Economic Update. September 2016

Transcription

1 Economic Update September 2016

2 Pardon my rant September 9, 2016 Neither stocks nor bonds could make any headway over the past month. August lived up to its reputation as a dull month, and September started in the same mode. The economic data received over the past month has been mixed but with a tinge of a slowdown. Meanwhile, various Fed officials again teased traders with tough talk about tightening. In this month s edition we ll look at what the economy is up to now, what the Fed will do in September, and why we shouldn t expect much to change over the next three months. Don t believe the hype; the job market is solid Economists were forecasting August payrolls would expand by 180k, but traders were prepared for something much lower. August is notorious for downward surprises. Payrolls rose by a solid 151k. Other measures weren t so great. The workweek declined by.1 and the hourly wage rose only.1%. Bullish bond traders (which describes all bond traders) and bearish economists jumped on this news to declare the job market dead. They ignored some basis fact. The workweek and wage weakness came after two months of above-trend growth. They also ignored the fact that the U.S. job market needs only k jobs per month to stay even. This is something that even Janet Yellen finally stated in her Jackson Hole speech. The last thing they ignored was the likelihood that August will be revised higher. August is the most revised month of all. Over the last ten years, August payrolls were revised higher in the following two months by an average of 70k. The average payroll gain over the past twelve months has been 232k, and the three-month average has been 202k. In no way can the job market be fairly described as weak. As I have written often, I do expect future job gains to average k because of a tighter labor market. Job gains this year so far have exceeded my expectations, but I still expect the average to fall slightly for positive reasons. I ve also mentioned over the past few months that wages are rising faster than the Bureau of Labor Statistics' Hourly Wage component depicts. Moody s Analytics and the Atlanta Fed were the first to point out that workers in the same job for one year or longer had seen wage gains of just under 4%. Since those studies have been posted, other regional Fed s as well as university studies have come to the same conclusion. Fed officials have taken notice and most have dropped any references to weak wage growth. Barring any major political surprises here or abroad, I see no reason to suddenly get bearish on the job market or the U.S. economy.

3 The consumer is solid, too There was nothing in the last round of consumer data on Retail Sales, Auto Sales, and the various housing numbers that suggest anything but slow and steady growth. Further, there is nothing to suggest we have to worry about anything less than slow and steady. I believe auto sales have plateaued, but the pace is very healthy for both the U.S. economy and credit union lending. The consumer is set up for a good holiday season with lower prices for both food and gasoline. The one thing holding consumers back from really splurging might be the recent run-up in credit card balances. Home price gains have slowed in most areas as affordability has become an issue in many markets. The pace of sales has been good, but would have been better had more homes been available. Demand for homes remains very good, and pool of potential buyers as evidenced in the strong rental market is growing. Home price gains are likely to continue at a subdued pace, but overall market conditions will remain on the positive side. Of course, I have to add the caveat that the only big risk would be a sharp rise in rates. I understand where the economic bears are coming from about future risks, but there are always future risks. As far as the here and now go, the economy is doing just fine. We ve seen this movie before I ve lost count of how many times Yellen and her band of merry Fed officials have led the markets to expect a tightening only to pull back at the last minute. The last time was in May. Fed officials had all but assured the markets to expect a tightening in June. But the weak May payroll number sent the Fed back into hiding. The Fed also had an unstated concern about the upcoming Brexit vote, but the payroll number was reason enough for this myopic Fed. The Fed did it again in August. Yellen s much-anticipated Jackson Hole speech left the door open to tightening in September, but she avoided being pinned down. However, after Yellen spoke, Vice Chairman Fischer casually mentioned in an interview that perhaps two tightening moves would be needed this year. That certainly would mean September and December. While the August payroll data does still leave a rate hike in September on the table, it s on the edge of the table. I expect the Fed to do nothing, and use the cover of the payroll data to mask other reasons for not tightening. Those other reasons include possible turmoil from the U.S. presidential race and the Italian referendum vote. A firm date for the Italian vote has not been set, but it looks like a vote will be taken sometime in the second half of November. Traders still respond to what Fed officials say, but it escapes me why they listen to them at all. The Fed has made it abundantly clear that they have no vision or foresight. They respond to the latest news and data at the same time traders do when it is released. Fed officials also turn on a dime, just like traders. In fact, Fed officials are essentially traders now. What do traders do? They try to influence market prices. What do Fed officials do? They try to influence market prices, and they have much more firepower than traders to aim at the markets. I am not aware of any traders who have used over $4 trillion dollars to manipulate market prices. That s something only the Fed can do and has done.

4 Central bankers see no evil, hear no evil, and speak no evil The theme of the big Jackson Hole confab of central bankers was Designing resilient monetary policy frameworks for the future. I can hardly get through reading the title without falling asleep. But that wasn t the real theme. The real theme was How Great Are We?! The speakers fell all over themselves and each other to congratulate themselves on how the bold polices of QE and negative rates were working so splendidly. No one mentioned the policies have indeed been magic for asset prices stocks and bonds particularly. No one mentioned how this has been a gift for sophisticated leveraged investors to pile up huge carry trades. No one mentioned how this also allowed corporations to raise money at obscenely low rates, not to invest in plant and equipment, but to financially engineer their balance sheets and results with buybacks and dividends. Nope. Somehow what the central banks have done is the only thing that has saved the overall global economy. And of course, in their world they have much more they are prepared to do. Not a single speaker referenced to any degree who and what the policies have damaged. There is a lot of talk about the lack of growth in median household income. Everyone seems to assume this is solely wage related. It is not. Part of the reason is demographics. The rising tide of retirees automatically lowers median income. But another portion of the sagging of household income has to do with earnings on savings and investments. Just think of the retirees and many other investors who are inclined to put money into c.d.s, money market accounts, or high grade bonds. They want safety and no risk. That strategy was fine for many years. Yes, they got left out of some big stock rallies, but they could depend on a solid interest income rate of return of say 4-6%. Now these savers earn bubkes unless they wade into the stock market or some high risk bonds. Where in Jackson Hole was any concern expressed about that? And this is a direct consequence of global manipulation of rates. We also heard nothing from the central bankers about the costs of their actions to pensions, annuities, insurance companies,etc. Let s just focus on pensions. Most pensions assume and base their ability to pay claims based on an expected rate of return of 7-8% over time. They aren t even coming close. These returns are looked at over time, but time is running out as the pensions get further and further behind. Some private pensions might be able to cut benefits in the future, but the biggest pensions, the public pensions, cannot legally do so. This means that not only will private pensioners suffer shortfalls, but you, the taxpayer, will be on the hook for the shortfall of public pensions. Do you think this was discussed at Jackson Hole? Of course not. The time the central bankers weren t using to pat each other on the back was used to talk about how they could do more. Even Yellen hopped on board. While she said the Fed did not expect to have to go to negative rates, they had cleared up any possible legal constraints and have been studying the path they could take with negative rates and other tools. Maybe I m wrong, but don t most major scams eventually come undone? Ponzi, Madoff, Milken, Hunt, just to name of few. In my very biased and negative opinion, I believe the current scam of global market manipulation is of epic proportions and will one day have epic consequences. And just think about this: It all started with the mild-mannered, bearded professor from Princeton. I hope I am dead wrong about consequences.

5 I have no doubt the central bankers starting with Ben Bernanke had the best of intentions. But I do have a problem with their failure to acknowledge the downsides of their actions. They claim to be worried about the growing wealth gap and income gap, while failing to admit the key role they played in widening those gaps. They can see only the good they did and how they can do more. What I really hope for is that economic conditions improve to a point at which no more tools are needed and somehow massive positions created can be slowly unwound; but the blindness, deafness and muteness of global central bankers as evidenced in Jackson Hole makes me doubtful. I haven t had a good rant in quite a while. That felt good. I could have gone on for several more pages, but that was enough. Hope you didn t mind. Mismatch will continue The mismatch between the actual performance of the economy and distorted levels of interest rates shows no signs of changing anytime soon. Perhaps in a few more months we ll see one of those two opposing forces start to creep closer to the other. But the question remains, which side will make a move?