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.
Tags: Fed, FOMC, Janet Yellen, Stanley Fischer, wage inflation
March 16, 2016 at 6:57 pm |
” I am not buying into the theory and believe like Diane Swonk…”
I printed and filed this blog post. The above quote from Prof. Harris is a very rarefied moment in our opinionated realm of financial commentary.
March 16, 2016 at 7:05 pm |
Joe—yes it takes a great deal to agree with her but she was dead on target
March 16, 2016 at 7:37 pm |
The new high in the Dow Utility Av. today seems to add validity to the current equity rally
March 16, 2016 at 9:54 pm |
Adam Smith was not a champion of having labor increasing its share of profits over capital. What he observed is that in an expanding economy and productivity without an expanded workforce the worker will benefit in rising wages- and vice versa.
What should not be overlooked in the rising equity markets of recent weeks is the massive corporate buybacks fueled by borrowings and retained earnings with little going to capex. This when revenues and net profits are declining, but being masked by financial engineering. The widening gap between equity prices and economic fundamentals, supported by a Fed cheering team for risk on will have its inevitable consequences. Central Banks will always have the last word if they want to cheapen their currencies. Kuroda and Draghi may not be able to immediately achieve their goals because of a crowded trade but the house usually has the upper hand. Precious metals, the kryptonite of BIS and Co. will be the big winner.
March 17, 2016 at 3:06 am |
Asherz–Adam Smith was as much a moral philosopher as an economist–that was my point–sorry if I failed to be clear.
March 17, 2016 at 9:09 am |
asherz — great summation of all key points. as for “Central Banks will always have the last word if they want to cheapen their currencies. ..” according to Bernanke, the Dollar is Treasury’s responsibility, not the central bank’s 🙂
March 16, 2016 at 11:10 pm |
Wouldn’t corporate profit be attached to wage increases? Is it likely, post-crash corporate tax holiday has run it’s course?
March 17, 2016 at 2:01 am |
I sold my Fluor yesterday IRA. The stock has come too far too fast in world environment of reduced petrochemical and other projects. There are no fundamentals to support infrastructure companies, absent the Presidency of Donald Trump.
I switched the money into Royal Dutch Shell – with a history of uninterrupted dividend payments, I figured that a 5% return from dividends for the remainder of 2016 should protect the stock. RDS will unload the $30 billion of assets in what seems to be a more stable environment for oil. That’s my 2 cents.
March 17, 2016 at 6:12 am |
Yra- Every economist is a philosopher just as every historian is a philosopher. We all see the same events, look at the same facts, but filter them through our own lenses. The social sciences all have their roots in philosophy.
March 17, 2016 at 7:57 am |
agreed –but i think the contrary capture of economics by the frustrated electrical engineers means less philosophy and more dependence on mathematical models making Dostoyevsky ever more meaningful
March 17, 2016 at 9:20 am
Both of you gentlemen have just explained why economics is called the dismal science. Half-science, half-art? Wasn’t it Truman who thought he could get straighter answers from a one-handed economist?
March 17, 2016 at 6:39 am |
Very interesting Yra.
Do you think she wants to raise wages, because she believes wages are too low to be able to survive in this current and near future economic environment,
or do higher wages equate to more taxes to be collected to pay back the us debt?
And or higher wages leads to more spending, kicking the overall economy up higher?
If I recall correctly, you had mentioned previously that lower RBOB prices at the pumps was not fueling (pun) more consumer spending, because the costs of healthcare had increased significantly. Or maybe I heard that from Ben Hunt.
As a trader, I guess it really doesn’t matter the reason behind her objective, I just need to understand where to position myself to capture the anticipated moves.
As a consumer and citizen, it helps me to have a bigger picture view of where we might be heading and why and the probabilities of the outcome.
For instance on a long term investment, I might want to short DB or GS, as no increase in interest rates plus flat consumer income and rising commodity prices increase the risk of loan payback defaults, especially in a weak global true economy, not the fake economy of the stock market.
I enjoy your writings, thanks.
March 17, 2016 at 6:51 am |
WSJ reports CAT sees downbeat rev forecast for first quarter as business challenged by falling demand. The question is do we believe them, lol. The major infrastructure projects will take a while to get started won’t they? Or will stocks start rallying in anticipation of capital spending as the USA implements a new deal era?
March 17, 2016 at 7:53 am |
Ball–the fiscal stimulus is the policy being pushed by the Larry Summer’s camp around the globe and will take time to play out—but if there is movement afoot the infrastructure involved stocks will be the barometer–but this is a long,drawn out process.I believe Yellen has been honest in her desire to see labor take a greater piece of the economic pie as it has been ravaged by the davos crowd measure of globalization–this is really the fallout from the argument of Thomas Piketty—on the RBOB you must have heard that from the very wise Ben Hunt who is always a must read
March 17, 2016 at 7:55 am |
Ben Hunt’s recent piece–Welcome to the Jungle was just great
March 17, 2016 at 8:38 am |
“The time is not far off in the Middle East, Richard, when it will be literally ‘God help the Shia’. More than a billion Sunnis have simply had enough of them.”
Saudi Prince Bandar
Former Saudi ambassador to the US and organizer of ISIS?
March 17, 2016 at 9:25 am |
Chicken-that probably depends on whether Bandar and/or a few other “family” members can make a buck off it to supplement their share of national commodity revenues.
March 17, 2016 at 6:09 pm
Yes precisely, however, it’s not only about securing wealth although that does have a lot of weight, IMO.
March 17, 2016 at 10:05 am |
Janet’s mentor/professor was Professor Joseph Stiglitz. Both are Keynesians who believe that government need to play a role in markets. Both are very liberal ( Not a criticism, but insightful to her decision bias). Janet taught at Cal Berkeley.
Yesterday’s decision unveiled the lie of data dependent.
What was probably most disturbing was the answer to the question by Steve Liesman on Fed credibility. It was total babble. Your good friend Rick Santelli even got Liesman to admit her answer was unintelligible. Janet is not quick on her feet. And no doubt the market is/has lost faith.
My greatest criticism of Janet Yellen is she was the co-pilot who over saw the crash of the housing market into the financial crisis and never saw it coming. Where was she when she was to be regulating banks and allowed all the subprime no docs garbage loans, home equity lines and lack of capital and regulation?
No question that Lael Brainard is excerting more of her influence on the Fed than Stanley Fischer. It looks like continued easy money.
What is most interesting is that the markets assume we don’t have negative interest rates in the US. That is far from the truth. When inflation is running at 2-3% (last month 0.3%) and fed funds are at 25 bps that is a negative real rate of 2%. While the US may not be at nominal negative interest rates we certainly have real negative interest rates.
For certain Janet will always err on the side of holding back on normalization.
March 17, 2016 at 11:32 am |
Frank–very great post and you are right that Steve Liesman was danced by Yellen and Santelli forced him to admit it—-a momentous day as many of the lap dogs appeared to be growing weary of the Fed and LIesman’s question about credibility probably means he will not ask the first question at the next press conference..Stiglitz was just at the BOJ and I will post what Tobias Harris had to say about that tonight
March 17, 2016 at 11:37 am |
Joe- Bernanke pointing a finger at the Treasury regarding the dollar, yeah, they print it and also determine which lady will replace Hamilton on the 10 spot, leaving Alex to be seen only on Broadway and entertaining the White House. But Ben’s pointing, three fingers point back at him as the Fed distributes the currency.
Yra, re your thesis on the Summers camp pushing fiscal stimulus and therefore the investor looking at infrastructure companies such as CAT and Fluor, have you factored in our $19 trillion deficit and growing? Since the Republican House sets the budget, do you think they will be inclined to increase the deficit? Paul Ryan today said that priorities are in reaching a balanced budget and reducing debt.
Our growing debt burden, manageable because of ZIRP, has become an albatross to growth and spending. The Electrical Engineers haven’t put this into their algos. But neither did the two Nobel prize winners factor in some key data points that almost collapsed the financial markets at LTCM.
Lots of Kool-Aid in the punchbowl.
March 17, 2016 at 1:38 pm |
asherz–absolutely. Through all the testimony before congress, Fed officials fall back on whatever is convenient and expedient. Pumping up reserves? Quit publishing M3 & piously point out the $ exchange rate is not their job. Can’t give a straight answer on Fed policy effect on labor market? Remind Members of the Dual Mandate and the importance of Price Stability. Some Congressman from Fly Over Country asks about potential for inflation due to present Fed policy? Repeat reminder regarding Dual Mandate and point out the challenges of trying to put Americans back to work in a diversely dynamic global financial environment. Greenspan taught his successors verbiage is your friend.
March 17, 2016 at 11:57 am |
Asherz—yes that is certainly in my thinking but I see the desperation and even Ryan will reshuffle the deck to get some stimulus—I am never a fan of the Military-Industrial complex so money can be found that will come out of the defense end and with any type of genuine effort money can be found and redirected towards investment projects —but the deficit is a major priority for me but I am and will be a fan of Bowles-Simpson as a starting point
March 17, 2016 at 6:36 pm |
Precisely, Ryan is no different from others inside the beltway who say one thing and do another. One could only hope the US doesn’t continue spending upwards of $500B and perhaps divert some of that towards building the domestic economy but this is their drug.
Why run a deficit as opposed to simply monetizing the debt and funding the government that way, it all boils down to paper shuffling, nothing more.
One more point, have a look at what’s been accomplished, seems almost as if the mountains of money was spent for the purpose of cementing defense demand, just put it on the public’s dime.
Personally, I feel we deserve a refund from the past couple decades of bait and switch.
There a limited number of explanations for why/how Yellen “missed” the housing crisis. Pick one and think it through to today, extrapolate that into the future (b/c some things never change).
Yes, it appears to me the public is becoming progressively apprehensive as time passes and the same old music keeps playing.
Is it becoming clear yet, DC is nothing but a gang of thieves?
Oh, what are the reasons for capital rapidly fleeing China, perhaps the unwinding of the consumerism real estate ATM party?
IMO