorrow but the recent gains in local elections by the AfD (alternative for Deutschland Party) may make it difficult for Chancellor Merkel to take a conciliatory approach for the ECB‘s ABS program or any other type of bailout program being devised by Mario Draghi and the Eurocrats in Brussels. If Draghi meets the immovable object of German austerity, the market’s love of affair with a depreciating euro because of quantitative easing may end. Bundesbank Bank President Weidmann may be in the minority at ECB meetings but the rise of the AfD may give the Bundesbank a greater voice in European monetary and fiscal policy. It is never easy with all the moving parts in the European Union.


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25 Responses to “Notes From Underground: Nineteen Ways To Leave Your Lover”

  1. asherz Says:

    Just as the New York Times is the premier outlet for State Department leaks to signal a policy in advance, so is Jon Hilsenrath the recipient of ” a little birdie told me” info from the Fed. His suggestion that a “qualified considerable time” “guess” is not one I would want to bet against. The Fed never wants to surprise the markets, and JH is their tipster to lessen volitility.

  2. yra Says:

    Yes Asherz you may be right but I see the world thru other glasses and will respect the market’s actions of today–but my outline is what I think based on some solid research—I don’t go to the back of books for answers.Besides,if what you say is correct isn’t Hilsenrath taking part in insider trading by the measures of the New York Attorney General for who received the “insider” scoop first

  3. asherz Says:

    Leaks of this sort are never given in a straighforward and direct way which certainly would be illegal. It’s drip, drip, drip, needing some analysis and acumen from the recipient making it a very educated guess.
    But tomorrow at 2:15 will tell.

  4. Nate Says:


    I agree Scotland will vote no. If they vote no, doesn’t that raise the pound, in theory, putting pressure on the dollar?

  5. Jozsef Nagypal Says:

    hi, I am also in the group of belivers that the fed will leave the “considerable time” expression. As ECB, China setps in, and BOJ easing is just around the corner, it is a safe time to step further ahead.

  6. yra Says:

    Nate–don’t over think it—if you like thepound buy the pound

  7. Dustin L. Says:

    Yra- Great piece, thanks for sharing! Markets are really heating up, I continue to watch buybacks, dividend hikes, M&A activity and the junk bond mania (it may just be termed this in the next Devil Take the Hindmost) as signs of money starting to slosh around in the US especially as haven flows have been especially strong of late from Europe. While I think everyone is on the same page that the Fed has turned more hawkish in it’s stance, and thank goodness it has, they are still far behind the cycle of inflation. With Chief Yellen focused on wage rates and slack as measured against an economy that will never be the same again (oh historicism how I abhor you) they seem likely to stay too loose for too long until inflation does become a problem. I believe the only debate on this front should be will they, and can they, turn away from super easing in time and avoid complete monetary mayhem? I believe they will at first, at least this time. But, time will tell and their are several conditions that make this a hard decision and circumstance for the Fed, a decision of which I am glad I don’t have to make. But, unfortunately for the Fed long rates will start to rise without their go ahead and the curve should stay steep, much in accordance I believe with your current thinking, even if the Fed engages in token tightening along the way raising short rates. The massive balance sheet creates so many various problems at this juncture as to the Fed’s credibility as it’s asset values fall (it’s long duration assets in particular) and thus it’s ability to absorb liquidity falls as the market prices in inflation expectations in long rates. But, at least the Fed is on their way to stop buying.

    I would like to leave you with a question Yra; with so much capital flow to the U.S. from Europe (with plenty of potential for a pickup from Asia and SA as well), how much does a rising dollar take pressure off of the Fed? It seems a bit of conundrum, something the Turkish central bank struggled with a few years back; the rise in the currency helps to control price pressure but the currency is rising because of capital flows that put upward price pressure. So my thinking is that the composition of the foreigners acquisitions become key. Bonds or equities? Corporates or Treasuries?

    Now back to trading and enough theorizing for the morning. Safe trading to you on Fed day and all week, it may just create some more opportunities like you said.

  8. rolaf Says:

    Love the bold calls, Yra. Even if you’re not correct, there is huge value in thinking outside the box. BTW, I’m still with you that GS goes private — you are just early, not wrong, on that one.

    Testing your conspiratorial chops, what are your thoughts on brent here? Interesting that a partial solution to two of the western world’s biggest problems (Russia and ISIS) can be found in brent selling off, hurting both of their revenue streams. Should we expect further presser on it? Would a release of SPR be to direct of a shot at those two for Obama to take? I’m sure he’s tempted.


  9. Nate Says:


    I’m embarrassed to say, I’m such a simpleton, I do not trade currencies, nor do I know how. I am so inundated with other aspects of life I have little time to learn. Hopefully that will change soon.

  10. yra Says:

    Dustin–thanks for the great post –I will answer you when time permits but a great post and should get all readers thinking

  11. ShockedToFindGambling Says:

    Yra- I have no idea on the specifics, but doubt JY will do anything very hawkish.Expect some meaningless, miniscule change in wording.

    Even Greenspan noted last week that a strengthening dollar is equivalent to a tightening . With EC and Japan to ease more, a real tightening by the FED could send the dollar into overdrive, choke off our exports, and cause a recession.

  12. Chicken Says:

    More of same.

  13. yra Says:

    Shocked–right on in the analysis in my opinion but that is why should could have just relied on the underutilization of labor as the ultimate fall back position–which in her language is what she has done—the silence of Stan Fischer is deafening

  14. Alex F Says:

    The gap for 2016 is 100bps vs market pricing. This is way too big for the market to maintain.

    The widening gap between the FOMC dots and market leaves more scope for a sharper reaction if data delivers as per the Fed’s expectations.

  15. yra Says:

    Alex–yes but the fed’s projections have not been very accurate for the last three decades–about as good as the CBO forecasts over the years.It is time to get rid of all the forecasts and become data dependent –normalization is a funky term—does it mean the real yield in terms of return to creditors?

  16. Scot Says:

    At least tell me what was inappropriate about my questions below:

    Do you view Scotland’s vote for Independence in the same light as our “choice” to bail out the banks? The short-term cost/benefit may favor a NO vote, but the long-term benefit for Scotland favors a YES vote. The banksters are only threatening to leave because of their UK debt holdings. When the EU economy falls off the cliff shortly, the financial transaction tax (and other desperate govt measures) will make the argument for Scottish independence even stronger. Actually, a NO vote now won’t matter much, as it will occur down the road anyway, and prevent the separatist from being blamed when the economy tanks in the coming years.

    If we would have bitten the bullet in 2008, and certainly in 2001, the short-term pain may have been sufficient to drive the needed reform without risking a Dark Age. However, by favoring the short-term cost/benefit we risk over-shooting reform and moving to something much less democratic when the consequences of our govt’s fraud and negligence hits with ever greater force by 2016.

    If Scotland bites the bullet now, they have a good chance of emerging as Europe’s next safe-haven for capital. The economic contraction from the ongoing sovereign debt crisis will be causing increased govt plundering of its citizens that will accelerating the Separatist movement’s going on across the globe. Why shouldn’t Scotland get ahead of the curve/tsunami?

  17. ShockedToFindGambling Says:

    Yra and group- something I have been working on

    Fixing Monetary Policy

    There has been a lot of discussion recently in the financial community about how the FED will facilitate the raising of interest rates, at some point in 2015. It appears that the FED is planning to use an increase in the Fed Funds rate, to signal and implement this tightening, as they have done for decades.

    Trading in the Fed Funds market has declined drastically since the onset of the financial crisis……..there is so much liquidity in the system, that banks do not need to borrow as often to meet “reserve requirements”. As economist Lawrence Berra would say, “Interest Rates have gotten so low in the Fed Funds market, no one borrows there anymore”.

    Since the “financial crisis”, the FED has kept interest rates exceedingly low. Though it has long been standard operating procedure to lower interest rates during a recession, the magnitude of this “easing”has been unprecedented. The apparent result has been a sharp increase in asset prices, but consumer and business spending has not rebounded at a rate typical of previous economic recoveries.

    “Easy money” policies are believed to have led to the price inflation of technology stocks and the crash of the “tech bubble” in 2000. The “financial crisis” of 2008-2009 was caused, in large part, by the extreme price inflation (and collapse) of only about $2 Trillion of sub-prime mortgages.

    I would guess that current “easy money” policies of the FED (and other Central Banks), have led to the extreme price inflation of at least, tens of $Trillions of financial assets. The magnitude of “easy money” policies of the past 5 years dwarfs any previous efforts to inflate the economy.

    “Easy money” policies favor borrowers over lenders, and have negative consequences. Every penny saved by borrowers is lost income to lenders. Conservative investors in bank savings accounts, money market funds, certificates of deposit, and Treasury securities have been hurt financially by low interest rate policies. The purchasing power and retirement plans of these conservative investors have been negatively impacted. The end result is that Central Bank policies are promoting speculation and penalizing conservative savers, thereby weakening the financial stability of the world economy.

    So what do we do now? How do we fix the disequilibrium that exists between borrowers and lenders? And how do we help solve the problem of bubbles that led to crashes in 2000, 2008, and in the future?

    I would argue that the best way to normalize interest rate policy is for the FED to let the Fed Funds rate float……… would become a “free market” rate. The Fed would also need to gradually begin to drain “excess reserves” from the system. More specifically, drain until banks need to borrow on a somewhat regular basis to meet reserve requirements, thus helping to once again make the Fed Funds market a viable high volume market, with many active participants. The FED would still be able to inject/remove liquidity to somewhat influence interest rates and to deal with capital imbalances in the banking system and to deal with crises.

    Why do this? If allowed to float, the market will find the right price for borrowers and lenders to meet. A “free market” will “ration credit” by increasing interest rates when appropriate and “making credit more available” when appropriate, by lowering rates. This should help us avoid the “boom/bust” cycle which appears to be intensifying over the last 2 decades.

    Simultaneously, the FED should start to phase out the policy of paying interest on “excess bank reserves” held at the FED. If the FED believes that “reserve requirements” are too low to safeguard the economy, they should simply raise them. They can still continue to pay interest on reserves. Some may argue that raising “reserve requirements” is a tightening, but over $2.5 Trillion in “excess reserves” are currently voluntarily parked at the FED.

    Our ability to forecast the economy is limited. Once the economy gets rolling, no one wants the party to stop, and those who accurately predict a coming downturn will be effectively overwhelmed by those who want the party to continue. When supplied with ridiculously “cheap credit”, expansions will typically proceed to excess. The exaggerated downturns caused by bubbles are dangerous. The “financial crisis” of 2008-09 was far from a worst case scenario. The world economy barely held together, and we may not be so lucky the next time.

    The only rational choice that I see to prevent future economic disasters is to let “free markets” ration the cost of credit. Economists en masse, have a poor record of forecasting downturns and upturns in the economy. A “free market” in Fed Funds should act as a governor to prevent the economy from overheating (by raising rates and making credit more expensive, when appropriate) and an accelerator to bolster to the economy (by lowering rates and making credit less expensive, when appropriate).

    A “free market” in Fed Funds has the best shot to be the accurate “one-armed economist” that we have been searching for.

  18. yra Says:

    Shocked–i think this is a great post and you should take over publishing this Notes From Underground.The Fed is in a position where it does not want the market to set rates for fear it will lose control of the overnight rate,especially as so much takes place in the shadow banking industry.Also,the fact that the present fed policy is being mimicked by the other central banks makes the market power even more uncertain.All your points are well taken which is why I maintain that the fundamentals for GOLD have never been better while the Technicals are miserable—but ultimately fiat currencies are in a very difficult situation

  19. Chicken Says:

    Good stuff, shocked.

    Aside: “Can’t make money sitting in cash.” Augh!

  20. Dustin L. Says:

    Shocked- Great stuff, and hard not to agree with! The great distortion of originary interest via the Fed’s manipulation of the money relation is a very dangerous thing for the future of civilization of as a whole. Too much capital is wasted as we continue this yo-yo of credit induced bubbles. Future generations would be grateful to such a pragmatic approach where a Bagehot type central bank could provide elastic money supply in liquidity related events at high rates but not attempt to outright control interest rates for an entire economy and thus inevitably, via the immense complexity of the global economy, distort the global universe of human action (plug Mises).

  21. Dustin L. Says:

    Yra- The silence of Stan Fischer is indeed deafening! I guess they only brought him in to “spot bubbles” that Yellen & CO. feed!

  22. Chicken Says:

    CO2 footprint just got considerably larger.

  23. ShockedToFindGambling Says:

    Yra, Chicken, Dustin, thanks for the encouraging comments.

    I realize the FED does not want to lose control of the FF rate, but I am trying to get a conversation going on floating the rate.

    • Chicken Says:

      Yeah, I dunno what can be added to the wish list as an improvement shocked but it seems to me the FED has particular masters calling the shots so whatever occurs isn’t likely to benefit the peanut gallery in a way I can imagine.

      But I like your idea.

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