I TOLD YOU THEY WERE COMING. When Janet was named FOMC Chair I wrote a piece about Ms. Yellen not being a friend of Wall Street as she was first and foremost a LABOR ECONOMIST. When she took the FED reins corporate profits (as a percentage of GDP) were more than 11%, around all-time highs. I opined that Chair Yellen would prefer to see wages rise and corporate profits fall so as to adjust the economic balance toward labor and away from KAPITAL. In today’s FOMC statement I believe that Yellen let it be known again that inflation running hot may be beneficial if it results in higher wages. The sense of the FED was so transparent that even Diane Swonk actually raised the issue rather than performing her typical lap dog tricks and heaping unwarranted praise upon Yellen. Swonk poignantly said the underbelly of the economy and the Fed was revealed. She also said very clearly that Yellen and her husband were both labor economists. Scott Minerd also supported this view. In backing up Swonk’s analysis, Minerd noted that Yellen appears ready to overshoot on inflation as “she wants to see wage rises sustained.”
TO ALL STOCK MARKET BULLS: IF WAGES ARE TO INCREASE IN A TEPID GROWTH ECONOMY, THEN LOGICALLY PROFITS HAVE TO DECLINE AND P/E RATIOS WILL BECOME STRETCHED FURTHER. THIS COMING PERIOD OUGHT TO FAVOR QUALITY STOCK PICKING VERSUS JUST BUYING STOCK INDEXES. Again, I’m noting that Chair Yellen will err on the side of labor for she is a moral philosopher in the true spirit of Adam Smith. (I make no judgement about her moral philosophizing for I agree with her but I don’t strive to have this quality in the Fed Chair.) People over profits is no vice but high stock prices are not a necessary virtue.
At this point, it may be appropriate to revisit a post from May 2014, titled, “Has the Fed Potentially Created a Trap For Itself??? (Maybe)”. The piece asks an important question: “IF PRICES ARE ON THE RISE AND UNEMPLOYMENT IS STILL DEEMED BY YELLEN TO BE CYCLICAL WILL SHE MOVE TO RAISE RATES EVEN IF INFLATION FAILS TO PUT UPWARD PRESSURE ON WAGES?”
***The market outcomes Yellen’s revelation of erring on the side of increased wages were highly expected:
1. GOLD and SILVER rallied as the markets were anticipating a more “hawkish” Fed but the vote was 9-1 with only Esther George having the strength to oppose Chair Yellen. It seems that Vice Chairman Fischer would have voted AGAINST but being 72 years old he has low testosterone. The yield curves, which have been in flattening mode for several weeks reversed as BONDS AND NOTES became concerned about the Fed’s tepid views on inflation.
The speculators’ favorite, the 5/30 curve, made a low of 119 basis points earlier today but after the Fed release and the Yellen press conference the curve steepened out to 132 basis points, a significant retracement. The 2/10 curve also had a volatile day as it erased the early low of 95 basis points and the curve steepened to 106 by day’s end.
2. All commodities rallied after the FOMC statement as oil, grains and copper either added price gains or reversed earlier losses. The most violent move came in the foreign currencies as the Fed’s softened concern on wage inflation was seen as DOLLAR negative. Some analysts are maintaining that YELLEN was just delivering what was agreed to at the G-20 meeting, which has been noted as a Plaza Accord.
There is some who think a dollar rally would upset the Chinese YUAN peg to the DOLLAR by putting upward pressure on the YUAN by default. Also, the Plaza Accord theory maintains that a DOLLAR rally would cause greater strain on the emerging market currencies who have great exposure to dollar-based borrowings. I am not buying into the theory and believe like Diane Swonk that it is an issue of concern for the political mood in the U.S.: WAGES OVER ALL.