Notes From Underground: The Sins of Wages

Tuesday was the first round of the Federal Reserve Chairman Jerome Powell’s semi-annual testimony to Congress. The Senate Banking Committee questioned Powell about recent Fed decisions and looked for some guidance as to how the FOMC viewed the current state of the domestic and global economy. There were many questions about the impact on the economy from the Trump tariffs, which the Fed chairman adroitly evaded and put the onus on Congress, where it rightly belongs.

I think 60 percent of all questions involved the concept of WHY WAGES HAVE FAILED TO RISE even as economic growth has begun to gain velocity as a result of the Trump tax cuts and fiscal stimulus. Both parties hammered on the lack of real wage gains so rest assured the November elections will be about the failure of economic policy to lift the bottom line of the average American household. On Wednesday you can be sure that the House Financial Services Committee will also concentrate on the failure of real wage gains to improve the financial condition of the average American worker.

Chairman Powell cited the usual reasons for lackluster wage growth: 1. stagnation in education; 2. productivity flattening out; 3. weak investment hindering productivity; and some sense of foreign-based competition.

The Senate Committee failed to push Powell on a discussion about the Phillips Curve and whether it remains relevant for setting Fed policy. Hopefully somebody in the House will stumble onto the question. Powell maintained that the FED can do very little to lift wages as all of the reasons he cited fall upon the shoulders of the executive and legislative branches since that is where fiscal and education policy is created. Senator Bob Corker did suggest that wages have failed to rise even when productivity has increased, which should have led to a discussion about the impact of global competition acting to suppress workers’ pay. In the spirit of Tomas Piketty and others, while capital is mobile labor forces are sedentary so there is certainly a lag effect on workers’ compensation.

In my OPINION, the issue of WAGES will result in an attack upon the FED as it raises interest rates in an effort to contain wage increases–which the Phillips curves maintains is the mother of all inflation dynamics. It is in this vein that I BELIEVE PRESIDENT TRUMP WILL BEGIN TWEETING ABOUT THE FED. The White House will question why the FED is acting to curb workers’ gains by attempting to slow the economy (and stealing the thunder of the Democrats). There were a few questions about the flattening of the yield curve and Powell said he isn’t convinced that it is the harbinger of a recession. Powell sustained his argument that if it tells us something it is that the long-end of the curve is sending us information about the neutral rates for longer term investments and debt.

The market absorbed Powell’s hawkish stance on the short-end and the belief that the FED will raise rates in the fall and maybe in December as the job market remains strong and inflation is approaching the Fed’s self-imposed target. Gold broke and the DOLLAR rallied as the Fed chairman held firm to his previous views while also remaining nonplussed by the flattening of the curve.

One thing I would remind my readers is that the agriculturally sensitive states raised the issue of farm prices as North Dakota’s Heidi Heitkamp and Indiana’s Joe Donnelly noted the concerns about the impact of President Trump’s trade policies on their constituencies. Senator Donnelly was very concerned about farm prices falling below the cost of production, which would put severe pressure on farmer’s debt loads, especially with the FED making the cost of servicing that debt more expensive.

It is one thing for Congressional voices to raise concerns about agricultural prices and slow wage gains but when the TWEETER-IN-CHIEF gets his fingers going, watch for an increase in volatility. The SIN of STAGNANT WAGES WILL CERTAINLY BE AN ELECTION ISSUE, which will prompt politicians to target suspected villains. Several senators targeted Wall Street as the culprit for the increased WAGE GAP but the FED will also prove to be a convenient public enemy. The failure of wages to rise will be a key component to the election discussion.
In the spirit of Powell’s testimony I am stealing a page from President Gerald Ford: Instead of WIN buttons (whip inflation now), I am promoting SIN buttons in response to lackluster wages: START INFLATION NOW. As Congress pressed Powell, the WAGE GAP is truly SINFUL. Onto November.

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30 Responses to “Notes From Underground: The Sins of Wages”

  1. David Richards Says:

    Some of those farm states, the poster child being Illinois, will fail financially as US agriculture eventually collapses due to retaliatory tariffs being slapped on US agricultural exports worldwide. A sub-federal sovereign debt crisis looms. Wheat is a sole standout, but looking at Illinois again, soybeans have crashed. Illinois is doomed, and several others aren’t far behind.

    Maybe Congress should ask Powell if the Fed will bail out these likely to fail states with a state bond purchase program like what the ECB does for failing Eurozone states?

  2. Stefan Jovanovich Says:

    Can we bet on this, Yra? I am happy to give you odds. Trump will blame wage stagnation entirely on immigration, both legal and illegal. He will say nothing at all about the Fed except to say what a fabulous guy Powell is and what a wonderful job he is doing. He will press Conference to build the wall and to increase the reduction of middle class tax rates and make them permanent.

    • yraharris Says:

      Stefan–sure as i am sitting here writing this response–you name the bottle of whiskey and you have a bet.I will let you and the readers objectively determine the winner although theoretically we can both be right with the tweeter in chief

      • Stefan Jovanovich Says:

        Buffalo Trace – 1 bottle to me if I win, 2 to Yra if I Iose. Let’s be quants.Tweets about riing interest rates, inflation by the Big Orange are points for Yra, tweets about immigration are points for me. Election day, midnight Eastern is the finish line. I have to score 2x to win. I will post the running tally based on the real Donald Trump original tweets.

  3. Arthur Says:

    Debt. Rising.
    Inflation. Rising.
    Interest rates. Rising.

    • David Richards Says:

      Economy. Falling?

      Some leading economic surprise indicators have recently been negative for the US and positive for Europe. A reversal of what I wrote here months ago. It’s like passing a baton back & forth.

  4. asherz Says:

    In 2005 Greenspan expressed his conundrum as short rates were being raised but the long bond yield was declining.
    In 2018 the unemployment rate had fallen from 10% to 4% with no apparent effect on wages. The middle class was suffering. A conundrum?
    Various explanations have been offered, led by globalization. Is there another reason that is fundamental and not being spoken about?
    It is an existing and more importantly, impending explanation.

    Robots and artificial intelligence. Minimum wages in some jobs are accelerating this trend. But even high paying positions are replaceable. It will not be limited to taxi or truck drivers or hamburger flippers. Lawyers and accountants? Pharmaceutical researchers?
    There is an estimate than in a little over a decade 800 million jobs globally will be robotized. Could this be a factor in our present conundrum?

  5. Stefan Jovanovich Says:

    Bourbon bet twitter tally: 7/18

    2 mentioning “the Border” in support of Republican candidates- Kevin Yoder, KS-3 and Brian Kemp – GA Gov

    1 supporting ICE, criticizing Democrats and MS-13 for being opposed

  6. David Richards Says:

    ^ Well I’d say that got decided pretty fast. Trump just blasted the Fed on hikes and collapsed USD intraday:..

    Big daily key reversal in the dollar. EURUSD never got back close to its low for the year, which I’m now even more sure is already in.

    • David Richards Says:

      Trump: “I don’t like all of this work that we’re putting into the economy and then I see rates going up,”

    • David Richards Says:

      “President Donald Trump’s criticism of the Federal Reserve has little precedence in history. Only Richard Nixon ever sought to overtly influence the direction of monetary policy while in office.”

      • Stefan Jovanovich Says:

        CNBC’s history is more than a bit off. The President’s remarks are meek and mild compared to what Lyndon Johnson did.

        When he became President, Lyndon Johnson’s first general comment was “It’s hard for a boy from Texas ever to see high interest rates as a lesser evil than anything else.” By December 1965 he was complaining about Martin’s specific votes. After the meeting on the 3rd when Martin cast the deciding vote to raise rates, Johnson “burn(ed) up the wires to Washington, asking one member of Congress after another, ‘How can I run the country and the government if I have to read on a news-service ticker that Bill Martin is going to run his own economy?’”

        There is a great deal more to the story than the Times narrates; but this is a decent – for them – preliminary study.

      • yraharris Says:

        stefan–you are very correct.The lazy media knows next to nothing.Harry Truman was a bully of the FED as the Treasury sought to keep rates low in an effort to finance the payment of war debt.Richard Nixon owned Arthur Burns and captured the FED to make his- we are all Keynesians a reality–the book by Alan Matusow captures it very well so all this noise is nonsense.It doesn’t justify Trumps efforts but it is not new and I would not be surprised when Trump nominates Larry Summers for the FED.The real story here is whether sources inside the White House who were around for the Kiernan interview traded ahead of the CNBC release.The SEC should be investigating this and probably the CFTC–look at the charts and see how markets were trading prior to the CNBC titillation

      • David Richards Says:

        Interesting. Expected as much from you. I expect Martin held his ground? And I expect we’ll get a chance to see whether Powell does as I expect more Fed criticism from Trump.

  7. Stefan Jovanovich Says:

    Bourbon bet twitter tally: 7/19

    1 supporting ICE, criticizing Democrats

    We need a video review a la World Cup. How many tweets should an interview comment with Joe Kiernan count towards Yra’s tally?

    • Yra Says:

      stefan—the score is a knockout blow.Audio/visual trumps all tweets but the avalanche has just begun–“I am LETTING them do what they think best.”

      • Stefan Jovanovich Says:

        Cricket, not boxing, Yra. I thought we were betting about what theme Trump would emphasize between now and the election and what the final score would be. You thought it would be interest rates and the Fed; I thought it would be immigration and the border. As we expand the scoring to verbal announcements by Le Grande Orange, we will need some referees to decide how many runs – i.e. tweets – each remark will earn. You definitely hit for 6 today.

      • David Richards Says:

        Listening to the market, Trump landed a TKO. The daily key reversal I mentioned yesterday is following through today with a dollar tumble against currencies. If this holds up today that daily key reversal will extend into a weekly key reversal, as will the overall dxy and even against the troubled Turkish Lira.

  8. the bigman Says:

    Oh great one a comment and a question from the unworthy in the back of the classroom:
    Comment: As far as education goes as Ike warned against the military-industrial complex we also need to guard against the educational-financial services complex perpetuating the myth of a college education at all cost. The ability for colleges to charge seemingly any amount and for banks to collect interest on that amount for degrees that lead to nowhere is a “major” problem. Why should a degree in art history(my son’s major) cost the same as a degree in computer engineering. How can these have the same value except in a distorted market where the funds to play are lent by another party. No wonder the JOLTS number exceeds that of that of the unemployed. So you have immigrants competing with gender studies majors for food industry jobs- so what. Where are the engineers and tradesmen? This week I heard Tom Coburn say that there are 45 federal job training programs that have had virtually no effect other than destroying capital by wasting tax dollars- so much for fed policy. But what started as a comment has become a rant so on to the question
    I have heard (I believe it was Rick Santelli) that Mr Powell has sufficient 10 year Treasuries at the fed after Operation Twist to control or at least influence the long end rates. Is this correct and if so why is he not allowing the curve to steepen? FWIW TBM

    • Stefan Jovanovich Says:

      Grain for the bigman’s and our host’s Mills. The demographic explosion of social studies majors finds its analog in the growth of theological studies in the 19th century in the U.S. Studying for the ministry became the default path for all the middle class children who could not hack the math exams for West Point, Rensselaer and the other engineering (read “tech”) schools that were springing up. I hope the parallel ends there. Those ministry graduates became the employment problem that could only be solved by inflicting missionaries on the American Indians and then the rest of the world; and, of course, wherever the Bible went, the Army and Navy had to carry the flag.

  9. Stefan Jovanovich Says:

    Bourbon bet twitter tally: 7/20

    3 complaining about interest rates and currency manipulation

    If we agree that the Kiernan interview was a cricket 6, Yra’s total to date: 9

    Stefan: 4

    • Stefan Jovanovich Says:

      Bourbon bet Twitter tally:

      2 supporting ICE and the border, criticizing Democrats

      To date: Yra – 9, Stefan – 6

      • Stefan Jovanovich Says:

        Bourbon bet Twitter tally – July 24

        Border issue support for and from Kemp, Barletta – 2, 4 with retweets
        Tariffs are the greatest – 1
        “Fair trade” – 1

        To date: Yra – 9, Stefan – 10 (12, counting retweets)

  10. David Richards Says:

    What bodes ill for future US monetary policy and the dollar: Is there much doubt after Trump’s remarks this week that Trump, who is in a unique position to reshape the Fed due to its many vacancies, will appoint doves?

    Mr Trump, a lesson from the market drama early this year is that nobody will clip bond coupons anymore when your currency is plunging double-digits. You risk recreating those dynamics when you desperately need financing for your massive spending and deficit. Mr President, slash spending, not interest rates.

    • yraharris Says:

      David–I agree with you.Trump has three slots to fill on the Fed Board which I tease him with appointing a strove dovish voice concerned about secular stagnation.Larry Summers cannot be appointed by the Dems as was proved when he was Obama’s number one choice to replace Bernanke but Sherrod Brown/Lizzie Warren would not have it as Summers was considered too wall Street.Your analysis is spot on and no matter how the talking heads maintain this is a one off effort by Trump I agree with Steve Liesman that it is anything but.The huge coverage by the lazy media of the Trump tweets about Powell will sustain Trumps efforts to question the FED

  11. Chicken Says:

    I’m looking forward to (hoping for) re-examining the bull-flattener vs bear-flattener discussion.

    • yraharris Says:

      Chicken–you are correct but it is too early although the 2/10 curve did put in a reversal week so from a technical perspective it bears watching.The media is discussing how Mnuchin was treated at the G20 meeting—it is of no significance.The bigger story may be that the BOJ is reconsidering its present efforts at Yield Curve Control although I maintain that the BOJ has bought very little of JGBS because there have been none available.But the JGBS did close under the 200 day moving average on a weekly close—something to pay attention to

      • Chicken Says:

        It’s my perception that a few Japanese listings have been showing weakness of late. FWIW

  12. A.M. Look 7/20/18 | Says:

    […] […]

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