tag:blogger.com,1999:blog-27634603511119487322024-03-04T23:14:37.170-05:00Robert Brusca's GPS for InvestorsRobert Brusca is Chief Economist at Fact and Opinion Economics. This blog will comment on various economic trends press commentary and market events on an ad hoc basis. Mr Brusca can be reached at 212-875-8637FAO-OPINIONhttp://www.blogger.com/profile/11086590490267067973noreply@blogger.comBlogger313125tag:blogger.com,1999:blog-2763460351111948732.post-19994125433848311742023-11-24T15:57:00.002-05:002023-11-24T15:57:17.644-05:00<p> </p><p class="MsoNormal">November 24, 2023<o:p></o:p></p>
<p class="MsoNormal"><o:p> </o:p></p>
<p align="center" class="MsoNormal" style="text-align: center;">Robert Brusca, PhD<o:p></o:p></p>
<p align="center" class="MsoNormal" style="text-align: center;">Fact and Opinion
Economics<o:p></o:p></p>
<p align="center" class="MsoNormal" style="text-align: center;">(FAO Economics)<o:p></o:p></p>
<p align="center" class="MsoNormal" style="text-align: center;"><o:p> </o:p></p>
<p class="MsoNormal" style="text-align: justify;">FAO economics is an economic research
consulting firm that delves into the analysis of macroeconomic data and policy
analysis. <o:p></o:p></p>
<p class="MsoNormal" style="text-align: justify;"><o:p> </o:p></p>
<p class="MsoNormal" style="text-align: justify;">There is a strong focus on central
bank behavior and how the Federal Reserve makes policy announces it to the public
and implements it.<span style="mso-spacerun: yes;"> </span><span style="mso-spacerun: yes;"> </span><o:p></o:p></p>
<p class="MsoNormal" style="text-align: justify;"><o:p> </o:p></p>
<p class="MsoNormal" style="text-align: justify;">I am currently writing a substack
at this address:<o:p></o:p></p>
<p class="MsoNormal" style="text-align: justify;"><o:p> </o:p></p>
<p align="center" class="MsoNormal" style="text-align: center;"><a href="https://robertbrusca.substack.com/">https://robertbrusca.substack.com/</a><o:p></o:p></p>
<p align="center" class="MsoNormal" style="text-align: center;"><o:p> </o:p></p>
<p class="MsoNormal" style="text-align: justify;"><o:p> </o:p></p>
<p class="MsoNormal"><b style="mso-bidi-font-weight: normal;"><span style="font-family: "Verdana",sans-serif;">BIO Summary:<o:p></o:p></span></b></p>
<p class="MsoNormal"><span style="font-family: "Verdana",sans-serif;"><o:p> </o:p></span></p>
<p class="MsoNormal" style="text-align: justify;"><span style="font-family: "Verdana",sans-serif;">ROBERT
A. BRUSCA is Chief Economist of <b style="mso-bidi-font-weight: normal;">Fact and
Opinion Economics</b>, a consulting firm he founded in <st1:place w:st="on"><st1:city w:st="on">Manhattan</st1:city></st1:place>.<span style="mso-spacerun: yes;">
</span>He is also a past professor graduate program at the Zicklin School of
Business at Baruch College in Manhattan. Mr Brusca has been an economist on
Wall Street for 48 years. He has visited central banking and large
institutional clients in over 30 countries in his career as an economist. Mr.
Brusca was a Divisional Research Chief at the Federal Reserve Bank of NY (Chief
of the International Financial markets Division), a Fed Watcher at Irving Trust
and Chief Economist at Nikko Securities International (for 16 years). Mr Brusca
currently is a consultant. He is operating the second of two consulting firms
he has founded since 2001. He is widely quoted and appears in various media. Mr.
Brusca holds an MA and PhD in economics from <st1:placename w:st="on">Michigan</st1:placename>
<st1:placetype w:st="on">State</st1:placetype> <st1:placetype w:st="on">University</st1:placetype>
and a BA in Economics from the <st1:place w:st="on"><st1:placetype w:st="on">University</st1:placetype>
of <st1:placename w:st="on">Michigan</st1:placename></st1:place>. His research
pursues his strong interests in non aligned policy economics, investing, as
well as international economics. <b style="mso-bidi-font-weight: normal;">FAO Economics’</b>
research targets investors to assist them in making better investment decisions
in stocks, bonds and in a variety of international assets. The company does not
manage money and has no conflicts in giving economic advice. Mr Brusca, or his
comments, appears in a wide variety of media outlets.<o:p></o:p></span></p>
<p class="MsoNormal" style="text-align: justify;"><span style="font-family: "Verdana",sans-serif;"><o:p> </o:p></span></p>
<p align="center" class="MsoNormal" style="text-align: center;"><o:p> </o:p></p>
<p class="MsoNormal" style="text-align: justify;"><o:p> </o:p></p>
<p class="MsoNormal" style="text-align: justify;"><o:p> </o:p></p>
<p class="MsoNormal" style="text-align: justify;"><o:p> </o:p></p>
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<p class="MsoNormal"><o:p> </o:p></p>
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<p class="MsoNormal"><o:p> </o:p></p>FAO-OPINIONhttp://www.blogger.com/profile/11086590490267067973noreply@blogger.com0tag:blogger.com,1999:blog-2763460351111948732.post-58467737171706868552023-11-24T15:45:00.003-05:002023-11-24T15:45:44.352-05:00<p> </p><p></p><p align="center" class="MsoNormal" style="text-align: center;"><b><span style="font-size: 14.0pt;">An October Surprise from Jobs<o:p></o:p></span></b></p>
<p align="center" class="MsoNormal" style="text-align: center;">How much of it do we
really believe?<o:p></o:p></p>
<p align="center" class="MsoNormal" style="text-align: center;"><o:p> </o:p></p>
<p class="MsoNormal" style="text-align: justify;">Job growth in October ratcheted
down gaining only 150,000 jobs after gaining nearly twice that much at 297,000
in September. The slowdown in private jobs was more severe as September's
246,000 gain turned into 99,000 in October.<span style="mso-spacerun: yes;">
</span>Government sector jobs led the job growth parade in October.<span style="mso-spacerun: yes;"> </span><o:p></o:p></p>
<p class="MsoNormal" style="text-align: justify;"><o:p> </o:p></p>
<p class="MsoNormal" style="text-align: justify;">Markets reacted strongly to this
news that job growth was weaker in October than September knowing that it meant
that job growth was weaker in October than it was in September…<span style="mso-spacerun: yes;"> </span>And although that's all we really know,
people in markets jumped to many, many, other conclusions based on this report
that seemed to fulfill their hopes and dreams...<o:p></o:p></p>
<p class="MsoNormal" style="text-align: justify;"><o:p> </o:p></p>
<p class="MsoNormal" style="text-align: justify;">A month ago, the headline gain
was even stronger as it has been revised down in this report but at that time
markets did not react strongly to it because they didn't completely believe it.
Markets have continued to believe the economy is going to slow. Indeed, markets
have been looking for the Fed to pivot almost from the moment the Fed began to
hike rates. This month on news of weakness. markets are even more certain that
they're right, more certain than they were last month when the numbers showed
them that they were dead wrong, at least for a while - unequivocally wrong.<span style="mso-spacerun: yes;"> </span>The Market view is undeterred. <o:p></o:p></p>
<p class="MsoNormal" style="text-align: justify;"><o:p> </o:p></p>
<p class="MsoNormal" style="text-align: justify;">Job growth in the economy has
wrong-footed forecasters for quite some time… but that's not surprising after
the tremendous amount of fiscal stimulus that had been poured into this economy
on top of an enormous dose of monetary stimulus.<span style="mso-spacerun: yes;"> </span>Stimulus is in the process of being unwound
and certainly based on the current level of rates, and that level compared to
inflation, monetary policy is no longer stimulative. However, monetary policy
works with the lag and that works both after stimulus as well as after rate
hiking and we can't be sure that all the effects of the monetary stimulus have
been boiled out of the system yet. For example, in this report, construction
jobs increased by 23,000, more than the 13,000 that were created in September,
and greater than the three-month average of 22,000 per month, and greater than
the year-over-year average of 18,000 per month. So, the spike in rates and the
high mortgage rates themselves have not caused the construction sector to roll
over. People looking at this report are saying that it's evidence that the
interest rate hikes are working but when you look at the interest sensitive
sectors that doesn't seem like a provable hypothesis.<o:p></o:p></p>
<p class="MsoNormal" style="text-align: justify;"><o:p> </o:p></p>
<p class="MsoNormal" style="text-align: justify;">The BLS tells us that part of the
reason for the downward revision to job growth in September was because of the UAW
strike and some misclassified workers. Since the UAW contract gives a raise of
11% in the first year and more to come later as auto production gets back to
normal, we can expect to see a reduction in these headwinds. We've seen in the
last several months while the strike was going on some pretty good job growth!
Perhaps now there will even be stimulus from the greater income that workers
will have in the wake of the new contract.<o:p></o:p></p>
<p class="MsoNormal" style="text-align: justify;"><o:p> </o:p></p>
<p class="MsoNormal" style="text-align: justify;">I'm not terribly excited to take
this weak October job report and to run with it and call it the start of a
slowdown in the economy. It may be that, but then again it may not because this
is not the only game in town. Monthly job creation is a volatile thing; the
150,000 jobs come after a 297,000 job gain which had come after a 165,000-job
gain. Over the last three months job creation averages 204,000 pretty similar
to the 207,000 and average in the previous three months and this month's number
of 150,000 isn't really all that much weaker than the average of 204,000 for me
to jump up and down about it.<span style="mso-spacerun: yes;"> </span><o:p></o:p></p>
<p class="MsoNormal" style="text-align: justify;"><o:p> </o:p></p>
<p class="MsoNormal" style="text-align: justify;">However, in the job report there
was also a reduction in hours worked. There was a rise in the unemployment rate
and there was some ongoing moderation in wage gains. But as we look ahead, we
have the UAW contract kicking in and its potential to be a bellwether for other
wage gains in the economy. The unemployment rate has risen half a percentage
point from its low and it's within 1/10 of a percentage point of triggering a
recession warning according to some of the signaling mechanisms that I'm
acquainted with. <o:p></o:p></p>
<p class="MsoNormal" style="text-align: justify;"><o:p> </o:p></p>
<p class="MsoNormal" style="text-align: justify;">It's true that there are several
aspects of this report that point to things slowing down but again we'd like to
see some trend rather than just one month's worth of data and particularly one
month after a very strong month.<span style="mso-spacerun: yes;"> </span>I urge
vigilance and looking at the numbers and anticipating the future we need to
make the numbers show us what's happening rather than to bet too much on
anticipation because anticipation has been so wrong in the wake of the COVID
recession. We continue to have cross currents in this economy and it's still
true that while the federal funds rate is no longer at a stimulative level it's
not at a very restrictive level either. So, when comes to braking the economy,
I don't think that interest rates are providing much braking although we could
be looking at the dissipation of the stimulus from monetary policy in the past
as well as a tailing of fiscal policy. Be open-minded about the trends we're
observing and about extrapolating them too far into future.<span style="mso-spacerun: yes;"> </span>It’s been a tough time for forecasters.<o:p></o:p></p>
<p class="MsoNormal" style="text-align: justify;"><o:p> </o:p></p>
<p class="MsoNormal" style="text-align: justify;"><o:p> </o:p></p>
<p class="MsoNormal" style="text-align: justify;"><o:p> </o:p></p>
<p class="MsoNormal"><o:p> </o:p></p><br /><p></p>FAO-OPINIONhttp://www.blogger.com/profile/11086590490267067973noreply@blogger.com0tag:blogger.com,1999:blog-2763460351111948732.post-6168482147483953722023-11-24T15:44:00.000-05:002023-11-24T15:44:02.687-05:00<p> </p><p align="center" class="MsoNormal" style="text-align: center;"><b><span style="font-size: 18.0pt; line-height: 107%;">Good fences make good neighbors<o:p></o:p></span></b></p>
<p align="center" class="MsoNormal" style="text-align: center;"><b><span style="font-size: 16.0pt; line-height: 107%;">Except on our Southern border?<o:p></o:p></span></b></p>
<p align="center" class="MsoNormal" style="text-align: center;"><b><span style="font-size: 16.0pt; line-height: 107%;">What would Robert Frost think?<o:p></o:p></span></b></p>
<p align="center" class="MsoNormal" style="text-align: center;"><b><span style="font-size: 16.0pt; line-height: 107%;"><o:p> </o:p></span></b></p>
<p class="MsoNormal" style="text-align: justify;"><b><i><span style="background: white; color: #252324; font-family: "Source Sans Pro",sans-serif; font-size: 18.0pt; line-height: 107%;">What a fence does:</span></i></b><i><span style="background: white; color: #252324; font-family: "Source Sans Pro",sans-serif; font-size: 18.0pt; line-height: 107%;"> Having a clear boundary between your house and your neighbor’s,
and respecting that boundary, helps to keep the peace between neighbors, and
thus good relations between neighbors are partly dependent on fences as a
marker boundaries. ‘Good fences make good neighbors’ pithily expresses
the need to have clear boundaries between properties, as well as the need for
neighbors to respect these boundaries, if relations between neighbors are to
remain amicable and ‘good’.</span></i><span style="background: white; color: #252324; font-family: "Source Sans Pro",sans-serif; font-size: 18.0pt; line-height: 107%;"><span style="mso-spacerun: yes;"> </span></span><a href="https://interestingliterature.com/2021/10/good-fences-make-good-neighbours-meaning-analysis-origins/"><span style="background: white; font-family: "Source Sans Pro",sans-serif; font-size: 18.0pt; line-height: 107%;">Source</span></a><span style="background: white; color: #252324; font-family: "Source Sans Pro",sans-serif; font-size: 18.0pt; line-height: 107%;"> <o:p></o:p></span></p>
<p class="MsoNormal" style="text-align: justify;"><span style="background: white; color: #252324; font-family: "Source Sans Pro",sans-serif; font-size: 18.0pt; line-height: 107%;"><o:p> </o:p></span></p>
<p class="MsoNormal" style="text-align: justify;"><span style="background: white; color: #252324; font-family: "Verdana",sans-serif; font-size: 12.0pt; line-height: 107%;">With that prelude I have never understood the Democrat’s opposition to
Donald Trump's desire to have a wall on the southern border. It is quite clear that
the southern border has been porous for some time and that people can get into
the country without too much difficulty and beyond our control because the
border are is so open and vast.<span style="mso-spacerun: yes;"> </span>What's
the point in having a border if the border doesn't mean anything? <o:p></o:p></span></p>
<p class="MsoNormal" style="text-align: justify;"><span style="background: white; color: #252324; font-family: "Verdana",sans-serif; font-size: 12.0pt; line-height: 107%;">Why don’t we rename the county: The United States and the Americas? <o:p></o:p></span></p>
<p class="MsoNormal" style="text-align: justify;"><span style="font-family: "Verdana",sans-serif; font-size: 12.0pt; line-height: 107%;">As a further point Democrats
who belittled and berated Donald Trump for wanting to build a wall accusing him
of racism, among other things, laid the groundwork for the belief by all people
South of our border - or anywhere else - that if Democrats gained office the
border would be open.<span style="mso-spacerun: yes;"> </span>And so the
incredible problems we have had with undocumented aliens coming in droves across
the border into the country straining social services can only be put at the
feet of Democrats. They wound up encouraging this because they were so eager to
damn the policies of Donald Trump. Lesson be careful how you hate?<o:p></o:p></span></p>
<p class="MsoNormal" style="text-align: justify;"><span style="font-family: "Verdana",sans-serif; font-size: 12.0pt; line-height: 107%;"><o:p> </o:p></span></p>
<p class="MsoNormal" style="text-align: justify;"><span style="font-family: "Verdana",sans-serif; font-size: 12.0pt; line-height: 107%;">It's hard for me to
understand why anybody in any political party would want to fail to define and
defend the border. The US has such a problem with that southern border not just
with undocumented aliens coming across but with drug smuggling it would seem
that a more secure border would be an objective of any political party with a
sensible view of geopolitics.<o:p></o:p></span></p>
<p class="MsoNormal" style="text-align: justify;"><span style="font-family: "Verdana",sans-serif; font-size: 12.0pt; line-height: 107%;"><o:p> </o:p></span></p>
<p class="MsoNormal" style="text-align: justify;"><span style="font-family: "Verdana",sans-serif; font-size: 12.0pt; line-height: 107%;">Mayor Adams in New York has
called the migrant crisis in the city- the city in which I live – one that is
very serious and the first time that he has seen a problem in his professional
career that he's not sure has a solution or an end.<span style="mso-spacerun: yes;"> </span>It is not surprising that border state
governors have taken action to try to ship immigrants who come into their state
to other states because these undocumented aliens create just as much strain on
the Texas economy as they do on the New York economy or any other economy. And
Democrats are the once who have strongly supported this porous border policy,
so Democrat run states need to share the pain. Since Texas is on the border and
since the federal government that is supposed to be guarding the border hasn't
done that Texas has wound up bearing the brunt of the burden along with other
border states.<o:p></o:p></span></p>
<p class="MsoNormal" style="text-align: justify;"><span style="font-family: "Verdana",sans-serif; font-size: 12.0pt; line-height: 107%;"><o:p> </o:p></span></p>
<p class="MsoNormal" style="text-align: justify;"><span style="font-family: "Verdana",sans-serif; font-size: 12.0pt; line-height: 107%;">It is often pointed out that
allowing people to flood across the border and get in a queue for citizenship
undermines other avenues for citizenship that have been in place far longer and
that have required a thorough vetting of applicants who have had to wait many
years for their applications to be considered and approved. Why do that? <o:p></o:p></span></p>
<p class="MsoNormal" style="text-align: justify;"><span style="font-family: "Verdana",sans-serif; font-size: 12.0pt; line-height: 107%;"><o:p> </o:p></span></p>
<p class="MsoNormal" style="text-align: justify;"><span style="font-family: "Verdana",sans-serif; font-size: 12.0pt; line-height: 107%;">This is another example of
the Democrats creating a policy much like French foreign policy at the end of
World War Two period. At that time the French were determined to be on their
own and not necessarily to follow the United States. French foreign policy
became the opposite of US foreign policy. Whatever US foreign policy objectives
were the French objectives were the opposite. And this is precisely what the
Democrats have done with Donald Trump. Whatever Donald Trump likes, whatever he
endorses, whatever he supports, they are instantly against, without even
thinking about it. And this border situation is the perfect example of how that
kind of cancel-culture has gotten them into a great deal of trouble.<o:p></o:p></span></p>
<p class="MsoNormal" style="text-align: justify;"><span style="font-family: "Verdana",sans-serif; font-size: 12.0pt; line-height: 107%;"><o:p> </o:p></span></p>
<p class="MsoNormal" style="text-align: justify;"><span style="font-family: "Verdana",sans-serif; font-size: 12.0pt; line-height: 107%;">Joe Biden put the border
problem in the hands of Kamala Harris who decided it was a toxic problem that
it had no solution and she didn't want to be anywhere near it. And as far as I
can tell nobody in the administration has done anything to try to deal with the
issues that came to the border with the election of Joe Biden. The Democrats
insistence that Donald trump's closed border policies were wrong led to this
mess.<o:p></o:p></span></p>
<p class="MsoNormal" style="text-align: justify;"><span style="font-family: "Verdana",sans-serif; font-size: 12.0pt; line-height: 107%;"><o:p> </o:p></span></p>
<p class="MsoNormal" style="text-align: justify;"><span style="font-family: "Verdana",sans-serif; font-size: 12.0pt; line-height: 107%;">There are many examples of Trump
supported policies that were subsequently blocked by Democrats or by medical
experts during the COVID crisis. And while there's no sense that Donald Trump
had any kind of magic touch it's also clear that he had a number of ideas and
policies that never should have been dismissed out of hand the way they were.
But this is the new world in which we live and in which Democrats have
supported this culture of cancellation as well as an approach to assert that
they know what is right and have implemented policy based upon their view of
science even where science is in dispute. <o:p></o:p></span></p>
<p class="MsoNormal" style="text-align: justify;"><span style="font-family: "Verdana",sans-serif; font-size: 12.0pt; line-height: 107%;"><o:p> </o:p></span></p>
<p class="MsoNormal" style="text-align: justify;"><span style="font-family: "Verdana",sans-serif; font-size: 12.0pt; line-height: 107%;">Just a reminder here…
science is much less in dispute than it is in flux. When policy needs to depend
on some aspect of science that's in dispute, we need to have a better way to
decide what we think the approach should be rather than have one party dictate
and steamroll its own view into the future.<span style="mso-spacerun: yes;">
</span>The Democrats bull on the China shop approach to the southern border
problem should be enough to convince just about everyone that when it comes to
dispute resolution, they don't have a clue, let alone the answer. <o:p></o:p></span></p>
<p class="MsoNormal" style="text-align: justify;"><span style="font-family: "Verdana",sans-serif; font-size: 12.0pt; line-height: 107%;"><o:p> </o:p></span></p>
<p class="MsoNormal" style="text-align: justify;"><span style="font-family: "Verdana",sans-serif; font-size: 12.0pt; line-height: 107%;">But we do have complaints
from some politicians such as the mayor of New York City who are very concerned
about how they are being overrun by immigrants and about the financial burdens
being placed on their cities. We do not find the liberal press engaging in any
criticism of the open border policy. Instead, if you want to consider the
positives and negatives of Trump's wall all you need to do is go to this
article on Vanity Fair (</span><a href="https://www.vanityfair.com/news/2023/09/donald-trump-border-wall-damage"><span style="font-family: "Verdana",sans-serif; font-size: 12.0pt; line-height: 107%;">here</span></a><span style="font-family: "Verdana",sans-serif; font-size: 12.0pt; line-height: 107%;">).<span style="mso-spacerun: yes;"> </span>I think you'll agree that the article
displays a lot of vanity and little fairness.<span style="mso-spacerun: yes;">
</span><o:p></o:p></span></p>FAO-OPINIONhttp://www.blogger.com/profile/11086590490267067973noreply@blogger.com0tag:blogger.com,1999:blog-2763460351111948732.post-1921461583060775412023-11-24T15:41:00.001-05:002023-11-24T15:41:11.631-05:00<p> </p><p></p><p align="center" class="MsoNormal" style="text-align: center;"><b>What to expect if you
are expecting (low-inflation) but shouldn’t be<o:p></o:p></b></p>
<p align="center" class="MsoNormal" style="text-align: center;"><b>...and why you probably
shouldn’t be<o:p></o:p></b></p>
<p class="MsoNormal"><o:p> </o:p></p>
<p class="MsoNormal" style="text-align: justify;">Economists put inflation expectations
and term premium effects on treasury securities in different boxes when analyzing
the yield curve but maybe they should not.<span style="mso-spacerun: yes;">
</span>I have had a bit of a ‘running feud’ with Fed officials as I have been
haggling with different visiting Federal Reserve officials when I have been
able to catch them in New York and query them on Fed policy, real interest
rates, and interest rate expectations. The Fed has only one position on these
things and there is a reason for it. I am convinced the reason is not just because
the Fed thinks it is right. <o:p></o:p></p>
<p class="MsoNormal" style="text-align: justify;"><o:p> </o:p></p>
<p class="MsoNormal" style="text-align: justify;">What is at issue here and now is
that the yield curve is getting steeper without any explanation! The Fed
asserts that term premia are rising (for some reason) but that inflation expectations
are anchored- and not a reason for this. One conjecture is that the size of the
federal deficits, political conflicts, the risk of a fiscal event, and huge
slate of bonds to be auctioned are causing investors to seek greater premia on
US treasuries. <o:p></o:p></p>
<p class="MsoNormal" style="text-align: justify;"><o:p> </o:p></p>
<p class="MsoNormal">As Peggy Lee once asked…is that all there is? <span style="mso-spacerun: yes;"> </span><o:p></o:p></p>
<p align="center" class="MsoNormal" style="text-align: center;"><o:p> </o:p></p>
<p class="MsoNormal">Maybe not…<o:p></o:p></p>
<p class="MsoNormal"><o:p> </o:p></p>
<p class="MsoNormal" style="text-align: justify;">The Fed is conveniently leaving itself
out of the picture (ignore that man behind the curtain…). And yet, the Fed has
allowed inflation to flare, run high, and has only reluctantly chased it, and vigorously
raised rates, then stopped suddenly, when interest rates reached the level of trailing
inflation.<span style="mso-spacerun: yes;"> </span>After letting inflation run hot,
I do not recognize this Fed rate hiking effort as a strong anti-inflation move.
The Fed wants to tout its string of 75bp rate hikes but those were essential
for the Fed to catch up after it sat on its hands for a year doing nothing as
inflation surged over its target.<span style="mso-spacerun: yes;"> </span>To cut
to the chase… I greatly suspect one of the reasons the yield curve’s term premia
are rising is the loss of Fed credibility mixed in with perceptions of higher inflation
risk because of that.<span style="mso-spacerun: yes;"> </span>The Fed of course
will not go there. My argument is below:<o:p></o:p></p>
<p class="MsoNormal" style="text-align: justify;"><o:p> </o:p></p>
<p class="MsoNormal" style="text-align: justify;"><b>The Issues are… <o:p></o:p></b></p>
<p class="MsoNormal">When I have complained about Fed policy, I point out the
real Fed funds rate in the past cycle was as deeply negative as it had even
been. Sixteen of the twenty lowest real Fed funds rates since 1960 (exceptionally
low negative values) occurred in this cycle. When confronted with this FACT Fed
officials reject this argument since you need to compare the level of interest rates
to expected inflation not actual inflation from the past- so they say. Really? Well,
full points to the Fed on that academic argument. But how does that work in reality?<span style="mso-spacerun: yes;"> </span>Answer: it does not work… <span style="mso-spacerun: yes;"> </span><o:p></o:p></p>
<p align="center" class="MsoNormal" style="text-align: center;">Chart 1<o:p></o:p></p>
<div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhA4AzhQKC64LjH3m2L0wMqdiHIZ181QvQsO9KSP99Oxeil_d-yBrs177pQHJxxiPUuCIlimAiqw2NeVQCcSPD0oONvi8hys0prEKh-zTk3CMk3RuxJb2Sl_P7Exdb6TGoVXXfIn4DYNGGPJpLTXDwNA4Jyako2eg-Az1YoJcjfD8ViMUD19zj5jnUgkpmM/s849/aaainflexpec.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="504" data-original-width="849" height="238" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhA4AzhQKC64LjH3m2L0wMqdiHIZ181QvQsO9KSP99Oxeil_d-yBrs177pQHJxxiPUuCIlimAiqw2NeVQCcSPD0oONvi8hys0prEKh-zTk3CMk3RuxJb2Sl_P7Exdb6TGoVXXfIn4DYNGGPJpLTXDwNA4Jyako2eg-Az1YoJcjfD8ViMUD19zj5jnUgkpmM/w400-h238/aaainflexpec.png" width="400" /></a></div><br /><div style="text-align: center;"><br /></div>
<p align="center" class="MsoNormal" style="text-align: center;"><o:p> </o:p></p>
<p class="MsoNormal" style="text-align: justify;">The University of Michigan
provides several series on CPI inflation expectations five years ahead. <span style="mso-spacerun: yes;"> </span><span style="mso-spacerun: yes;"> </span><span style="mso-spacerun: yes;"> </span>There are two here, the mean and the median.
The mean is higher so naturally the Fed usually refers to speak of the median. You
can clearly see that inflation is much more volatile than inflation expectations
here. The CPI’s variability is over two times as volatile as the mean and nearly
four times more volatile than the U of M median. The Fed wants to argue now –
and every Fed member who gives a speech these days - reports this bromide: ‘that
inflation expectations are well anchored.’<span style="mso-spacerun: yes;">
</span>But if you look at the history of these series, they seem to be
perpetually anchored! Especially the median! <span style="mso-spacerun: yes;"> </span>The chart here plots inflation expectations at
the time they are formed not shifted against the period five-years ahead to
which they apply. <span style="mso-spacerun: yes;"> </span>But it’s obvious that
these series do not predict future inflation well at all. <o:p></o:p></p>
<p class="MsoNormal" style="text-align: justify;"><o:p> </o:p></p>
<p class="MsoNormal" style="text-align: justify;">Now I am going to show you something
that is shocking! <o:p></o:p></p>
<p align="center" class="MsoNormal" style="text-align: center;"><o:p> </o:p></p>
<p align="center" class="MsoNormal" style="text-align: center;">Chart 2<o:p></o:p></p>
<p><br /></p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhhHGX5AxVJQjTjwTngkuI-XGs3PAssPQwJWvIlJIU2jK7Eg5IVm6SHMuaZYF-Hdhe8SMJZ_VX_GaXsazaTJWpBb7t8u4Vnvj39j2i_V0hftjgkoP31WRo-t3yA4gF1nRcNhoGLpLQdDXKNG08jSr9h-FIDHEmGiJFZ4LFypciPhaUaBlihX6cmVqq_uRJW/s762/AAAINflaion%20expect2.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="526" data-original-width="762" height="276" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhhHGX5AxVJQjTjwTngkuI-XGs3PAssPQwJWvIlJIU2jK7Eg5IVm6SHMuaZYF-Hdhe8SMJZ_VX_GaXsazaTJWpBb7t8u4Vnvj39j2i_V0hftjgkoP31WRo-t3yA4gF1nRcNhoGLpLQdDXKNG08jSr9h-FIDHEmGiJFZ4LFypciPhaUaBlihX6cmVqq_uRJW/w400-h276/AAAINflaion%20expect2.png" width="400" /></a></div><br /><p style="text-align: center;"><br /></p><br />
<p class="MsoNormal" style="text-align: justify;">This chart plots the U of M mean
inflation estimate Vs the actual CPI inflation rate at the time the U of M estimate
is formed. The greatly improved fit is achieved by plotting inflation expectations
as rankings against the CPI also plotted as a ranking over the same period.<span style="mso-spacerun: yes;"> </span>What these charts help to reveal is that <b><i>the
level of inflation expected</i></b> is not well correlated with the <b><i>level
of current or future inflation</i></b>. But when ranked, expectations are
higher when inflation is higher and with that an expectation-inflation link is
established.<span style="mso-spacerun: yes;"> </span><o:p></o:p></p>
<p class="MsoNormal" style="text-align: justify;"><o:p> </o:p></p>
<p class="MsoNormal" style="text-align: justify;">What this demonstrates, in fact,
is something that can be seen in chart 1 if you look closely, that inflation expectations
are not anchored at all. Presented as rankings inflation expectations are
exceptionally high- compared to the range of values that historically it has
taken on. <span style="mso-spacerun: yes;"> </span>People who form inflation
expectations in this survey are affected by the current environment but are not
willing to be very bold in making projections…that is the Achilles heel for the
Fed.<o:p></o:p></p>
<p class="MsoNormal" style="text-align: justify;"><o:p> </o:p></p>
<p class="MsoNormal" style="text-align: justify;">To me this observation significantly
blunts the usefulness of inflation expectations that the Fed relies on so much.
In fact, it seems to me that it is more likely that we should conclude that
investors really do not form inflation expectations in a formal sense the way
theory assumes. Still, the ranking data strongly indicate they are aware and perceive
inflation risk as higher or lower from time to time. Because of this I believe that
it is likely that inflation risk becomes embedded in the yield curve as part of
the term premium – it’s not a separate issue. That opens the door to saying that
the yield curve is steepening because of a too-tepid monetary policy and perhaps
also for various fiscal reasons.<o:p></o:p></p>
<p class="MsoNormal" style="text-align: justify;"><o:p> </o:p></p>
<p class="MsoNormal" style="text-align: justify;">The Fed will not go there. I will.
I have made somewhat more detailed arguments on this topic in an article you
can read on Seeking Alpha <a href="https://seekingalpha.com/article/4644770-is-the-feds-obsession-with-interest-rate-expectations-undermining-its-effectiveness#comment-96458742">here</a>.
<span style="mso-spacerun: yes;"> </span><span style="mso-spacerun: yes;"> </span>The Fed’s unwillingness to take a reasonable position
on the subject of real interest rates and its unwillingness to accept that it
made real rates exceptionally low in the post Covid period, is just a way for
it to try to avoid the blame for what is happening. <span style="mso-spacerun: yes;"> </span><o:p></o:p></p>
<p class="MsoNormal" style="text-align: justify;"><o:p> </o:p></p>
<p class="MsoNormal" style="text-align: justify;">But what is worse is that the
ranking data confirm my suspicion that whether they are good or not, inflation
expectations, in fact, are formed. And they are not good because they do not anticipate
future inflation well. But the relative rise in expectations is clear and demonstrates
that investors inflation hackles are raised. <span style="mso-spacerun: yes;"> </span><span style="mso-spacerun: yes;"> </span>That means
they may in fact be marking up inflation risk much more than the Fed thinks. That
maybe part of what the yield curve is telling you…<o:p></o:p></p>
<p class="MsoNormal" style="text-align: justify;"><o:p> </o:p></p>
<p class="MsoNormal" style="text-align: justify;">You can accept or reject this
argument. I put it on the table. And I think the Fed’s approach of refusing to
look at the traditional real Fed funds rate measures that have been a reliable gauge
of the tightness of monetary policy historically is a real mistake. We are
witnessing a Fed that is being extraordinarily influenced by politics. I am quite
concerned that the Fed will not talk about policy and what it has done in an
even-handed way. <span style="mso-spacerun: yes;"> </span>The Fed’s fingerprints
are all over this inflation rate and now it is hoping that inflation continues
to ratchet down.<span style="mso-spacerun: yes;"> </span>I think the inflation deceleration
period is about to slow dramatically. That will then put the Fed in a more difficult
spot with elections coming. How long can the Fed continue to pretend a soft
landing lies ahead? Maybe we should take bets on that… <o:p></o:p></p><br /><p></p>FAO-OPINIONhttp://www.blogger.com/profile/11086590490267067973noreply@blogger.com0tag:blogger.com,1999:blog-2763460351111948732.post-57006742985584171922017-03-05T19:04:00.003-05:002017-03-05T19:22:45.574-05:00Fed should hug you with alligator arms<div dir="ltr" style="text-align: left;" trbidi="on">
<div align="center" class="MsoHeader" style="tab-stops: 3.75in 5.0in; text-align: center;">
<b><span style="font-size: 14.0pt; mso-bidi-font-size: 12.0pt;">Schematic of Fed policy<o:p></o:p></span></b></div>
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<br /></div>
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<br /></div>
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<b><u><span style="font-size: 14.0pt; mso-bidi-font-size: 12.0pt;">Fed
Schematic (1) How the Fed thinks the world works<o:p></o:p></span></u></b></div>
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<br /></div>
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<b><span style="font-size: 14.0pt; mso-bidi-font-size: 12.0pt;">Unemployment</span></b><b><span style="font-size: 16.0pt; mso-bidi-font-size: 12.0pt;"> </span> </b><b><span style="font-size: 14.0pt; mso-bidi-font-size: 12.0pt;">Labor<o:p></o:p></span></b></div>
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<b><span style="font-size: 16.0pt; mso-bidi-font-size: 12.0pt;"> </span></b><b><span style="font-size: 14.0pt; mso-bidi-font-size: 12.0pt;">Rate </span></b><b><span style="font-size: 16.0pt; mso-bidi-font-size: 12.0pt;"> </span></b><b><span style="font-size: 14.0pt; mso-bidi-font-size: 12.0pt;">---</span></b><b><span style="font-family: "wingdings"; font-size: 14.0pt;">à</span></b><b><span style="font-size: 14.0pt; mso-bidi-font-size: 12.0pt;"> market</span></b><b><span style="font-family: "wingdings"; font-size: 14.0pt;">à</span></b><b><span style="font-size: 14.0pt; mso-bidi-font-size: 12.0pt;"> Wages -</span></b><b><span style="font-family: "wingdings"; font-size: 14.0pt;">à</span></b><b><span style="font-size: 14.0pt; mso-bidi-font-size: 12.0pt;"> Prices </span></b><b><span style="font-family: "wingdings"; font-size: 14.0pt;">à</span></b><b><span style="font-size: 14.0pt; mso-bidi-font-size: 12.0pt;"> Fed Funds -</span></b><b><span style="font-family: "wingdings"; font-size: 14.0pt;">à</span></b><b><span style="font-size: 14.0pt; mso-bidi-font-size: 12.0pt;"> Activity</span></b><b><span style="font-family: "wingdings"; font-size: 14.0pt;">à</span></b><b><span style="font-size: 14.0pt; mso-bidi-font-size: 12.0pt;">Prices<o:p></o:p></span></b></div>
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<b><u><span style="font-size: 14.0pt; mso-bidi-font-size: 12.0pt;">Fed
Schematic (2) How Policy Works in this world <o:p></o:p></span></u></b></div>
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<b><u><span style="font-size: 14.0pt; mso-bidi-font-size: 12.0pt;"><br /></span></u></b></div>
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<b><span style="font-size: 14.0pt; mso-bidi-font-size: 12.0pt;">Unemployment <o:p></o:p></span></b></div>
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<b><span style="font-size: 14.0pt; mso-bidi-font-size: 12.0pt;">Rate -</span></b><b><span style="font-family: "wingdings"; font-size: 14.0pt;">à</span></b><b><span style="font-size: 14.0pt; mso-bidi-font-size: 12.0pt;"> Labor Market -</span></b><b><span style="font-family: "wingdings"; font-size: 14.0pt;">à</span></b><b><span style="font-size: 14.0pt; mso-bidi-font-size: 12.0pt;"> W</span>a</b><b><span style="font-size: 11.0pt; mso-bidi-font-size: 12.0pt;">g</span></b><b><span style="font-size: 10.0pt; mso-bidi-font-size: 12.0pt;">e</span></b><b><span style="font-size: 9.0pt; mso-bidi-font-size: 12.0pt;">s</span></b><b><span style="font-size: 14.0pt; mso-bidi-font-size: 12.0pt;">-</span></b><b><span style="font-family: "wingdings"; font-size: 14.0pt;">à</span></b><b><span style="font-size: 14.0pt; mso-bidi-font-size: 12.0pt;"> </span></b><b><span style="font-size: 9.0pt; mso-bidi-font-size: 12.0pt;">Prices</span></b><b><span style="font-family: "wingdings"; font-size: 9.0pt;">à</span></b><b><span style="font-size: 9.0pt; mso-bidi-font-size: 12.0pt;"> </span></b><b><span style="font-size: 14.0pt; mso-bidi-font-size: 12.0pt;"> Fed Funds <o:p></o:p></span></b></div>
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<b><span style="font-size: 14.0pt; mso-bidi-font-size: 12.0pt;"> DIMINISHED </span></b></div>
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<b><span style="font-size: 14.0pt; mso-bidi-font-size: 12.0pt;"> IMPACT ON WAGES and PRICES <o:p></o:p></span></b></div>
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<b><u><span style="font-size: 14.0pt; mso-bidi-font-size: 12.0pt;">Schematic
(3) How the Fed/economy has really been
working
<o:p></o:p></span></u></b></div>
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<b><span style="font-size: 14.0pt; mso-bidi-font-size: 12.0pt;">
<o:p></o:p></span></b></div>
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<b><span style="font-size: 14.0pt; mso-bidi-font-size: 12.0pt;">Rate -</span></b><b><span style="font-family: "wingdings"; font-size: 14.0pt;">à</span></b><b><span style="font-size: 14.0pt; mso-bidi-font-size: 12.0pt;"> <strike>???
-</strike></span></b><strike><b><span style="font-family: "wingdings"; font-size: 14.0pt;">à</span></b><b><span style="font-size: 14.0pt; mso-bidi-font-size: 12.0pt;"> W</span>a</b><b><span style="font-size: 11.0pt; mso-bidi-font-size: 12.0pt;">g</span></b><b><span style="font-size: 10.0pt; mso-bidi-font-size: 12.0pt;">e</span></b><b><span style="font-size: 9.0pt; mso-bidi-font-size: 12.0pt;">s</span></b><b><span style="font-size: 14.0pt; mso-bidi-font-size: 12.0pt;">-</span></b><b><span style="font-family: "wingdings"; font-size: 14.0pt;">à</span></b><b><span style="font-size: 14.0pt; mso-bidi-font-size: 12.0pt;"> </span></b><b><span style="font-size: 9.0pt; mso-bidi-font-size: 12.0pt;">Prices</span></b><b><span style="font-family: "wingdings"; font-size: 9.0pt;">à</span></b><b><span style="font-size: 9.0pt; mso-bidi-font-size: 12.0pt;"> </span></b></strike><b><span style="font-size: 14.0pt; mso-bidi-font-size: 12.0pt;"> Fed Funds <o:p></o:p></span></b></div>
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<b><span style="font-size: 14.0pt; mso-bidi-font-size: 12.0pt;"> Fed skips wait for pass-through, assumes it and hikes Fed Funds<o:p></o:p></span></b></div>
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<b><span style="font-size: 14.0pt; mso-bidi-font-size: 12.0pt;"> on the basis of a low U3-rate alone</span></b></div>
<div class="MsoHeader">
<br /></div>
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Since the Fed believes that
the world works one way {Schematic (1)} it makes policy on that belief.<o:p></o:p></div>
<div class="MsoHeader">
Seeing the unemployment rate
so low, the Fed assumes that the process is underway and DOES NOT WAIT to see
inflation emerge before it hikes rates Schematic (2). But we have a
PROLIFERATION of information that question whether that transitional process is
really still operative,<b> </b>Schematic
(3).<b><span style="font-size: 14.0pt; mso-bidi-font-size: 12.0pt;"><o:p></o:p></span></b></div>
<div class="MsoHeader">
<br /></div>
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<b><span style="font-size: 14.0pt; mso-bidi-font-size: 12.0pt;">Problems <o:p></o:p></span></b></div>
<div class="MsoHeader">
<b>Evidence suggests that the unemployment rate is not the same variable
it used to be…</b><b><span style="font-size: 14.0pt; mso-bidi-font-size: 12.0pt;"><o:p></o:p></span></b></div>
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<div align="center" class="MsoHeader" style="tab-stops: 3.75in 5.0in; text-align: center;">
Participation
rate changes show some of the labor force characteristics are changing<o:p></o:p></div>
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As
the labor force ages its characteristics change’ productivity changes, many
aspects change<o:p></o:p></div>
<div align="center" class="MsoHeader" style="tab-stops: 3.75in 5.0in; text-align: center;">
Not
surprisingly…<o:p></o:p></div>
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<div class="MsoHeader" style="tab-stops: 3.75in 5.0in; text-align: justify;">
There has
been a big shift. The participation rate has come to explain the bulk of the
shift in the unemployment rate. This did not used to be the case (see below).
This shift should cause us to wonder the nature of unemployment rate itself. If
shifting demographics rather than rising employment or falling unemployment is
the main determinate of the rate of unemployment, hasn’t the nature of that
rate changed? It is a question the Fed seems to entertain in policy discussions
and in speeches BUT NOT in the application of policy itself. That’s odd. <o:p></o:p></div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgL-0vIWux5Qfy6vYK57UA9f1WNiamKCKpBNjWvS-pP3eBuxgd3437Ci5A_fy4H2UUV4H2vRzVVvcTOjthVMLr01wwNbT1axD0zqLYi99fNSJArXAfYxcsnLv5dMMlprn-55YXdjUKW4Vxf/s1600/particpChartOld.2017.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="192" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgL-0vIWux5Qfy6vYK57UA9f1WNiamKCKpBNjWvS-pP3eBuxgd3437Ci5A_fy4H2UUV4H2vRzVVvcTOjthVMLr01wwNbT1axD0zqLYi99fNSJArXAfYxcsnLv5dMMlprn-55YXdjUKW4Vxf/s320/particpChartOld.2017.png" width="320" /></a></div>
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In
addition there have been non-demographic shocks as people, not just those in
the upper age cohorts, have reduced their willingness to participate in the
labor force as either employed or unemployed persons. The U6 rate is more
inclusive as it encompasses a broader view of what people are jobless. <o:p></o:p></div>
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjLFenXKppY3XlFjWsIN2ENUP__s5WQWItjESAs0B0sosIa9IiURQGrzL2tJxzCCHsZf-jindt6a_AGH6e31QDgMeVgX5LOlkSHPveep9VGL3usWpnrJNXyZYhOMkKRj8pmHcvnZQYiqzBO/s1600/ratioU6toU3.2017.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="192" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjLFenXKppY3XlFjWsIN2ENUP__s5WQWItjESAs0B0sosIa9IiURQGrzL2tJxzCCHsZf-jindt6a_AGH6e31QDgMeVgX5LOlkSHPveep9VGL3usWpnrJNXyZYhOMkKRj8pmHcvnZQYiqzBO/s320/ratioU6toU3.2017.png" width="320" /></a></div>
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While the
unemployment rate (U3) has fallen, the U6 rate has not fallen nearly as much.
The charts (above and below) show very different views of the world. The U3
rate is rarely lower and so the Fed fears (AKA is ‘sure’) that schematic number
one is in play. It is ready to act as in schematic number 2 to jump interest
rates on the reality of a low U3 rate fearing inflation is coming… But the
unemployment rate ratio of U6 to U3 shows us that the U6 rate has not fallen
nearly as much. It reminds us that by a
different measure there is a lot more slack in the economy than U3 suggests. By
that I do not just mean that the U6 is higher. It is both absolutely and
relatively higher. The ratio is higher. And that is significant. If there is
more slack a lower U3 rate might not create so much wage pressure. Anticipatory
rate hikes might be ill conceived. <o:p></o:p></div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh__loRCV171D-sZmbRQ0b6Akzgz5qb24N-pYv8GLgVmaEzV07YPCeL7z1-Gfz8Qz8dRjltXBR90CG5yfdQGKY2mFKjUua7Msw-y3SupchyOtrcWvY3V5pgEnyCRFg_QEGu0YpvjGvaKjbz/s1600/LongUrate.2017.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="172" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh__loRCV171D-sZmbRQ0b6Akzgz5qb24N-pYv8GLgVmaEzV07YPCeL7z1-Gfz8Qz8dRjltXBR90CG5yfdQGKY2mFKjUua7Msw-y3SupchyOtrcWvY3V5pgEnyCRFg_QEGu0YpvjGvaKjbz/s320/LongUrate.2017.png" width="320" /></a></div>
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<b><span style="font-size: 14.0pt; mso-bidi-font-size: 12.0pt;"><br /></span></b></div>
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U3 is
rarely lower. And the Fed is worried that such a low unemployment rate implies
with NEAR CERTAINTY inflation is on the way. So the Fed is taking the
OPPORTUNITY of growth that it sees as being more stable and reliable to HIKE
interest rates from super low levels. Still the chart above also informs us of
another interesting peculiarity. In the Post-War period when the U3 rate has
been this low a recession has been ‘just around the corner.’ In fact recessions
have occurred from much higher levels of unemployment than what we have today. On
average since 1950, recession has occurred with about 2 ½ years of the
Unemployment rate (U3) first breaking the 4.8% mark. But lead times have been
as short as two months and as long as nearly five years. So there is the
question of if the Fed thinks that the old U3 rate is just the same old thing
or not? Does this explain why the Fed is hiking rates? Is it because it fears a
recession is around the corner and the Fed feels a need to get rates higher?
Does it really fear inflation? …Inflation that is not really developing? What
is the Fed’s real rationale for what it is doing? I get the sense that the Fed
is running words past us that derive from an old paradigm that no longer works
and is not relevant.<o:p></o:p></div>
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How we
should measure the unemployment rate has become a controversial subject, but we
also know that what the unemployment rate DOES has shifted. In short the Fed’s
policy of leap-frogging the impact of the low unemployment rate to head off
inflation (that may not be in train) is a policy tact without strong rationale
anymore. For an institution with more economists than you can shake a stick at
this is a brazen disregard of some basic economic facts. Let’s look at
some. <o:p></o:p></div>
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<div class="MsoHeader" style="tab-stops: 3.75in 5.0in; text-align: justify;">
<b>More Problems: Stylized facts about the
unemployment rate… <o:p></o:p></b></div>
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<br /></div>
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgVH8hJvSvvc5j_giRknndQb6IgzaLXbT_gJbYv45hnlvZ1lc086AR_tqDondJO85jnCjKxu0yyGJ9dPhYfMJ8u4YVPU8ybHbFSsSK8VBjY9h9toySDJ_tlAAq1JsNVm7kVMIWSIyWecMUr/s1600/Phillips.2017.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="184" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgVH8hJvSvvc5j_giRknndQb6IgzaLXbT_gJbYv45hnlvZ1lc086AR_tqDondJO85jnCjKxu0yyGJ9dPhYfMJ8u4YVPU8ybHbFSsSK8VBjY9h9toySDJ_tlAAq1JsNVm7kVMIWSIyWecMUr/s320/Phillips.2017.png" width="320" /></a></div>
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<o:p><br /></o:p></div>
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<o:p><br /></o:p></div>
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The main
relationship that maps the unemployment rate and its changes into inflation
works through wages and is called the Phillips curve. But the Phillips Curve
relationship has become flat. It has shifted down and it does not depict a very
POWERFUL relationship between unemployment and inflation. It certainly does not
begin to explain why the Fed is so dogmatically out of sorts about the low rate
of unemployment. On the chart above
the unemployment rate can fall from 7% to 4% and wage rate inflation will rise
from about 2% to about 2.7%. However, the lowest unemployment rate we have seen
since 1950 is 2.5%.... a rate that low would result in a drop in the unemployment
rate by only another 2.3 percentage points, and some modest additional wage
pressure. Is that what the Fed fears? <o:p></o:p></div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgbjXx3kA6_vqfV5sfYEuQgm0Xg9YvMkLKY4u1oAbdpKOtjf8L9WF5y2pdVX3oivwT4jd8Dq9I_I0FEKp0gD0VKtOsjdMlGJ2Vk-HAMxGgPxxz7b29TfAYxvWjb7KCEX_SItNTm7VHhEKKy/s1600/quitrate.2017.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="192" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgbjXx3kA6_vqfV5sfYEuQgm0Xg9YvMkLKY4u1oAbdpKOtjf8L9WF5y2pdVX3oivwT4jd8Dq9I_I0FEKp0gD0VKtOsjdMlGJ2Vk-HAMxGgPxxz7b29TfAYxvWjb7KCEX_SItNTm7VHhEKKy/s320/quitrate.2017.png" width="320" /></a></div>
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<o:p><br /></o:p></div>
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<o:p><br /></o:p></div>
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In
addition, other relationships have shifted. Here we see that there is still a
relationship to wages through a heightened quit rate but that that relationship
is also is less powerful. It has shifted downward and the slope depicting the
impact of change in the quit rate on the change in wage inflation is diminished
as well (the slope of the line is flatter). Market power has shifted away from
the worker even when the job market tightens. Firms are reluctant to raise
wages because of international competition and are further empowered to hold
back wages hikes because technology has given them more options. Note that we
get these muted relationships even though, in recent years, government
legislation has had a role in pushing wages up though increases in the minimum
wage rate as the unemployment rate fell.
Those hikes are still in progress.<o:p></o:p></div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjkyTQmhzT6XXtsHDxoy0I8WXPOHNsUqSweAXN1-C-oHgRV1RVAkomFgwbUfyK4GdqppAcfl1QE4zhBUGONvl8spckVLFeW1nN8-OhjP3HYqwqzM70xNT3Ykr6a8T_jirD7I5i5jFH1tBLK/s1600/6MoChange+in+Urate.2017.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="162" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjkyTQmhzT6XXtsHDxoy0I8WXPOHNsUqSweAXN1-C-oHgRV1RVAkomFgwbUfyK4GdqppAcfl1QE4zhBUGONvl8spckVLFeW1nN8-OhjP3HYqwqzM70xNT3Ykr6a8T_jirD7I5i5jFH1tBLK/s320/6MoChange+in+Urate.2017.png" width="320" /></a></div>
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<o:p><br /></o:p></div>
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Moreover
the ‘trigger’ for inflation creation in this model is a dropping unemployment rate
and the chart above shows that the pace of the unemployment rate drop has
slowed to crawl and we might even wonder if it is still in train…<o:p></o:p></div>
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<br /></div>
<div class="MsoHeader" style="tab-stops: 3.75in 5.0in; text-align: justify;">
<b>Conclusions, observations and a policy
recommendations<o:p></o:p></b></div>
<div class="MsoHeader" style="tab-stops: 3.75in 5.0in; text-align: justify;">
In the 1980s
when inflation was high the Fed adopted a monetary approach to monitoring inflation
and to setting monetary policy. In the early 1980s Fed policy tightness rose
and fell on things like money supply and bank reserves. Under Alan Greenspan
the Fed lost its theoretical focus and began heuristically to follow his mantra
which was that inflation should be as low and close to zero as is practically
possible. Under Ben Bernanke the Fed drifted on the same path for a short while
until Bernanke got the Fed to adopt inflation targeting on the heels of the
same approach used by the ECB and the BOE. This policy, which like Greenspan’s
method, is output oriented (targeting inflation itself) rather than input
oriented (aimed at controlling the money supply and bank reserves that create
inflation). Inflation targeting is also meant to corral the benefits of
focusing expectations on the target. If the central bank has credibility and
demonstrates that it hits its inflation target, the more likely it is that the
transactors in the economy will build that expectation into what they are doing
so that the target becomes more robust and more easily achievable. <o:p></o:p></div>
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<div class="MsoHeader" style="tab-stops: 3.75in 5.0in; text-align: justify;">
<b>Leader as follower</b>- Janet Yellen’s recent
speech (March 3, 2017) began on the note the Fed likes to reinforce which is that
the Fed is merely following the mandate laid down by Congress. But in fact the Fed
has a great deal of flexibility in how it achieves its dual mandate for price
stabilization and sustaining low unemployment. The Fed has chosen to use
inflation targeting and to adopt all the layers of communication problems that
resulted when it chose to implement Congress’ directives by dabbling with the
notion of employing policy guidance. <o:p></o:p></div>
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<br /></div>
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<b>Fed policy makes more sense than the
rationale for Fed policy</b>…The Fed insists on a policy paradigm that focuses
on its ability to achieve its unemployment rate and inflation objectives. These
are two goals that often find themselves in opposition. For now the Fed is in
the position of having both metrics reasonably close to their goals. For the
moment the Fed acts as if the unemployment rate can’t fall much further (or that
it shouldn’t) and that inflation is still not quite high enough, but is almost (…and
soon will be). However, all that is a lot of hair-splitting. The ongoing bump up
for inflation is oil-price-related which the Fed has told us it usually tries
to ‘look through’ (as the ECB is doing). Core inflation is really not rising. And
the unemployment objective is for a rate that is flawed and of unknown merit as
we document above. Core inflation shows little pressure and is a bit farther
below its target of 2% than the headline (which is at 1.9%). But in economics
given leads and lags and other variabilities one has to conclude that inflation
is reasonably close to target. YES… it is technically below target and has been
below target for many, many, months (57, but who’s counting?). Still, policy is
really close to being in its ‘sweet spot. Policymaking is about looking ahead
even if one does not drink the Fed’s Kool Aid on its need to forecast ahead. By
looking at the position of the economy in the business cycle and at the level
of the rate of unemployment, the Fed can make assessments of trends and of
economic needs and decide on the fine tuning of making policy. So what should the Fed be doing? <o:p></o:p></div>
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<div class="MsoHeader" style="tab-stops: 3.75in 5.0in; text-align: justify;">
<b>What Janet Yellen should do for her winter
vacation: change the way she operates:</b> The Fed should be focusing less on
the hairsplitting notion of getting inflation back to 2% and on getting each of
its variables precisely on target and focus more on having policy get rates
back into a configuration that looks more like normalcy. Since growth is simply
not going to get as strong as it used to, GDP growth around 2% is now
good-to-normal. The Fed should be less concerned about whether the labor market
is going to tighten, raise wages and boost inflation and instead be more
focused on the fact that its main policy variables - even with all their issues-
are relatively close to where they ‘should’ be and declare victory so policy
can carefully -CAREFULLY- nudge the Fed funds rate back toward normal. The Fed
in displaying the DOTS should focus MORE on a POLICY corridor from the dots
than on the median or average of the dots (trimmed or otherwise). I know many
will read this and say but that is what they are doing. Yes, it is sort of….
But this is not the justification that the Fed is using and the policy approach
is important. The Fed has to step out of the particular partition of the Japanese
lunchbox of policy options it has set for itself and look at the whole lunch.
If it were to do this it could free itself of the straight jacket of the
language it has adopted and actually have the flexibility to implement policy
within essentially the same framework. Right now policy is too myopic, too literal,
too mechanistic and too technically oriented on policy parameters of unknown
quality. The Fed needs to stop pretending that the job market, the unemployment
rate and the Phillips curve are a good way to run policy. They certainly are
not. And the sooner that the Fed jumps off that band wagon the better. <o:p></o:p></div>
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<br /></div>
<div class="MsoHeader" style="tab-stops: 3.75in 5.0in; text-align: justify;">
<b>It’s not brain surgery...it’s about
alligator arms (or, more simply, STOP Over-reaching!) <o:p></o:p></b></div>
<div class="MsoHeader" style="tab-stops: 3.75in 5.0in; text-align: justify;">
The Fed needs
to use a blunter pencil when assessing its own performance. If we knew that <o:p></o:p></div>
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(1)
2% were exactly the right inflation rate, <o:p></o:p></div>
<div class="MsoHeader" style="margin-left: .5in; tab-stops: 3.75in 5.0in; text-align: justify;">
(2)
the PCE were the exact right inflation gauge, <o:p></o:p></div>
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(3)
the U3 rate were the right unemployment rate and <o:p></o:p></div>
<div class="MsoHeader" style="margin-left: .5in; tab-stops: 3.75in 5.0in; text-align: justify;">
(4)
where the proper U3 level stood, <o:p></o:p></div>
<div class="MsoHeader" style="margin-left: .5in; tab-stops: 3.75in 5.0in; text-align: justify;">
then,
policy would be (somewhat) easier to conduct. <o:p></o:p></div>
<div class="MsoHeader" style="tab-stops: 3.75in 5.0in; text-align: justify;">
<br /></div>
<div class="MsoHeader" style="tab-stops: 3.75in 5.0in; text-align: justify;">
But in
fact we know none of these things - NONE. That’s why I think that Fed should declare
victory and move on to focus on the right path or speed for getting the Fed
funds rate back to (or toward) normal without destabilizing growth. That, right
now, is the key policy problem not whether the core PCE is going to climb three
tenths of a percentage point in the next two years….really! The Fed has been
framing this as a question of where r-star is. And in reality r-star (r*) is in
the Fed’s spot light more than the Fed’s two policy ‘targets.’ R-star is the
interest rate (natural rate of interest) that is neutral or stable-growth-low-inflation-preserving
at full resource utilization. Thus the question now is not whether inflation is
exactly at 2% but if there is some reasonable expectation, not a real true
forecast, but a reasonable expectation that it will rise there by 20XX as
growth progresses accordingly. Obviously
since inflation is ‘bit lean now’ the Fed could allow a slightly faster growth
rate and do this by keeping (r<sub>t</sub><r a="" able="" about="" accessible="" accommodative="" actually="" alligator="" always="" and="" are="" arms="" articulate="" as="" at="" basically="" been="" below="" beyond="" but="" by="" check="" complicated="" declare="" deliver.="" depicted="" develop="" double="" easily="" economics="" economy="" elaborate="" explain="" fed="" find="" funds="" general="" goals.="" goals="" grasp.="" has="" hat="" have="" how="" in="" inflation="" interacting="" is.="" is="" it="" its="" more="" move="" nbsp="" needs="" new="" not="" notion="" o:p="" of="" on.="" on="" policy="" precise="" r-star="" r="" rate="" reach="" relative="" s="" should="" stop="" success="" such="" sync="" t="" talk="" targets="" that="" the="" thus="" time="" to="" try="" trying="" unemployment="" use="" way="" we="" weave="" web="" what="" whether="" will="" with=""></r></div>
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END <o:p></o:p></div>
</div>
FAO-OPINIONhttp://www.blogger.com/profile/11086590490267067973noreply@blogger.com1tag:blogger.com,1999:blog-2763460351111948732.post-12857201477924568272016-11-21T08:48:00.001-05:002016-11-21T08:48:18.709-05:007 Pitfalls For Donald Trump<div dir="ltr" style="text-align: left;" trbidi="on">
<h1 class="has-title-test" itemprop="headline" style="background-color: white; box-sizing: border-box; color: #360000; display: block; font-family: Verdana,Georgia,Arial,Helvetica,sans-serif; font-size: 30px; font-stretch: normal; font-style: normal; font-variant: normal; letter-spacing: normal; line-height: 40px; margin: 0px; orphans: 2; padding: 0px 0px 15px; text-indent: 0px; text-transform: none; white-space: normal; widows: 2; word-spacing: 0px;">
7 Pitfalls For Donald Trump</h1>
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<div style="margin: 0px; text-align: justify;">
<span style="color: black; font-family: Times New Roman; font-size: small;">The order of
policy implementation matters...Trump will get it wrong.</span></div>
<div style="margin: 0px;">
<span style="color: black; font-family: Times New Roman; font-size: small;">Trade tariffs and competitiveness- The reason NAFTA fails
and China obstructs</span><span style="margin: 0px;"><span style="color: black; font-family: Times New Roman; font-size: small;"> </span></span></div>
<div style="margin: 0px; text-align: justify;">
<span style="color: black; font-family: Times New Roman; font-size: small;">Tax-cut
stimulus to be haunted by the 47%...remember them?</span></div>
<div style="margin: 0px; text-align: justify;">
<span style="color: black; font-family: Times New Roman; font-size: small;">Infrastructure
stimulus: loved but lacking </span></div>
<div style="margin: 0px; text-align: justify;">
<span style="color: black; font-family: Times New Roman; font-size: small;">Success depends
on whether it’s a ‘U-6’ or a ‘U-3’ world</span></div>
<div style="margin: 0px; text-align: justify;">
<span style="color: black; font-family: Times New Roman; font-size: small;">Reality
bytes – tech remains a problem for jobs </span></div>
<div style="margin: 0px; text-align: justify;">
<span style="color: black; font-family: Times New Roman; font-size: small;">Demographics,
trade, and the 47% stalk the multipliers </span></div>
<div style="margin: 0px; text-align: justify;">
<span style="color: black; font-family: Times New Roman; font-size: small;">See full article at link below</span></div>
<div style="margin: 0px; text-align: justify;">
<span style="color: black; font-family: Times New Roman; font-size: small;">http://seekingalpha.com/article/4025070-7-pitfalls-donald-trump</span></div>
<div style="margin: 0px; text-align: justify;">
<span style="color: black; font-family: Times New Roman; font-size: small;"><br /></span></div>
<div style="margin: 0px; text-align: justify;">
<span style="color: black; font-family: Times New Roman; font-size: small;"><br /></span></div>
</div>
<b></b><i></i><u></u><sub></sub><sup></sup><strike></strike><br /></div>
FAO-OPINIONhttp://www.blogger.com/profile/11086590490267067973noreply@blogger.com0tag:blogger.com,1999:blog-2763460351111948732.post-75128790188597442992016-10-25T21:17:00.001-04:002016-10-25T21:17:45.658-04:00Fed rate hikes matter<div dir="ltr" style="text-align: left;" trbidi="on">
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<b><span style="font-size: 14.0pt; mso-bidi-font-size: 12.0pt;">Fed rate hikes matter<o:p></o:p></span></b></div>
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<br /></div>
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<br /></div>
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<b><i><span style="font-size: 14.0pt; mso-bidi-font-size: 12.0pt;">There are two extreme
schools of thought on the Fed. One is that because of the size of its balance
sheet it controls everything: the level of interest, the yield curve, all of
it. Another view is that the Fed does not matter because the market still can
poke through the veil of secrecy and get rates where it wants them. If the Fed has
a different view from the market and it lower rates too much the market will
steepen the yield curve. If the Fed over tightens, the yield curve inverts to
compensate. <o:p></o:p></span></i></b></div>
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<br /></div>
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<b><u><span style="font-size: 14.0pt; mso-bidi-font-size: 12.0pt;">Reality-</span></u></b><span style="font-size: 14.0pt; mso-bidi-font-size: 12.0pt;"> Between these two extremes there is the reality
which I believe is that the Fed sets the short rate and influences the long
rates – how much influence remains a matter of debate. But I do not think that
the Fed pegs all rates yet it does disrupt many of them in a way that may
render the yield curve and the rate spreads as much less useful barometers on
the markets and on the economy compared to more ‘normal’ times. Markets can be
fooled by what the Fed does and says and markets can be misled as well. <o:p></o:p></span></div>
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<br /></div>
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<b><u><span style="font-size: 14.0pt; mso-bidi-font-size: 12.0pt;">Mystifying monetary poli</span></u></b><b><span style="font-size: 14.0pt; mso-bidi-font-size: 12.0pt;">cy</span></b><span style="font-size: 14.0pt; mso-bidi-font-size: 12.0pt;">-
With the economy fragile, growing slowly, productivity weak, inflation still
undershooting and the outlook uncertain, it would not be a good time for the
Fed to mystify markets but that is what it seems to be headed for.<o:p></o:p></span></div>
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<br /></div>
<div class="MsoHeader" style="tab-stops: 3.75in 5.0in; text-align: justify;">
<b><u><span style="font-size: 14.0pt; mso-bidi-font-size: 12.0pt;">The WSJ view as an example of what is wrong</span></u></b><span style="font-size: 14.0pt; mso-bidi-font-size: 12.0pt;">- A recent WSJ article <a href="http://www.wsj.com/articles/feds-task-next-week-signal-december-rate-rise-1477351253">(here</a>)
just jumbled together the ideas of the Fed guiding markets, communicating
clearly, and having made up its mind about December while fluffing past the
notion of the Fed being data-dependent. <o:p></o:p></span></div>
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<br /></div>
<div class="MsoHeader" style="tab-stops: 3.75in 5.0in; text-align: justify;">
<b><u><span style="font-size: 14.0pt; mso-bidi-font-size: 12.0pt;">Two schools on the Fed</span></u></b><span style="font-size: 14.0pt; mso-bidi-font-size: 12.0pt;">- Interestingly a number of
Fed critics think that the Fed is doing the economy a disservice by keeping rates
so low. Another group fears that the Fed is ready hike them too soon or too
quickly or by too-much altogether. I am in that latter group. <o:p></o:p></span></div>
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<b><u><span style="font-size: 14.0pt; mso-bidi-font-size: 12.0pt;">The 2015 paradigm</span></u></b><span style="font-size: 14.0pt; mso-bidi-font-size: 12.0pt;">- In my view, the Fed got
itself into trouble in 2016 by what it did at the end of 2015- hiking rates
prematurely. Amid great fanfare, calling
the period of special accommodation over, the Fed raised rates in December
about 10-months ago even though its own stipulations for a rate hike had not
been met. But since many (all!) Fed officials had said at one time or another
last year that they expected to raise rates in 2015, the Fed felt obligated to
do just that – even though to do it required that the Fed violate its own rules.
To accommodate and justify that rate hike that the Fed claimed to make policy
based on its view of the intermediate term and where it ‘deemed’ growth,
inflation rates and unemployment were going. That is how, with oil prices in
the midst of spiraling lower and lower, the Fed was still able to move to hike
rates in December of 2015. That is something that will always look like a
really foolish mystery to future Fed historians. How could the Fed think it was
on path to meet its inflation objective with oil prices in near freefall? <o:p></o:p></span></div>
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<b><u><span style="font-size: 14.0pt; mso-bidi-font-size: 12.0pt;">The 2016 question:</span></u></b><span style="font-size: 14.0pt; mso-bidi-font-size: 12.0pt;"> Now what is the Fed going
to use to justify a rate hike in December 2016? It will pass on a rate hike in
November because of the elections but will state a different reason. That is
allowable central bank misdirection. But (a) with growth still weak, (b)
inflation under shooting - (c) not accelerating- and with (d) the unemployment
rate having stopped its relentless move lower and (e) having backed up from its
lows, what will be the Fed’s excuse/reason for hiking rates this time? <o:p></o:p></span></div>
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<span style="font-size: 14.0pt; mso-bidi-font-size: 12.0pt;">And why does it make a
difference?<o:p></o:p></span></div>
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<br /></div>
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<b><span style="font-size: 14.0pt; mso-bidi-font-size: 12.0pt;">Why rate hikes make a difference<o:p></o:p></span></b></div>
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<b><u><span style="font-size: 14.0pt; mso-bidi-font-size: 12.0pt;">International fragility and feedback</span></u></b><span style="font-size: 14.0pt; mso-bidi-font-size: 12.0pt;">- While the Fed has from
time to time talked about the importance of the international economy and on
two occasions in the past year actually swerved policy (allegedly) for international
reasons, the Fed’s expressed view of the importance of the international
economy misses the point. The point is not that international turbulence should
stay the Fed’s hand (Sept of 2015 and early 2016). Nor is the point that Brexit
was a risk and a reason for policy to hit the pause button. Not that I am not
arguing that those decisions were wrong, just that they miss the point. Yellen
has talked of how monetary policies are more connected in some way which is
curious because under floating rates monetary policies are supposed to be more
independent. But that is getting somewhat closer to the point. <o:p></o:p></span></div>
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<b><u><span style="font-size: 14.0pt; mso-bidi-font-size: 12.0pt;">Structure, impact and policy diffusion-</span></u></b><span style="font-size: 14.0pt; mso-bidi-font-size: 12.0pt;"> There are several aspects
on internationalization that the Fed seems to almost completely ignore. The first
(1) is the way in which trade already had changed the structure of the U.S.
economy and made it more vulnerable. The strong dollar already makes it hard
for the U.S. to produce anything at home for export or even in competition with
imports. Technology should be an equal opportunity disruptor but it has
disrupted the U.S. more because of its high wages and uncompetitive exchange
rate. A Fed rate hike (2) will make all that worse by moving the dollar higher,
making it even less competitive. But that is not all it will do, (3) a stronger
dollar will drive up the foreign currency cost of all commodities, oil included,
and that puts downward pressure on dollar prices. A strong dollar will spread
the U.S. rate hike globally; it is globally deflationary at a time that other
central banks are trying to jump start inflation. Is that a good idea? In summary, I am concerned not so much about
the Fed hiking rates and about that impact on the US economy as I am concerned
about the feedback effects in the international community<o:p></o:p></span></div>
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<b><u><span style="font-size: 14.0pt; mso-bidi-font-size: 12.0pt;">And it is
NEVER about just one 25bp rate hike</span></u></b><span style="font-size: 14.0pt; mso-bidi-font-size: 12.0pt;">-. However, do not dismiss
the prospect of a Fed rate hikes as unimportant at home. Many have asked, “what’s
the trouble with one 25bp rate hike?” Well that was December 2015 and you tell
me, “what followed?” It was one 25bp rate hike… followed by chaos. Some of that
chaos was Fed-generated as Stanley Fischer came forth with his great theory of
why the markets were wrong and what the Fed would really do. Stanley will still
be eating crow for Thanksgiving this year (…with a wonderful dessert of humble
pie) he has so much stocked in his refrigerator after that dead wrong analysis-
road-kill crow. <o:p></o:p></span></div>
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<b><u><span style="font-size: 14.0pt; mso-bidi-font-size: 12.0pt;">Fed fears make for bad policy moves-</span></u></b><span style="font-size: 14.0pt; mso-bidi-font-size: 12.0pt;"> And that is just another
reason why we should be wary of Fed policy pronouncements or forward guidance:
the Fed simply is making it up as it goes along. It has little wisdom to
impart, and worse, members have an agenda. They now fear anything from
inflation to bubbles. They are not sure which is worse but they are sure that
this will end badly and that there is something to fear and nothing like
slamming policy into reverse to fix it. <o:p></o:p></span></div>
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<b><u><span style="font-size: 14.0pt; mso-bidi-font-size: 12.0pt;">Not Ptolemy Copernicus or Kepler: the Big Bang
radiates!</span></u></b><span style="font-size: 14.0pt; mso-bidi-font-size: 12.0pt;">
- Rates are important. Interest rates
sit at the center of the international economy’s perceptions. They impact
exchange rates. They are links to current and future consumption and
investment. They have a role is setting inflation expectations. This is the
last place that the Fed needs to be spreading mischief. If it is appropriate
for the U.S. to raise rates it should be sure – very sure- because there will
be repercussions of a significant nature from abroad, too. Last year’s hike
should have made that clear. But I get the sense that the Fed has not learned
much from that episode and instead treats it like a one-off event instead of
like the endogenous response to the Fed’s own actions that it was. <o:p></o:p></span></div>
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<b><u><span style="font-size: 14.0pt; mso-bidi-font-size: 12.0pt;">A mind is a terrible thing to waste…a waist is a
terrible thing to mind…</span></u></b><span style="font-size: 14.0pt; mso-bidi-font-size: 12.0pt;">In short I fear that the Fed has grown and learned very little. It
still seems to regard its new tool box as adequate, or it is willing to act as
though it does. It seems to be willing to be bold with policy and inventive
with its forecasts despite the economy’s circumstances and its past lack of
forecast ‘suck-cess.’ In the guise of lifting rates to get away from the zero
bound threat the Fed is flirting with that very problem and may force us to
deal with it very soon instead of just to think about it hypothetically. Rate
hikes are important because they are dangerous. Play with fire at your own
risk. Ask yourself this…if there were no Fed what would the markets be doing
with rates in this environment? I don’t
think that marching higher is a likely result. Do you? <o:p></o:p></span></div>
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<b><span style="font-size: 14.0pt; mso-bidi-font-size: 12.0pt;">General central banking rules</span></b><span style="font-size: 14.0pt; mso-bidi-font-size: 12.0pt;">- <o:p></o:p></span></div>
<br />
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<span style="font-size: 14.0pt; mso-bidi-font-size: 12.0pt;">My bottom line is that the
central bank should have reasons for what it does. It should make these reasons
known and be true to them. If it expresses a model or point of view its policy
enactments need to be consistent with that view. Central bank policy should not
cram the square peg of policy change into the round hole of what I said I’d do.
Policy should be easy to understand and should not take much hairsplitting to
explain why the bank acted as it did. Policies should flow freely out of the
central bank’s policy ‘map’. No right hand turns from the left hand lane. <o:p></o:p></span></div>
</div>
FAO-OPINIONhttp://www.blogger.com/profile/11086590490267067973noreply@blogger.com0tag:blogger.com,1999:blog-2763460351111948732.post-91855769282871908282016-07-04T11:05:00.001-04:002016-07-04T11:05:44.587-04:00Draghi’s dilemma delivers depressing <div dir="ltr" style="text-align: left;" trbidi="on">
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<div class="MsoHeader" style="tab-stops: 3.75in 5.0in;">
<b style="mso-bidi-font-weight: normal;"><span style="font-size: 14.0pt; mso-bidi-font-size: 12.0pt;">Draghi’s
dilemma delivers depressing dilly </span></b></div>
<div class="MsoHeader" style="tab-stops: 3.75in 5.0in;">
<br /></div>
<div class="MsoHeader" style="tab-stops: 3.75in 5.0in; text-align: justify;">
Mario
Draghi has an idea. Well he has a fragment of an idea. He has a fragment of an
idea he would like to turn into a policy initiative someplace. <span style="mso-spacerun: yes;"> </span>His idea is that countries should be careful
about transmitting distortions overseas from their own policies because they are
growing at different speeds. It has some basis in fact but also a vague
scatterbrain cast to it like a Saturday Night Live spoof of a real policy maker’s
speech. He must have been in an amazing state of denial when he thought up
those remarks…here they are:</div>
<div class="MsoHeader" style="tab-stops: 3.75in 5.0in; text-align: justify;">
<br /></div>
<div class="MsoHeader" style="margin-bottom: .0001pt; margin-bottom: 0in; margin-left: .5in; margin-right: .5in; margin-top: 0in; tab-stops: .5in; text-align: justify;">
“In a
globalized world, the global policy mix matters—and will likely matter more as
our economies become more integrated,” Mr. Draghi said. “The speed with which
monetary policy can achieve domestic goals inevitably becomes <b style="mso-bidi-font-weight: normal;"><i style="mso-bidi-font-style: normal;">more
dependent on others</i></b>.”</div>
<div class="MsoHeader" style="margin-right: .5in; tab-stops: .5in; text-align: justify; text-indent: .5in;">
-- Mario Draghi</div>
<div class="MsoHeader" style="tab-stops: 3.75in 5.0in; text-align: justify;">
<br /></div>
<div class="MsoHeader" style="tab-stops: 3.75in 5.0in; text-align: justify;">
Draghi
rambled on because he did not want to say directly what he was directly
thinking. So he rambled on and tried not say what was really on his mind, that
was of course:</div>
<div class="MsoHeader" style="tab-stops: 3.75in 5.0in; text-align: justify;">
<br /></div>
<div class="MsoHeader" style="tab-stops: 3.75in 5.0in; text-align: justify;">
Please
don’t hurt me! <span style="mso-spacerun: yes;"> </span></div>
<div class="MsoHeader" style="tab-stops: 3.75in 5.0in; text-align: justify;">
<br /></div>
<div class="MsoHeader" style="tab-stops: 3.75in 5.0in; text-align: justify;">
He was worried
about that villain of international monetary policy, Janet Yellen and her
monetary policy plan to hike rates in 2016…to do it as much as four times. Reverberations
from that would wrack the EMU economy. But of course a central banker can’t
single out a fellow banker so he spoke in these broad generalities, in vague
generalities. He tried to make it sound like something academic or rhetorical
maybe a theoretic construct. <span style="mso-spacerun: yes;"> </span>He tried
that but it came out sounding very confused and whiney. <span style="mso-spacerun: yes;"> </span></div>
<div class="MsoHeader" style="tab-stops: 3.75in 5.0in; text-align: justify;">
<br /></div>
<div class="MsoHeader" style="tab-stops: 3.75in 5.0in; text-align: justify;">
That is because
it was illogical and confused. </div>
<div class="MsoHeader" style="tab-stops: 3.75in 5.0in; text-align: justify;">
<br /></div>
<div class="MsoHeader" style="tab-stops: 3.75in 5.0in; text-align: justify;">
Some
background…</div>
<div class="MsoHeader" style="tab-stops: 3.75in 5.0in; text-align: justify;">
The G-7 had
a go at trying to mutually manipulate exchange rates. They gave that up for the
notion that each country would run the best policies it could for its own
economy. But now that is not working either. The world trading system is broken
and so this is the sort of thing that will happen. <span style="mso-spacerun: yes;"> </span></div>
<div class="MsoHeader" style="tab-stops: 3.75in 5.0in; text-align: justify;">
<br /></div>
<div class="MsoHeader" style="tab-stops: 3.75in 5.0in; text-align: justify;">
Now with the
ECB’s back against the wall and the Germans holding the key to the lock box of
fiscal policy Draghi is without options. He is doing QE and interest rates are
negative. He has even appealed for more efficiency. He is afraid that rate hikes
in the US could swamp him like a man in a small dingy as a freighter goes by.
Please make no wake. But the problem here is not with the potential wake maker.
It’s with the guy in the dingy who has no business being there.</div>
<div class="MsoHeader" style="tab-stops: 3.75in 5.0in; text-align: justify;">
<br /></div>
<div class="MsoHeader" style="tab-stops: 3.75in 5.0in; text-align: justify;">
The idea
that the US is at fault for wanting to hike rates seems preposterous: US inflation
is low but climbing and the unemployment rate is quite low. Yet, the fact that
the US is the one more at risk because Europe has launched a policy of negative
rates is, in fact, much truer but almost never voiced. <span style="mso-spacerun: yes;"> </span>Money is pouring into the US pushing rates down
at time that they might be better served going up. Why should the needs of the
European business cycle take precedence over the needs on the US business cycle
in the making of US policy?</div>
<div class="MsoHeader" style="tab-stops: 3.75in 5.0in; text-align: justify;">
<br /></div>
<div class="MsoHeader" style="tab-stops: 3.75in 5.0in; text-align: justify;">
Riddle me
that one bat man...or super Mario. Where does this idea come from? What is its
precedent? </div>
<div class="MsoHeader" style="tab-stops: 3.75in 5.0in; text-align: justify;">
<br /></div>
<div class="MsoHeader" style="tab-stops: 3.75in 5.0in; text-align: justify;">
Arguably
ECB policies have been much more distortive to global events than US policy.
Although with the dollar as a much more powerful reserve unit, and the
numeraire for commodity prices, its potential to spread its effects globally
takes on greater impact when the Fed moves. Higher U.S. rates would send a
deflationary chill across the rest of the world and, in this environment that
could be enough to make a difference. I can understand Draghi’s fear. But does
he really want to influence the conduct of US policy? </div>
<div class="MsoHeader" style="tab-stops: 3.75in 5.0in; text-align: justify;">
<br /></div>
<div class="MsoHeader" style="tab-stops: 3.75in 5.0in; text-align: justify;">
First of
all the idea of a US policy move is fanciful –still only hypothetical- while
the EMU negative interest rate policy is a reality. Their reality is affecting
the US economic situation and the US policy-trade-offs. And so what is the US
supposed to do? It is in a different position in its business cycle than
Europe. Should policy stand still and let bad stuff happen in the US? Germany
is actually a member of the EMU and what is it doing with its own substantial
fiscal flexibility? How much is it helping its own cause? (i.e. zero).</div>
<div class="MsoHeader" style="tab-stops: 3.75in 5.0in; text-align: justify;">
<br /></div>
<div class="MsoHeader" style="tab-stops: 3.75in 5.0in; text-align: justify;">
It is not clear
to me at all what Draghi expects or why except this...</div>
<div class="MsoHeader" style="tab-stops: 3.75in 5.0in; text-align: justify;">
<br /></div>
<div class="MsoHeader" style="tab-stops: 3.75in 5.0in; text-align: justify;">
Don’t hurt
me, Janet. Please… <span style="mso-spacerun: yes;"> </span></div>
<div class="MsoHeader" style="tab-stops: 3.75in 5.0in; text-align: justify;">
<br /></div>
<div class="MsoHeader" style="tab-stops: 3.75in 5.0in; text-align: justify;">
Draghi did
not say anything profound. He offered no resolution to any problem. In fact he
seems to have made something up… Why does Europe’s policy goal become more
dependent on overseas events necessarily? There is a business cycle conflict
and we have had countries with business cycles out of sync before. One thing
EMU/EU could do is use fiscal policy. But the Germans have put that off limits
and because of <b style="mso-bidi-font-weight: normal;"><i style="mso-bidi-font-style: normal;">that </i></b>the US needs to alter its money policy to fit into Europe’s
policy pickle? <span style="mso-spacerun: yes;"> </span>Frankly I don’t get it. I
don’t see it. And I think it is an example of how fouled up Europe has become. At
the European Summit members were gaming Scotland about its EU ambitions to
aggravate the U.K. But instead they aggravated Spain that has its own separatist
regions to be concerned about and quashed the notion of making an offer to
Scotland for its own reasons. These bureaucratic machinations are unbecoming of
a major currency bloc. Its leadership is showing their pettiness. The EU should
be focused on what it can do to help the ECB instead wasting energy trying to make
the UK miserable over Brexit. <span style="mso-spacerun: yes;"> </span></div>
<div class="MsoHeader" style="tab-stops: 3.75in 5.0in; text-align: justify;">
<br /></div>
<div class="MsoHeader" style="tab-stops: 3.75in 5.0in; text-align: justify;">
Europe
seems to see its problems as exacerbated by what everyone else does. The UK’s
Brexit decision has Europeans hopping mad. US monetary policy is causing them
problems. Of course, their own inaction in the Middle East allowed ISIS and the
migrant problem to get out of hand. Europe wants to blame Greece for being a
migrant entry point, but what can Greece do? </div>
<div class="MsoHeader" style="tab-stops: 3.75in 5.0in; text-align: justify;">
<br /></div>
<div class="MsoHeader" style="tab-stops: 3.75in 5.0in; text-align: justify;">
At some
point Europe has to face the music, take its share of the blame, and choose
among the policy options it has. Taking policy options off the table is not a
good idea. But the Germans and much of the rest of EMU have different ideas
about policy. Germany is engaged in a show of force to make the rest of Europe
pay for past fiscal transgressions. Europe is being disciplined by Germany and
Draghi wants the US to take off some of the pressure. Meanwhile, European bureaucrats
are playing stupid tricks on one another as Italian banks are reeling from a post
Brexit stock sell-off. Here again Europe wants the Italians to follow-the EU
protocols on bank bailouts. Renzi has all but given them a Bronx cheer on the
notion of letting shareholders step up to feel the pain, that - THAT – is not
going to happen in Italy. But what will happen is still unclear.</div>
<div class="MsoHeader" style="tab-stops: 3.75in 5.0in;">
<br /></div>
<div class="MsoHeader" style="tab-stops: 3.75in 5.0in;">
Isn’t that interesting? None
of it bodes well for the future. Markets may be settling down in the Brexit as
a reality era. But there are still lots of hurdles to go over and it seems few
adults to do it. The market turbulence is unlikely to be over soon with leadership
like this. <span style="mso-spacerun: yes;"> </span></div>
<div class="MsoHeader" style="tab-stops: 3.75in 5.0in;">
<br /></div>
<div class="MsoHeader" style="tab-stops: 3.75in 5.0in;">
<span style="mso-spacerun: yes;"> </span></div>
<div class="MsoHeader" style="tab-stops: 3.75in 5.0in;">
<span style="mso-spacerun: yes;"> </span></div>
<div class="MsoHeader" style="tab-stops: 3.75in 5.0in;">
<br /></div>
</div>
FAO-OPINIONhttp://www.blogger.com/profile/11086590490267067973noreply@blogger.com2tag:blogger.com,1999:blog-2763460351111948732.post-55193052830757795002016-06-24T12:34:00.002-04:002016-06-24T12:34:53.602-04:00I woke up…it was a Brexit morning<div dir="ltr" style="text-align: left;" trbidi="on">
<br />
<div class="MsoHeader" style="margin: 0in 0in 0pt; tab-stops: 3.75in 5.0in; text-align: justify;">
<b><span style="font-family: "Verdana","sans-serif";">Clueless is what clueless does… </span></b><span style="font-family: "Verdana","sans-serif"; font-size: 11pt; mso-bidi-font-size: 12.0pt; mso-bidi-font-weight: bold;">Financial markets and their pollsters got it
completely wrong.<span style="mso-spacerun: yes;"> </span>The ‘Out’ vote was
largely about immigration and dissatisfaction with it and the ‘remain’ faction
never ‘got’ that nor tried to combat it. Their tactic was to threaten financial
and economic chaos and now they will have to go eyeball to the eyeball with
those dire warning statements- which are probably greatly exaggerated. There is
message here beyond just the UK…</span><b><span style="font-family: "Verdana","sans-serif";"><o:p></o:p></span></b></div>
<br />
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<span style="font-family: "Verdana","sans-serif"; font-size: 11pt; mso-bidi-font-size: 12.0pt; mso-bidi-font-weight: bold;"><o:p> </o:p></span></div>
<br />
<div class="MsoHeader" style="margin: 0in 0in 0pt; tab-stops: 3.75in 5.0in; text-align: justify;">
<span style="font-family: "Verdana","sans-serif"; font-size: 11pt; mso-bidi-font-size: 12.0pt; mso-bidi-font-weight: bold;">What’s good for the goose is good for the gander<o:p></o:p></span></div>
<br />
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<span style="font-family: "Verdana","sans-serif"; font-size: 11pt; mso-bidi-font-size: 12.0pt; mso-bidi-font-weight: bold;">But what goes around comes around. The U.K. is the
United Kingdom not the magic kingdom. And with this vote the U.K, may be posed
to get smaller as Scotland is now likely to take a second go at leaving the
U.K. What is good for the goose is good for the gander. U.K. claims to
Gibraltar are being challenged by Spain, now that the U.K. will be politically
OUT of EU. The stage is reset for all sorts of new arrangements to be put in
play. <o:p></o:p></span></div>
<br />
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<span style="font-family: "Verdana","sans-serif"; font-size: 11pt; mso-bidi-font-size: 12.0pt; mso-bidi-font-weight: bold;"><o:p> </o:p></span></div>
<br />
<div class="MsoHeader" style="margin: 0in 0in 0pt; tab-stops: 3.75in 5.0in; text-align: justify;">
<span style="font-family: "Verdana","sans-serif"; font-size: 11pt; mso-bidi-font-size: 12.0pt; mso-bidi-font-weight: bold;">EU to E-MOO or are they cowed?<o:p></o:p></span></div>
<br />
<div class="MsoHeader" style="margin: 0in 0in 0pt; tab-stops: 3.75in 5.0in; text-align: justify;">
<span style="font-family: "Verdana","sans-serif"; font-size: 11pt; mso-bidi-font-size: 12.0pt; mso-bidi-font-weight: bold;">The EU is telling the U.K. to leave quickly to dispel
the air of uncertainty quickly (i.e. don’t let the door hit you in the butt on
the way out). And while they will not want to treat the U.K. too well they will
not want to treat it too shabbily either. The U.K. is an important trading partner
with the rest of Europe and everyone will want to keep that connection. But if
the EU makes it too easy and without consequences to leave there could be
others to take that route. The U.K. and Denmark got opt out clauses to join the
EU and not EMU. For everyone else EU membership is supposed to be the stepping
stone to EMU. So how will that work in the future? Can EU set as a membership
condition the aspiration to EMU? Does EMU still look that attractive?<span style="mso-spacerun: yes;"> </span><o:p></o:p></span></div>
<br />
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<span style="font-family: "Verdana","sans-serif"; font-size: 11pt; mso-bidi-font-size: 12.0pt; mso-bidi-font-weight: bold;"><o:p> </o:p></span></div>
<br />
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<span style="font-family: "Verdana","sans-serif"; font-size: 11pt; mso-bidi-font-size: 12.0pt; mso-bidi-font-weight: bold;">Geo-P<o:p></o:p></span></div>
<br />
<div class="MsoHeader" style="margin: 0in 0in 0pt; tab-stops: 3.75in 5.0in; text-align: justify;">
<span style="font-family: "Verdana","sans-serif"; font-size: 11pt; mso-bidi-font-size: 12.0pt; mso-bidi-font-weight: bold;">As for geopolitics all European nations went their
own way politically although there was also an EU position. The UK will get its
full voice back in the international area and they have been a strong U.S.
ally. That is a good thing. An ‘independent’ U.K. does not weaken Europe as
much as it gives it another independent voice and one-less opinion to bargain
with inside EU to craft a single position.<span style="mso-spacerun: yes;">
</span><o:p></o:p></span></div>
<br />
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<span style="font-family: "Verdana","sans-serif"; font-size: 11pt; mso-bidi-font-size: 12.0pt; mso-bidi-font-weight: bold;"><o:p> </o:p></span></div>
<br />
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<span style="font-family: "Verdana","sans-serif"; font-size: 11pt; mso-bidi-font-size: 12.0pt; mso-bidi-font-weight: bold;">EU and EMU: now more than ever the Deutsche Zone<o:p></o:p></span></div>
<br />
<div class="MsoHeader" style="margin: 0in 0in 0pt; tab-stops: 3.75in 5.0in; text-align: justify;">
<span style="font-family: "Verdana","sans-serif"; font-size: 11pt; mso-bidi-font-size: 12.0pt; mso-bidi-font-weight: bold;">The U.K. leaving EU raises the risk that someone
else will leave EU…or even EMU. It shifts the balance of power between EU
non-EMU members and EMU members who are also EU members. With the U.K. out, the
EMU has a huge weight in the EU. The Germans have acted in a way to make EMU membership
as unpleasant as possible for everyone else. If there ever was a question about
whose culture would prevail in EMU there is no question anymore. Other member
countries cannot afford to be out of step with most competitive country in EMU.
Germany controls EMU. And Germany’s response to membership has been to run a
fiscal budget surplus and run and even lower than 2% inflation rate –stepping
up pressure on fellow members in EMU to follow Germany or to slip further
behind it. <span style="mso-spacerun: yes;"> </span>Germany also has enforced
selectively the rules governing the ECB so as to bring maximum pressure on its
fellow members. What this does is to make the EMU rule of 2% inflation an upper
bound for everyone else particularly after their poor policies in the early days
of EMU. Clearly Germany has been a deflationary force in EMU although everyone
talks of joining EMU as being growth-enhancing. How about that? <o:p></o:p></span></div>
<br />
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<span style="font-family: "Verdana","sans-serif"; font-size: 11pt; mso-bidi-font-size: 12.0pt; mso-bidi-font-weight: bold;"><o:p> </o:p></span></div>
<br />
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<span style="font-family: "Verdana","sans-serif"; font-size: 11pt; mso-bidi-font-size: 12.0pt; mso-bidi-font-weight: bold;">But…<o:p></o:p></span></div>
<br />
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<span style="font-family: "Verdana","sans-serif"; font-size: 11pt; mso-bidi-font-size: 12.0pt; mso-bidi-font-weight: bold;"><o:p> </o:p></span></div>
<br />
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<span style="font-family: "Verdana","sans-serif"; font-size: 11pt; mso-bidi-font-size: 12.0pt; mso-bidi-font-weight: bold;">NO LEHMAN MOMENT<o:p></o:p></span></div>
<br />
<div class="MsoHeader" style="margin: 0in 0in 0pt; tab-stops: 3.75in 5.0in; text-align: justify;">
<span style="font-family: "Verdana","sans-serif"; font-size: 11pt; mso-bidi-font-size: 12.0pt; mso-bidi-font-weight: bold;">In the wake of Brexit. No one is bankrupt. It is not
like Lehman bros. Although sterling has fallen sharply there is no new FX deal
to cut. The BOE is independent. There is no need to extract it from the ECB. There
are no bailouts to be done. There is no central bank or treasury propping up of
anything. In short the U.K’s flexible exchange rate will buffer the economy. A
lower sterling will stimulate UK growth. U.K. industry groups have been quick
to call for new deal to keep trade flowing Vis a Vis Europe. Europe will be
reeling and wonder about further consequences. <o:p></o:p></span></div>
<br />
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<span style="font-family: "Verdana","sans-serif"; font-size: 11pt; mso-bidi-font-size: 12.0pt; mso-bidi-font-weight: bold;"><o:p> </o:p></span></div>
<br />
<div class="MsoHeader" style="margin: 0in 0in 0pt; tab-stops: 3.75in 5.0in; text-align: justify;">
<span style="font-family: "Verdana","sans-serif"; font-size: 11pt; mso-bidi-font-size: 12.0pt; mso-bidi-font-weight: bold;">The potential Zombie opts out<o:p></o:p></span></div>
<br />
<div class="MsoHeader" style="margin: 0in 0in 0pt; tab-stops: 3.75in 5.0in; text-align: justify;">
<span style="font-family: "Verdana","sans-serif"; font-size: 11pt; mso-bidi-font-size: 12.0pt; mso-bidi-font-weight: bold;">Questions about London as a financial center may
continue for some time. But the EU was flirting with a transactions tax that
might have killed London as a financial center anyway had it stayed in. London
has bought its freedom form that but at an unknown price.<span style="mso-spacerun: yes;"> </span><o:p></o:p></span></div>
<br />
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<span style="font-family: "Verdana","sans-serif"; font-size: 11pt; mso-bidi-font-size: 12.0pt; mso-bidi-font-weight: bold;"><o:p> </o:p></span></div>
<br />
<div class="MsoHeader" style="margin: 0in 0in 0pt; tab-stops: 3.75in 5.0in; text-align: justify;">
<span style="font-family: "Verdana","sans-serif"; font-size: 11pt; mso-bidi-font-size: 12.0pt; mso-bidi-font-weight: bold;">Markets gyrate<o:p></o:p></span></div>
<br />
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<span style="font-family: "Verdana","sans-serif"; font-size: 11pt; mso-bidi-font-size: 12.0pt; mso-bidi-font-weight: bold;">There are knee jerk reactions in Fx markets and in
stock market. But on balance it is in everyone’s interest not to cut off their
nose to spite their face. It would make sense that Europe and UK would try to
keep commercial ties more or less intact.<o:p></o:p></span></div>
<br />
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<span style="font-family: "Verdana","sans-serif"; font-size: 11pt; mso-bidi-font-size: 12.0pt; mso-bidi-font-weight: bold;"><o:p> </o:p></span></div>
<br />
<div class="MsoHeader" style="margin: 0in 0in 0pt; tab-stops: 3.75in 5.0in; text-align: justify;">
<span style="font-family: "Verdana","sans-serif"; font-size: 11pt; mso-bidi-font-size: 12.0pt; mso-bidi-font-weight: bold;">It’s delightful...it’s de-lovely… its decoupling?<o:p></o:p></span></div>
<br />
<div class="MsoHeader" style="margin: 0in 0in 0pt; tab-stops: 3.75in 5.0in; text-align: justify;">
<span style="font-family: "Verdana","sans-serif"; font-size: 11pt; mso-bidi-font-size: 12.0pt; mso-bidi-font-weight: bold;">The risk here is that there could be more
de-coupling. And the act of de-coupling per se is risky. Scotland may leave the
U.K. making the U.K a smaller economy and there could be other more painful
disassociations in Europe as well. But leaving EMU would be much more painful
making that knock-on effect a more remote possibility. Still the U.K. leaving
is a shock to the system and it STOPS a move to persistent, mindless, knee-jerk
integration.<o:p></o:p></span></div>
<br />
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<span style="font-family: "Verdana","sans-serif"; font-size: 11pt; mso-bidi-font-size: 12.0pt; mso-bidi-font-weight: bold;">The globalization hobgoblin<o:p></o:p></span></div>
<br />
<div class="MsoHeader" style="margin: 0in 0in 0pt; tab-stops: 3.75in 5.0in; text-align: justify;">
<span style="font-family: "Verdana","sans-serif"; font-size: 11pt; mso-bidi-font-size: 12.0pt; mso-bidi-font-weight: bold;">I think a stronger subliminal message here is
dissatisfaction with the pressures of various sorts from globalization. For the
U.K. immigration was the big risk. But even today commentators are talking about
the potential impact on trade and trade-reducing deals. <o:p></o:p></span></div>
<br />
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<span style="font-family: "Verdana","sans-serif"; font-size: 11pt; mso-bidi-font-size: 12.0pt; mso-bidi-font-weight: bold;"><o:p> </o:p></span></div>
<br />
<div class="MsoHeader" style="margin: 0in 0in 0pt; tab-stops: 3.75in 5.0in; text-align: justify;">
<span style="font-family: "Verdana","sans-serif"; font-size: 11pt; mso-bidi-font-size: 12.0pt; mso-bidi-font-weight: bold;">Broader concerns<o:p></o:p></span></div>
<br />
<div class="MsoHeader" style="margin: 0in 0in 0pt; tab-stops: 3.75in 5.0in; text-align: justify;">
<span style="font-family: "Verdana","sans-serif"; font-size: 11pt; mso-bidi-font-size: 12.0pt; mso-bidi-font-weight: bold;">LET ME MAKE THIS PERFECTLY CLEAR. Free trade is the best
of all worlds. But we don’t live there any more than we live on Mars. This vote
is also is a wake-up call to bureaucrats who think they can scare us with flawed
analysis and threats. This is a boost to unconventional candidates and to the
candidacy of Donald Trump in the U.S. This is another nail in the coffin of
analysis by polling. How did that work?<o:p></o:p></span></div>
<br />
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<span style="font-family: "Verdana","sans-serif"; font-size: 11pt; mso-bidi-font-size: 12.0pt; mso-bidi-font-weight: bold;"><o:p> </o:p></span></div>
<br />
<div class="MsoHeader" style="margin: 0in 0in 0pt; tab-stops: 3.75in 5.0in; text-align: justify;">
<span style="font-family: "Verdana","sans-serif"; font-size: 11pt; mso-bidi-font-size: 12.0pt; mso-bidi-font-weight: bold;">I do not look to SLOW international trade but to
reconfigure it. And I believe this vote takes us a step closer to that.<o:p></o:p></span></div>
<br />
<div class="MsoHeader" style="margin: 0in 0in 0pt; tab-stops: 3.75in 5.0in; text-align: justify;">
<span style="font-family: "Verdana","sans-serif"; font-size: 11pt; mso-bidi-font-size: 12.0pt; mso-bidi-font-weight: bold;"><o:p> </o:p></span></div>
<br />
<div class="MsoHeader" style="margin: 0in 0in 0pt; tab-stops: 3.75in 5.0in; text-align: justify;">
<span style="font-family: "Verdana","sans-serif"; font-size: 11pt; mso-bidi-font-size: 12.0pt; mso-bidi-font-weight: bold;">How we got here…<o:p></o:p></span></div>
<br />
<div class="MsoHeader" style="margin: 0in 0in 0pt; tab-stops: 3.75in 5.0in; text-align: justify;">
<span style="font-family: "Verdana","sans-serif"; font-size: 11pt; mso-bidi-font-size: 12.0pt; mso-bidi-font-weight: bold;">China and the rest of Asia grew through a strategy
of export-led growth. That meant they were set to tap into demand in the
developing economies and ride piggyback to stronger growth. But as China grew
into ‘Baby Huey’ its piggyback ride became piggish. The burden of China’s ride
has disrupted growth in the West. China has been able to produce and not consume
and there is nothing in economics about having specialized production and consumption
countries that leads to a stable result.<span style="mso-spacerun: yes;">
</span><o:p></o:p></span></div>
<br />
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<span style="font-family: "Verdana","sans-serif"; font-size: 11pt; mso-bidi-font-size: 12.0pt; mso-bidi-font-weight: bold;"><o:p> </o:p></span></div>
<br />
<div class="MsoHeader" style="margin: 0in 0in 0pt; tab-stops: 3.75in 5.0in; text-align: justify;">
<span style="font-family: "Verdana","sans-serif"; font-size: 11pt; mso-bidi-font-size: 12.0pt; mso-bidi-font-weight: bold;">Asia has co-opted the FREE TRADE model in favor of
an export-led growth model and that must be changed. But TOO MANY OPINION
LEADERS have simply drunk the Kool Aide of <b>any trade</b> instead of
insisting on <b>Free Trade</b>.<span style="mso-spacerun: yes;"> </span>Asia needs
to change to grow (mostly) on the back of tis (own) demand.<span style="mso-spacerun: yes;"> </span>U.S. corporations have to invest in the U.S.
not just in their offices abroad. And this suggests to me that there is a lot of
exchange rate re-alignment that is needed. But China is against it as are a number
of Asian and Latin American economies and as are a lot of U.S. corporations who
have investments in Asia and intend to benefit from exporting back to the US
using cheap Chinese (et al) labor. Like Brexit this will be hard to do and
expect the ‘experts’ to be against it.’ It may take an outsider to do it. <o:p></o:p></span></div>
<br />
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<span style="font-family: "Verdana","sans-serif"; font-size: 11pt; mso-bidi-font-size: 12.0pt; mso-bidi-font-weight: bold;"><o:p> </o:p></span></div>
<br />
<div class="MsoHeader" style="margin: 0in 0in 0pt; tab-stops: 3.75in 5.0in; text-align: justify;">
<span style="font-family: "Verdana","sans-serif"; font-size: 11pt; mso-bidi-font-size: 12.0pt; mso-bidi-font-weight: bold;">Our intelligentsia has done us wrong. And now people
may be much less likely to believe its leaders and experts. The way may no
longer be shut..<o:p></o:p></span></div>
<br />
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<span style="font-family: "Verdana","sans-serif"; font-size: 11pt; mso-bidi-font-size: 12.0pt; mso-bidi-font-weight: bold;"><o:p> </o:p></span></div>
<br />
<div class="MsoHeader" style="margin: 0in 0in 0pt; tab-stops: 3.75in 5.0in; text-align: justify;">
<span style="font-family: "Verdana","sans-serif"; font-size: 11pt; mso-bidi-font-size: 12.0pt; mso-bidi-font-weight: bold;">I am not so negative on Brexit. EMU and EU were
becoming a straightjacket, run by bureaucrats. What Brexit tells us is that
trends can change. Brexit is a breath of fresh air. The U.K. may pay a greater
price for it they thought: but at what price freedom? How can the price be too
high? <span style="mso-spacerun: yes;"> </span><o:p></o:p></span></div>
<br />
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<span style="font-family: "Verdana","sans-serif"; font-size: 11pt; mso-bidi-font-size: 12.0pt; mso-bidi-font-weight: bold;"><o:p> </o:p></span></div>
<br />
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<b><span style="font-family: "Verdana","sans-serif"; font-size: 11pt; mso-bidi-font-size: 12.0pt;">Brexit
morning…<o:p></o:p></span></b></div>
<br />
<div class="MsoHeader" style="margin: 0in 0in 0pt; tab-stops: 3.75in 5.0in; text-align: justify;">
<span style="font-family: "Verdana","sans-serif"; font-size: 11pt; mso-bidi-font-size: 12.0pt; mso-bidi-font-weight: bold;">I woke up, it was a Brexit morning<o:p></o:p></span></div>
<br />
<div class="MsoHeader" style="margin: 0in 0in 0pt; tab-stops: 3.75in 5.0in; text-align: justify;">
<span style="font-family: "Verdana","sans-serif"; font-size: 11pt; mso-bidi-font-size: 12.0pt; mso-bidi-font-weight: bold;">and the first thing that I saw<o:p></o:p></span></div>
<br />
<div class="MsoHeader" style="margin: 0in 0in 0pt; tab-stops: 3.75in 5.0in; text-align: justify;">
<span style="font-family: "Verdana","sans-serif"; font-size: 11pt; mso-bidi-font-size: 12.0pt; mso-bidi-font-weight: bold;">was the pound falling like a rock<o:p></o:p></span></div>
<br />
<div class="MsoHeader" style="margin: 0in 0in 0pt; tab-stops: 3.75in 5.0in; text-align: justify;">
<span style="font-family: "Verdana","sans-serif"; font-size: 11pt; mso-bidi-font-size: 12.0pt; mso-bidi-font-weight: bold;">and David Cameron’s fall<o:p></o:p></span></div>
<br />
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<span style="font-family: "Verdana","sans-serif"; font-size: 11pt; mso-bidi-font-size: 12.0pt; mso-bidi-font-weight: bold;"><o:p> </o:p></span></div>
<br />
<div class="MsoHeader" style="margin: 0in 0in 0pt; tab-stops: 3.75in 5.0in; text-align: justify;">
<span style="font-family: "Verdana","sans-serif"; font-size: 11pt; mso-bidi-font-size: 12.0pt; mso-bidi-font-weight: bold;">news flowed in like butterscotch<o:p></o:p></span></div>
<br />
<div class="MsoHeader" style="margin: 0in 0in 0pt; tab-stops: 3.75in 5.0in; text-align: justify;">
<span style="font-family: "Verdana","sans-serif"; font-size: 11pt; mso-bidi-font-size: 12.0pt; mso-bidi-font-weight: bold;">and smothered all my senses<o:p></o:p></span></div>
<br />
<div class="MsoHeader" style="margin: 0in 0in 0pt; tab-stops: 3.75in 5.0in; text-align: justify;">
<span style="font-family: "Verdana","sans-serif"; font-size: 11pt; mso-bidi-font-size: 12.0pt; mso-bidi-font-weight: bold;">pessimism came, it stayed for the day<o:p></o:p></span></div>
<br />
<div class="MsoHeader" style="margin: 0in 0in 0pt; tab-stops: 3.75in 5.0in; text-align: justify;">
<span style="font-family: "Verdana","sans-serif"; font-size: 11pt; mso-bidi-font-size: 12.0pt; mso-bidi-font-weight: bold;">and it knocked the markets senseless<o:p></o:p></span></div>
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<span style="font-family: "Verdana","sans-serif"; font-size: 11pt; mso-bidi-font-size: 12.0pt; mso-bidi-font-weight: bold;"><o:p> </o:p></span></div>
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<span style="font-family: "Verdana","sans-serif"; font-size: 11pt; mso-bidi-font-size: 12.0pt; mso-bidi-font-weight: bold;">…<o:p></o:p></span></div>
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<span style="font-family: "Verdana","sans-serif"; font-size: 11pt; mso-bidi-font-size: 12.0pt; mso-bidi-font-weight: bold;"><o:p> </o:p></span></div>
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<span style="font-family: "Verdana","sans-serif"; font-size: 11pt; mso-bidi-font-size: 12.0pt; mso-bidi-font-weight: bold;">Now the curtain opens on a portrait of the next day<o:p></o:p></span></div>
<br />
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<span style="font-family: "Verdana","sans-serif"; font-size: 11pt; mso-bidi-font-size: 12.0pt; mso-bidi-font-weight: bold;">And the street is paved with passers by<o:p></o:p></span></div>
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<span style="font-family: "Verdana","sans-serif"; font-size: 11pt; mso-bidi-font-size: 12.0pt; mso-bidi-font-weight: bold;">Commerce flies, bureaucrats cry,<o:p></o:p></span></div>
<br />
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<span style="font-family: "Verdana","sans-serif"; font-size: 11pt; mso-bidi-font-size: 12.0pt; mso-bidi-font-weight: bold;">But freedom’s come to stay<o:p></o:p></span></div>
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<span style="font-family: "Verdana","sans-serif"; font-size: 11pt; mso-bidi-font-size: 12.0pt; mso-bidi-font-weight: bold;">Won’t you wake up!<o:p></o:p></span></div>
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<span style="font-family: "Verdana","sans-serif"; font-size: 11pt; mso-bidi-font-size: 12.0pt; mso-bidi-font-weight: bold;">It’s a Brexit morning<o:p></o:p></span></div>
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<span style="font-family: "Verdana","sans-serif"; font-size: 11pt; mso-bidi-font-size: 12.0pt; mso-bidi-font-weight: bold;"><span style="mso-spacerun: yes;"> </span><o:p></o:p></span></div>
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FAO-OPINIONhttp://www.blogger.com/profile/11086590490267067973noreply@blogger.com2tag:blogger.com,1999:blog-2763460351111948732.post-49803602369109211382016-06-21T17:11:00.005-04:002016-06-21T17:11:45.688-04:00How Fed policy ran amok by focusing on ‘the wrong stuff’ <div dir="ltr" style="text-align: left;" trbidi="on">
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<b><span style="font-family: "Verdana","sans-serif";">How Fed policy ran amok by focusing
on ‘the wrong stuff’ <o:p></o:p></span></b></div>
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<b><span style="font-family: "Verdana","sans-serif";">(AKA our ever-changing job market)<o:p></o:p></span></b></div>
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<span style="font-family: "Verdana","sans-serif"; font-size: 11.0pt; mso-bidi-font-size: 12.0pt; mso-bidi-font-weight: bold;">The Fed has been making policy with a strong
reference to the job market. While we have heard all sorts of criticism about
the flaws in GDP, some have acted as though job market data are equivalent to
the Holy Grail. Several Fed officials recently have even said quite explicitly
that jobs data trump GDP. In what way is that? <o:p></o:p></span></div>
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<span style="font-family: "Verdana","sans-serif"; font-size: 11.0pt; mso-bidi-font-size: 12.0pt; mso-bidi-font-weight: bold;">All data are subject to revisions of various sorts.
And jobs data can be revised and can surprise as they did last month. Apart
from that, job data can look friendly and familiar and yet be distant and
misleading. With the labor force participation rate so low and the
not-in-the-labor-force cohort so large plus myriad demographic changes who can
say that we know what these current labor force metrics mean? Can you? The Fed
though it could. But it couldn’t.<o:p></o:p></span></div>
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<span style="font-family: "Verdana","sans-serif"; font-size: 11.0pt; mso-bidi-font-size: 12.0pt; mso-bidi-font-weight: bold;">I am quite serious. Consider the table below: </span></div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgqghdh9UjLUdnxZSiXNNsharVfflUR786aYN_bOu6wHq6-MD2qgKuNj4TVQIMpKgar0jlOpaqONE1HZzKGeN3yxFLa0X8TDkjf7wW4PA7qmFrAwiLrz7QjZcuIkEQg9CbrZtbJV1avkAyn/s1600/EmployTable.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="127" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgqghdh9UjLUdnxZSiXNNsharVfflUR786aYN_bOu6wHq6-MD2qgKuNj4TVQIMpKgar0jlOpaqONE1HZzKGeN3yxFLa0X8TDkjf7wW4PA7qmFrAwiLrz7QjZcuIkEQg9CbrZtbJV1avkAyn/s400/EmployTable.png" width="400" /></a></div>
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<span style="font-family: "Verdana","sans-serif"; font-size: 11.0pt; mso-bidi-font-size: 12.0pt; mso-bidi-font-weight: bold;"><br /></span></div>
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<br /></div>
<div class="MsoHeader" style="tab-stops: 3.75in 5.0in; text-align: justify;">
<span style="font-family: "Verdana","sans-serif"; font-size: 11.0pt; mso-bidi-font-size: 12.0pt; mso-bidi-font-weight: bold;">This table presents labor market data for the labor
force and unemployment rate for those age 25 and up. It provides four
exhaustive categories for labor: (1) Less than a high school diploma, (2) high
school diploma no college (3) college but less than a BA (4) BA and higher
degrees. Roughly we have unskilled, low-skilled,
semi-skilled and highly-skilled categories.<o:p></o:p></span></div>
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<br /></div>
<div class="MsoHeader" style="tab-stops: 3.75in 5.0in; text-align: justify;">
<span style="font-family: "Verdana","sans-serif"; font-size: 11.0pt; mso-bidi-font-size: 12.0pt; mso-bidi-font-weight: bold;">The table shows how the composition of the labor market
by those four categories has shifted. When data on these metrics began in 1992,
13% of the labor force was in the lowest skill group. In May of 2016 that
proportion is down to 7.6%. The
top-skill, BA-plus category used to comprise 26% of the labor force, now it
comprises 38.9% of it. The proportion that is low-skilled is now slightly lower
and the semi-skilled group is proportionately higher. <o:p></o:p></span></div>
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<span style="font-family: "Verdana","sans-serif"; font-size: 11.0pt; mso-bidi-font-size: 12.0pt; mso-bidi-font-weight: bold;">Despite all the job openings that cannot be filled
in the JOLTS report, the labor market is much more educated or skilled than it
used to be. Still that is not working –apparently there is a skills mismatch.
It’s like having enough silverware to set the dinner table for eight but with
too many spoons and not enough knives. It doesn’t work. Even if they are the
highest quality silver, a spoon is not a knife.
<o:p></o:p></span></div>
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<div class="MsoHeader" style="tab-stops: 3.75in 5.0in; text-align: justify;">
<span style="font-family: "Verdana","sans-serif"; font-size: 11.0pt; mso-bidi-font-size: 12.0pt; mso-bidi-font-weight: bold;">But, what is still working is that higher education
levels are correlated with lower rates of unemployment. If our labor market
were of the composition it had been in 1992 the current unemployment rate for
all workers age 25 and over would be 4.4% instead of the current 3.9% - one
half of one percentage point higher. It appears that our labor market gauge is
no longer so easy to read. But it’s good news. It’s like having a gas gauge that
is shifted so that the tank is not nearly as empty as the gauge is near ‘E’.
You are not as at risk as you think you are to having to walk for more gas... <o:p></o:p></span></div>
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<span style="font-family: "Verdana","sans-serif"; font-size: 11.0pt; mso-bidi-font-size: 12.0pt; mso-bidi-font-weight: bold;">The education composition of the labor force has
lowered the unemployment rate by one half of one percentage point. And this is
only one demographic feature I have isolated. There are other features that are
correlated with the rate of unemployment that can be analyzed in this way,
among them age, sex, race and more. As we get compositional shifts in these
areas either the structural unemployment rates among these various attributes
will shift or the impact on the overall unemployment rate will shift or both
will shift.<o:p></o:p></span></div>
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<br /></div>
<div class="MsoHeader" style="tab-stops: 3.75in 5.0in; text-align: justify;">
<span style="font-family: "Verdana","sans-serif"; font-size: 11.0pt; mso-bidi-font-size: 12.0pt; mso-bidi-font-weight: bold;">This is why the Fed has seemed so out of step. It has
focused on and has been fearful about the rate of unemployment. Just because
the rate sort of seems like the same thing it has always been does not mean
that its attributes have not changed. The evidence for education is that the unemployment
rate is going to look a lot lower just because of who is in the labor force now
compared to who is no longer in it. <o:p></o:p></span></div>
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<br /></div>
<div class="MsoHeader" style="tab-stops: 3.75in 5.0in; text-align: justify;">
<span style="font-family: "Verdana","sans-serif"; font-size: 11.0pt; mso-bidi-font-size: 12.0pt; mso-bidi-font-weight: bold;">As arguments go this one sees the labor force as tilted
to more skill and more education. But what it also suggests is that the less
skilled and less educated have been squeezed out. We do not have the same data
on the attributes of those who are not-in-the-labor–force for example so we
can’t really tell. <o:p></o:p></span></div>
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<br /></div>
<div class="MsoHeader" style="tab-stops: 3.75in 5.0in; text-align: justify;">
<span style="font-family: "Verdana","sans-serif"; font-size: 11.0pt; mso-bidi-font-size: 12.0pt; mso-bidi-font-weight: bold;">And, as the minimum wage rises, it is likely that
firms will find ways to hire more skilled workers at higher wages possibly
using technology solutions to eliminate jobs and become more streamlined and
that could result in an even higher skilled labor force. <o:p></o:p></span></div>
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<br /></div>
<div class="MsoHeader" style="tab-stops: 3.75in 5.0in; text-align: justify;">
<span style="font-family: "Verdana","sans-serif"; font-size: 11.0pt; mso-bidi-font-size: 12.0pt; mso-bidi-font-weight: bold;">Try to understand the labor force development as a
dynamic process, where supply and demand combine to determine who is in it and
who is out. Always bear in mind that compositional characteristics of those NOT
in the labor force may be quite different from those who are in the labor force
and that might keep those who are on the sidelines on the sidelines.<o:p></o:p></span></div>
<div class="MsoHeader" style="tab-stops: 3.75in 5.0in; text-align: justify;">
<br /></div>
<div class="MsoHeader" style="tab-stops: 3.75in 5.0in; text-align: justify;">
<span style="font-family: "Verdana","sans-serif"; font-size: 11.0pt; mso-bidi-font-size: 12.0pt; mso-bidi-font-weight: bold;">The table also gives us some notion of how much slack
we might have left in this labor market.
<o:p></o:p></span></div>
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<br /></div>
<div class="MsoHeader" style="tab-stops: 3.75in 5.0in; text-align: justify;">
<span style="font-family: "Verdana","sans-serif"; font-size: 11.0pt; mso-bidi-font-size: 12.0pt; mso-bidi-font-weight: bold;">For example since January 1992 the overall unemployment
rate has been lower than its May 2016 level 23% of the time and it has fallen
an additional 19% from its current level (minimum rate =3.8%) to its low. <o:p></o:p></span></div>
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<br /></div>
<div class="MsoHeader" style="tab-stops: 3.75in 5.0in; text-align: justify;">
<span style="font-family: "Verdana","sans-serif"; font-size: 11.0pt; mso-bidi-font-size: 12.0pt; mso-bidi-font-weight: bold;">For each of our age cohorts the unemployment rate has
been lower: over 20.1% of the time for the lowest skills group, 48.5% of the
time for the second lowest skill group, 37.5% of the time for the semi-skilled
and 41.0% of the time for the high skill group. Interestingly despite the focus
on skills shortages the highly educated group does not have a really low rate
of unemployment relative to its own historic standards-especially relative to
the other categories- it is in fact the least tight on this metric.<o:p></o:p></span></div>
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<br /></div>
<div class="MsoHeader" style="tab-stops: 3.75in 5.0in; text-align: justify;">
<span style="font-family: "Verdana","sans-serif"; font-size: 11.0pt; mso-bidi-font-size: 12.0pt; mso-bidi-font-weight: bold;">The percentages of time that each cohort’s rate has
been lower also echoes the next set of statistics which concern how much
farther these cohorts’ unemployment rates can fall to get back to their
respective lows (since 1992). The answer is that unskilled unemployment can
fall the least, by only 18.3%, and all the other categories can fall in a relatively
tight range of from 37.3% to 38.5% further-all about the same order of
magnitude. Oddly it is the unemployment rate among the unskilled that is the
relative lowest (has the least far to fall to hit its all-time low).<o:p></o:p></span></div>
<div class="MsoHeader" style="tab-stops: 3.75in 5.0in; text-align: justify;">
<br /></div>
<div class="MsoHeader" style="tab-stops: 3.75in 5.0in; text-align: justify;">
<span style="font-family: "Verdana","sans-serif"; font-size: 11.0pt; mso-bidi-font-size: 12.0pt; mso-bidi-font-weight: bold;">This prompts us to ask why? Are these ‘unskilled’
workers truly scare? Or are they so low-paid that they more easily leave the
labor force and become no longer counted as unemployed because government
support programs may look more attractive than the low paid wage? <o:p></o:p></span></div>
<div class="MsoHeader" style="tab-stops: 3.75in 5.0in; text-align: justify;">
<br /></div>
<div class="MsoHeader" style="tab-stops: 3.75in 5.0in; text-align: justify;">
<span style="font-family: "Verdana","sans-serif"; font-size: 11.0pt; mso-bidi-font-size: 12.0pt; mso-bidi-font-weight: bold;">Apply 1992 weights to all the historic data and we
find that the lowest age 25 and up unemployment rate allows for a 30.4% fall
while the lowest 2016 weigh pattern would foresee a further drop of 32.1%. The
1992 reweighed unemployment rates are lower than their actual May 2016 level
25.2% of the time while the 2016-weighted data have been lower 26.9% of the
time. Under the up-to-date weights the unemployment rate can fall by more. <o:p></o:p></span></div>
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<br /></div>
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<span style="font-family: "Verdana","sans-serif"; font-size: 11.0pt; mso-bidi-font-size: 12.0pt; mso-bidi-font-weight: bold;">Any way you slice it the new-view of the labor
market does not seem quite so tight. There is still some further 30% or more
that unemployment rates can fall in order to get back to previous cycle lows
looking at a fixed compositional weight for the labor market. <o:p></o:p></span></div>
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<br /></div>
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<span style="font-family: "Verdana","sans-serif"; font-size: 11.0pt; mso-ansi-language: EN-US; mso-bidi-font-family: "Times New Roman"; mso-bidi-font-size: 12.0pt; mso-bidi-font-weight: bold; mso-bidi-language: AR-SA; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-US;">Moreover, we can look at a decomposed Phillips curve
over the last three cycles to gain some further insight on what risks we may
face in terms of wage repercussions. </span></div>
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<span style="font-family: "Verdana","sans-serif"; font-size: 11.0pt; mso-ansi-language: EN-US; mso-bidi-font-family: "Times New Roman"; mso-bidi-font-size: 12.0pt; mso-bidi-font-weight: bold; mso-bidi-language: AR-SA; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-US;"> </span><span style="font-family: "Verdana","sans-serif"; font-size: 12.0pt; mso-ansi-language: EN-US; mso-bidi-font-family: "Times New Roman"; mso-bidi-font-weight: bold; mso-bidi-language: AR-SA; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-US;"> </span></div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiuYTb4HhGRNMqRZn7_4_n_ZWx7Rc_-6QR2N6EgdXpdxTUYPnJl04qaZQVCGQWpxRGZSvkzddzH5U9VwrXinhpbctBjLjncxVYCtlmKZPDtZFtZCLBWRVRHBPl8M7FYlk4WUb1tSuxVDKAd/s1600/decomposed+Phillips+Curve.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="192" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiuYTb4HhGRNMqRZn7_4_n_ZWx7Rc_-6QR2N6EgdXpdxTUYPnJl04qaZQVCGQWpxRGZSvkzddzH5U9VwrXinhpbctBjLjncxVYCtlmKZPDtZFtZCLBWRVRHBPl8M7FYlk4WUb1tSuxVDKAd/s320/decomposed+Phillips+Curve.png" width="320" /></a></div>
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<span style="font-family: "Verdana","sans-serif"; font-size: 12.0pt; mso-ansi-language: EN-US; mso-bidi-font-family: "Times New Roman"; mso-bidi-font-weight: bold; mso-bidi-language: AR-SA; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-US;"><br /></span></div>
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<div class="MsoHeader" style="tab-stops: 3.75in 5.0in; text-align: justify;">
<span style="font-family: "Verdana","sans-serif"; font-size: 11.0pt; mso-bidi-font-size: 12.0pt; mso-bidi-font-weight: bold;">In the chart above we show wage changes (one year %
change in Average Hourly Earnings) Vs the unemployment rate for this cycle and
for the average of the last two cycles. We present these data by arraying them by
lining them up starting with when the unemployment rate first reached 6% in
each cycle, possibly creating some wage tension. We color code the two cycles with unemployment
dark blue and wages light blue in the two previous ‘averaged’ cycles and with
unemployment dark green and wage light green in the current cycle. What we see
is that the unemployment rate has been falling MUCH FASTER in this cycle after
it reached 6% compared to the last two cycles. But that at this lower
unemployment rate the wage gains in the last cycle would have been much higher
at 4% instead of around 2.5%, currently. </span><span style="font-family: "Verdana","sans-serif"; mso-bidi-font-weight: bold;"><o:p></o:p></span></div>
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<br /></div>
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<span style="font-family: "Verdana","sans-serif"; font-size: 11.0pt; mso-bidi-font-size: 12.0pt; mso-bidi-font-weight: bold;">Of course there is still evidence here that the
Phillips Curve is ‘working.’ The unemployment rate is falling and wages are rising,
but the relationship is much diminished. Since the Fed was basing its policy
decisions on this relationship the fact that it has been muted had caused Fed
policy plans to become overly aggressive. <o:p></o:p></span></div>
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<br /></div>
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<span style="font-family: "Verdana","sans-serif"; font-size: 11.0pt; mso-bidi-font-size: 12.0pt; mso-bidi-font-weight: bold;">In short the Fed was simply too worried too soon
about the level of the unemployment rate. And we have given several reasons above
why this is might be so.<b> </b></span><b><span style="font-family: "Verdana","sans-serif";"><o:p></o:p></span></b></div>
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<span style="font-family: "Verdana","sans-serif"; font-size: 11.0pt; mso-bidi-font-size: 12.0pt; mso-bidi-font-weight: bold;">The macroeconomics of the situation has been just
too unstable to work. That is an admission that there are too many compositional
shifts in the labor force for us to treat all changes in the unemployment rate
as equivalent in nature to WHAT THEY HAVE BEEN IN THE PAST.<o:p></o:p></span></div>
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<br /></div>
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<span style="font-family: "Verdana","sans-serif"; font-size: 11.0pt; mso-bidi-font-size: 12.0pt; mso-bidi-font-weight: bold;">But there are macroeconomic diagnostics to reveal
this too. It’s just that the Fed has scrupulously (unscrupulously?) avoided
presenting them. <o:p></o:p></span></div>
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<b><span style="font-family: "Verdana","sans-serif"; font-size: 11.0pt; mso-bidi-font-size: 12.0pt;">The
Beveridge Curve<o:p></o:p></span></b></div>
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<b><span style="font-family: "Verdana","sans-serif"; font-size: 11.0pt; mso-bidi-font-size: 12.0pt;"><br /></span></b></div>
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<b><span style="font-family: "Verdana","sans-serif"; font-size: 11.0pt; mso-bidi-font-size: 12.0pt;"><br /></span></b></div>
<div class="MsoHeader" style="tab-stops: 3.75in 5.0in; text-align: justify;">
<b><span style="font-family: "Verdana","sans-serif";">What: </span></b><span style="font-family: "Verdana","sans-serif"; mso-bidi-font-weight: bold;">The Beveridge
curve shows a SHIFTED relationship between job openings and the unemployment
rate. <o:p></o:p></span></div>
<div class="MsoHeader" style="tab-stops: 3.75in 5.0in; text-align: justify;">
<b><span style="font-family: "Verdana","sans-serif";">Meaning: </span></b><span style="font-family: "Verdana","sans-serif"; mso-bidi-font-weight: bold;">it now
takes MORE job openings to reduce the rate of unemployment<b> <o:p></o:p></b></span></div>
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<b><span style="font-family: "Verdana","sans-serif";">Missed analysis: </span></b><span style="font-family: "Verdana","sans-serif"; mso-bidi-font-weight: bold;">While
everyone has been ‘oohing and aahing’ over the high count of job openings,
economists have missed the fact that it
takes more job openings to reduce the rate of unemployment than it used to (and
to create a hire). In other words ‘openings’ are worth less than they used to
be. <o:p></o:p></span></div>
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<b><span style="font-family: "Verdana","sans-serif";">This macroeconomic diagnostic, The
Beveridge Curve, has been ignored<o:p></o:p></span></b></div>
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<br /></div>
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<span style="font-family: "Verdana","sans-serif"; font-size: 11.0pt; mso-bidi-font-size: 12.0pt; mso-bidi-font-weight: bold;">Economics usually does not dirty its hands with such
things. But because there are so many changes in the economy it is no longer
wise to deal in such aggregated data. Yet that is exactly what macroeconomic
models do. It is much wiser to decompose the data to see what the macro data
really mean in times such as these and not to simply swallow the model forecast
hook line and sinker. When we take the time to do that we find that the job market
data are really not as reliable as many assumed.<o:p></o:p></span></div>
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<br /></div>
<div class="MsoHeader" style="tab-stops: 3.75in 5.0in; text-align: justify;">
<span style="font-family: "Verdana","sans-serif"; font-size: 11.0pt; mso-bidi-font-size: 12.0pt; mso-bidi-font-weight: bold;">We can make the same points about nonfarm payroll
data as we have about the unemployment rate. And those criticisms may be more
familiar. Economists (some) have been long complaining of the quantity of low
skill jobs being created. We have a service sector economy and it churns out
more low low-skill low-paid jobs. Indeed, this is one of the reasons that productivity
growth is so poor. Low productivity growth is not an exogenous development.
Productivity is low also because investment is low. Investment is low because the
US skill pool seems to be lacking some of the more specific skills needed
despite the proliferation of highly educated workers. Moreover, the strong
dollar makes the US uncompetitive (makes US wages higher in foreign currency
terms) and this scares off investment. We have many interrelated problems here.
But it comes down to trying to understand the micro-economic foundations of the
macro-economic failures. Not all failures will simply reverse themselves.
Economies do not necessarily grow out of them into success stories.<o:p></o:p></span></div>
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<span style="font-family: "Verdana","sans-serif"; font-size: 11.0pt; mso-bidi-font-size: 12.0pt; mso-bidi-font-weight: bold;">The Fed simply does not seem to have spent enough time
or effort trying to understand why its pet macroeconomic statistically sophisticated
metrics had stopped working. The answer is always that the devil is in the
details. It was the same answer this time around. </span><span style="font-family: "Verdana","sans-serif"; mso-bidi-font-weight: bold;"><o:p></o:p></span></div>
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FAO-OPINIONhttp://www.blogger.com/profile/11086590490267067973noreply@blogger.com0tag:blogger.com,1999:blog-2763460351111948732.post-74213703668355372872016-06-21T17:03:00.001-04:002016-06-21T17:03:21.602-04:00Yellen’s 6/21/2016 Testimony Before Senate Banking Committee<div dir="ltr" style="text-align: left;" trbidi="on">
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<b><span style="font-size: 14.0pt; mso-bidi-font-size: 12.0pt;">Yellen’s 6/21/2016 Testimony<o:p></o:p></span></b></div>
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<b><span style="font-size: 14.0pt; mso-bidi-font-size: 12.0pt;">Before Senate Banking Committee<o:p></o:p></span></b></div>
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<b><span style="font-size: 14.0pt; mso-bidi-font-size: 12.0pt;"><br /></span></b></div>
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Fed Chair
Janet Yellen is testifying before one of the Fed oversight committees today,
the Senate Banking Committee. One question has been which Janet Yellen would
appear. It looks like we got maňana Janet, the more dovish one. <o:p></o:p></div>
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<b>Same old same old…<o:p></o:p></b></div>
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</div>
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The Fed’s
June meeting issued a policy statement that sounded like the one that came
before it. The Fed released a number of economic projections made by committee
members that continued to erode the outlook for growth and that kept the
inflation ‘forecasts’ below their policy objective. <o:p></o:p></div>
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<div class="MsoHeader" style="tab-stops: 3.75in 5.0in; text-align: justify;">
<b>And, SURPRISE (!) at the same Fed meeting<o:p></o:p></b></div>
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The
surprise at the June meeting of just days ago was the tone in the Fed Chair’s post-meeting
press conference and the new SEPs by individual committee members about their
constrained forecasts for the path of the Fed funds rate in years ahead. Yellen’s tone and comments in the Q&A
were much more dovish that the past official policy statements have been and
the ‘presser’ was fully in sympathy with the new much lower path for Fed funds that
individual members laid out. Today’s testimony is very much in that same
spirit. <o:p></o:p></div>
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<b><u>Much less reliance on forward
guidance…REALLY??!!<o:p></o:p></u></b></div>
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Somewhat
paradoxically in her testimony today Yellen has said that the Fed is relying much
less on forward guidance than it did in the past and she has distanced the Fed
further from these estimates.<o:p></o:p></div>
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<br /></div>
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This seems
WRONG. After all it was the SEP interest rate forecasts that moved markets not
the June policy statement and it was Yellen’s tone at the press conference. <o:p></o:p></div>
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<br /></div>
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<b>SEP Fed funds rates are not coordinated<o:p></o:p></b></div>
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It is true
that the FOMC member outlooks are prepared before the FOMC meets and do not
reflect and stamp of approval from the committee itself. Each forecast relies
on each member’s own assessments so each one is actually based on a different
forecast and a personal view for the economy. In some sense pooling them
together is like adding up apples and oranges. But, of course, we do this all
the time by comparing various private sectors forecasts- the blue chip is one
well known such example.<b><o:p></o:p></b></div>
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<br /></div>
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<b>Fed swears off cake…<o:p></o:p></b></div>
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</div>
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It seems
to me that if most Fed members think in isolation that the rate path for Fed
funds is now lower if we were to pool them together and force a consensus we
would get the same result. The Fed here
seems to want to have its cake and eat it too or rather to deny that it has any
ownership of this cake and asserts that it has no intent to take even a bite. <o:p></o:p></div>
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So why are
these scenarios presented to us?<o:p></o:p></div>
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<br /></div>
<div class="MsoHeader" style="tab-stops: 3.75in 5.0in; text-align: justify;">
I have no
problem with the Fed denial that the midpoint or average or any summary
statistic from these Fed funds projections represents an official outlook by
the Fed. But denying that there is any forward guidance here seems a bit
Pollyannaish. Clearly, there is forward guidance here.<o:p></o:p></div>
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<b>Long standing Fed criticism:<o:p></o:p></b></div>
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Let me
repeat a criticism I have often lodged about the Fed. It has <b><i>no inflation
commitment.</i></b> It says that the economy operates better with inflation at
2% but is has no commitment to hit a 2% target over any time horizon. It has a mandate
for full employment but <b><i>it has no precise definition of full
employment or any promise to make that happen </i></b>in any technical way (no
target for nonfarm jobs growth or for the unemployment rate). <b><i>The
Fed’s treatment of its SEP Fed funds rate is in this spirit</i></b>. While
there is no specific number promised for unemployment and no specific horizon to
hit a 2% inflation rate the Fed has some very specific numbers laid out for
future Fed funds rates but it wants them to have NO OFFICIAL standing at all. <o:p></o:p></div>
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<b>The Fed: an attitude for latitude<o:p></o:p></b></div>
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All of
this gives the Fed a great deal of latitude to make policy and I think goes a
long way to explain why Fed communication so often goes off track. Moreover,
since policy is made by committee it serves the Fed’s need to forge a policy
consensus to have as vague a policy commitment as possible.<o:p></o:p></div>
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<b>Cautious Yellen<o:p></o:p></b></div>
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In
Yellen’s remarks today we see a lot of the cautious Janet Yellen from the post
FOMC meeting press conference. When pressed under questioning she talked about
headwinds as being the reason that the Fed funds rate is so far below the
Taylor Rule rate that otherwise might prevail. However, when pressed about the
prospect of recession by year-end she asserted that such a risk was quite low. <o:p></o:p></div>
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<br /></div>
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<b>Still: Fed under pressure<o:p></o:p></b></div>
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In
separate harangues Yellen has been pressured over the five banks that have
failed the ‘living will’ mandate. There is also concern about ongoing banking
sector consolidation and about the regulatory impact on small banks. In
addition the Fed was criticized on grounds of having poor diversity. There are
women in high positions at the Fed but no people of color. Elizabeth Warren
wants Congress to take a hard look at the regional bank president selection
process in order to get more diversity.<o:p></o:p></div>
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<o:p></o:p></div>
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FAO-OPINIONhttp://www.blogger.com/profile/11086590490267067973noreply@blogger.com0tag:blogger.com,1999:blog-2763460351111948732.post-20934428679706046362016-06-05T15:51:00.001-04:002016-06-05T15:51:28.825-04:00<div dir="ltr" style="text-align: left;" trbidi="on">
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<b><span style="font-family: "Verdana","sans-serif"; font-size: 14.0pt; mso-bidi-font-size: 12.0pt;">The
Irrelevancy Paradigm <o:p></o:p></span></b></div>
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<br /></div>
<div class="MsoHeader" style="tab-stops: 3.75in 5.0in; text-align: justify;">
<b><span style="font-family: "Verdana","sans-serif";">The Spin Cycle is not just a setting
on your washer…<o:p></o:p></span></b></div>
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<span style="font-family: "Verdana","sans-serif"; mso-bidi-font-weight: bold;">In the
wake of a very weak payroll and hours-worked report with very mild wage
inflation and a shrinking breadth of job creation we are now being inundated with
the latest and greatest spin by the greatest spin-meisters and practitioners of
Voodoo economics of our age. Please pay attention and enjoy the performance! <o:p></o:p></span></div>
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<br /></div>
<div class="MsoHeader" style="tab-stops: 3.75in 5.0in; text-align: justify;">
<b><span style="font-family: "Verdana","sans-serif";">Endogenization<o:p></o:p></span></b></div>
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<span style="font-family: "Verdana","sans-serif"; mso-bidi-font-weight: bold;">For the
most part these spinners of nonfactoids align with one party or another or one
ideology or another (more or less the same thing) and proceed to ‘dis’
(disparage) the things in the report that they do not like or do not want to deal
with. Or they simply fabricate a scenario to frame it, control it, and portray
it as part of their own long-lost paradigm and as such completely
understandable. <o:p></o:p></span></div>
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<br /></div>
<div class="MsoHeader" style="tab-stops: 3.75in 5.0in; text-align: justify;">
<b><span style="font-family: "Verdana","sans-serif";">Masters at work…<o:p></o:p></span></b></div>
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<span style="font-family: "Verdana","sans-serif"; mso-bidi-font-weight: bold;">I am
particularly in the thralls of analysis that portrays the weak payroll report
Vs the dropping unemployment rate (household report) as the logical paradigm of
an economy at full employment (true believers must genuflect, here). <o:p></o:p></span></div>
<div class="MsoHeader" style="tab-stops: 3.75in 5.0in; text-align: justify;">
<br /></div>
<div class="MsoHeader" style="tab-stops: 3.75in 5.0in; text-align: justify;">
<b><span style="font-family: "Verdana","sans-serif";">A spin cycle… on the dryer?<o:p></o:p></span></b></div>
<div class="MsoHeader" style="tab-stops: 3.75in 5.0in; text-align: justify;">
<span style="font-family: "Verdana","sans-serif"; mso-bidi-font-weight: bold;">As always
spin must have some fact behind it and this combination does. But as for most
items that are spun these particular ‘facts’ do not apply to this ‘case.’ <o:p></o:p></span></div>
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<br /></div>
<div class="MsoHeader" style="tab-stops: 3.75in 5.0in; text-align: justify;">
<b><span style="font-family: "Verdana","sans-serif";">Law Vs Economics<o:p></o:p></span></b></div>
<div class="MsoHeader" style="tab-stops: 3.75in 5.0in; text-align: justify;">
<span style="font-family: "Verdana","sans-serif"; mso-bidi-font-weight: bold;">Lawyers
are taught early on that if the facts are on your side you argue the facts. If
they are not, you argue the law. In other words if you are defending ‘the
accused’ and can prove he did not do it and has a rock-solid alibi you present
that case. If you cannot, you try to make the prosecutor’s case seem flimsy by
challenging his expert witnesses, the applicability of the law under which your
guy is being charged or the provenance of evidence being offered.<o:p></o:p></span></div>
<div class="MsoHeader" style="tab-stops: 3.75in 5.0in; text-align: justify;">
<br /></div>
<div class="MsoHeader" style="tab-stops: 3.75in 5.0in; text-align: justify;">
<span style="font-family: "Verdana","sans-serif"; mso-bidi-font-weight: bold;">Economists
are doing more or less these same things. <o:p></o:p></span></div>
<div class="MsoHeader" style="tab-stops: 3.75in 5.0in; text-align: justify;">
<br /></div>
<div class="MsoHeader" style="tab-stops: 3.75in 5.0in; text-align: justify;">
<b><span style="font-family: "Verdana","sans-serif";">The Bait- <o:p></o:p></span></b></div>
<div class="MsoHeader" style="tab-stops: 3.75in 5.0in; text-align: justify;">
<span style="font-family: "Verdana","sans-serif"; mso-bidi-font-weight: bold;">This
notion that the recent unemployment rate drop and job slowdown is a natural
phenomenon that occurs as an economy reaches full employment (genuflect again
please) is a near religious belief in economics. Yes, it is true, but its application
to THESE FACTS is wrong: hence ‘the spin.’
<o:p></o:p></span></div>
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<br /></div>
<div class="MsoHeader" style="tab-stops: 3.75in 5.0in; text-align: justify;">
<b><span style="font-family: "Verdana","sans-serif";">The Switch<o:p></o:p></span></b></div>
<div class="MsoHeader" style="tab-stops: 3.75in 5.0in; text-align: justify;">
<span style="font-family: "Verdana","sans-serif"; mso-bidi-font-weight: bold;">The ISM
surveys one for manufacturing and another for non-manufacturing have been
showing progressively less activity (‘less’ as in not more). Each of them is
lower than their respective May readings less than 40% of the time and YET –AND
YET- Los PhD’s de Spin-o-nomics- are arguing that this is a full employment
effect we are witnessing! It is actually hilarious. I don’t think I have ever witnessed a more
bare-faced lie in all my time as a professional economist (PhD circa 1977) so
that is saying something. <o:p></o:p></span></div>
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<br /></div>
<div class="MsoHeader" style="tab-stops: 3.75in 5.0in; text-align: justify;">
<b><span style="font-family: "Verdana","sans-serif";">ISM 101<o:p></o:p></span></b></div>
<div class="MsoHeader" style="tab-stops: 3.75in 5.0in; text-align: justify;">
<span style="font-family: "Verdana","sans-serif"; mso-bidi-font-weight: bold;">Now you
may know a thing or two about ISMs but chance are you only know a thing or two
about them so let me round out your education on ISMs. MOST PEOPLE treat them
as though they are BINARY in nature- really. The most frequently said thing I
hear from people when I tell them that the ISMs are (both) slowing and are stronger
more than 60% of the time is this: that they are above ‘50.’ Well they are.
That’s true. And since these are diffusion indices, a value about 50 means more
respondents to the survey see things expanding than contracting. But, consider
this: if you are on your death bed and your pulse is dropping and your breath is
labored it is reassuring for the doctor to say well, you are still breathing? I
think not. In real life The ISM’s take
on a spectrum of values from 100 to zero- these signals are <b><i>weakening</i></b>! While they still each
speak of growth in each sector for manufacturing and nonmanufacturing they also
speak of sectors that usually are growing faster, in fact much faster. And one
of them is deteriorating fast. The non-manufacturing gauge for May fell in May
relative to April so fast in one month that it has only done so faster 5% of the
time historically…Nothing says no problem-o like that? Right? The economy is
still breathing-gasping but breathing! <o:p></o:p></span></div>
<div class="MsoHeader" style="tab-stops: 3.75in 5.0in; text-align: justify;">
<br /></div>
<div class="MsoHeader" style="tab-stops: 3.75in 5.0in; text-align: justify;">
<b><span style="font-family: "Verdana","sans-serif";">Rule number one of Spin-o-nomics: Hey,
when you want to ‘reassure people’ set the hurdle low.<o:p></o:p></span></b></div>
<div class="MsoHeader" style="tab-stops: 3.75in 5.0in; text-align: justify;">
<br /></div>
<div class="MsoHeader" style="tab-stops: 3.75in 5.0in; text-align: justify;">
<b><span style="font-family: "Verdana","sans-serif";">Truth or disaster? <o:p></o:p></span></b></div>
<div class="MsoHeader" style="tab-stops: 3.75in 5.0in; text-align: justify;">
<span style="font-family: "Verdana","sans-serif"; mso-bidi-font-weight: bold;">There is
nothing reassuring here. There is something odd in the unemployment rate that’s
for sure and everyone knows it but pretends it isn’t true. For example if the
unemployment rate is so low why is wage growth so tepid? If it is so hard to
find workers - and IF demand is solid- why are hours-worked so weak and
falling? Why aren’t hours expanding to use existing (allegedly-scarce) labor
more thoroughly? Try arguing those facts to a sensible conclusion.<o:p></o:p></span></div>
<div class="MsoHeader" style="tab-stops: 3.75in 5.0in; text-align: justify;">
<br /></div>
<div class="MsoHeader" style="tab-stops: 3.75in 5.0in; text-align: justify;">
<b><span style="font-family: "Verdana","sans-serif";">E-Pop goes the weasel!<o:p></o:p></span></b></div>
<div class="MsoHeader" style="tab-stops: 3.75in 5.0in; text-align: justify;">
<span style="font-family: "Verdana","sans-serif"; mso-bidi-font-weight: bold;">The employment
population ratio is low and falling. Adam Smith wrote in the first chapter of
his famous book ‘Wealth of Nations’ that one of the characteristics of a
wealthy nation was being one with a large proportion of its population at work.
Oops…<o:p></o:p></span></div>
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<br /></div>
<div class="MsoHeader" style="tab-stops: 3.75in 5.0in; text-align: justify;">
<b><span style="font-family: "Verdana","sans-serif";">Man overboard? Optimism overboard! <o:p></o:p></span></b></div>
<div class="MsoHeader" style="tab-stops: 3.75in 5.0in; text-align: justify;">
<span style="font-family: "Verdana","sans-serif"; mso-bidi-font-weight: bold;">We have
people leaving the job market like rats jumping off a sinking ship and these
economists want you to take a cruise on the Good Ship rat-trap! Really everything is fine!<o:p></o:p></span></div>
<div class="MsoHeader" style="tab-stops: 3.75in 5.0in; text-align: justify;">
<br /></div>
<div class="MsoHeader" style="tab-stops: 3.75in 5.0in; text-align: justify;">
<b><span style="font-family: "Verdana","sans-serif";">Always some confusion<o:p></o:p></span></b></div>
<div class="MsoHeader" style="tab-stops: 3.75in 5.0in; text-align: justify;">
<span style="font-family: "Verdana","sans-serif"; mso-bidi-font-weight: bold;">There are
always some plus and minus data. Yes, several recent housing reports have been
strong (a very weather-dependent, volatile sector). Yes PCE (personal
consumption expenditures, a large part of GDP) rose sharply in April. But in
May vehicle sales went flat again. We are in a span of having two very weak quarters
of GDP growth back-to-back. Some ‘rebound’ in GDP may still leave the US in a ‘hole’
relative to trend. The broad weakness in manufacturing and in services sets a
poor tone for economic prospects overall.
<o:p></o:p></span></div>
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<br /></div>
<div class="MsoHeader" style="tab-stops: 3.75in 5.0in; text-align: justify;">
<b><span style="font-family: "Verdana","sans-serif";">Context: Global mess!<o:p></o:p></span></b></div>
<div class="MsoHeader" style="tab-stops: 3.75in 5.0in; text-align: justify;">
<span style="font-family: "Verdana","sans-serif"; mso-bidi-font-weight: bold;">The global
economy is a mess with monetary policy overused and impotent (not to be
confused with ‘important’) fiscal policy held hostage just about everywhere.
And international trade is being used as the lever of choice to pry growth out
of its torpor. The only problem is that everyone is trying to use this lever
against everyone else. <o:p></o:p></span></div>
<div class="MsoHeader" style="tab-stops: 3.75in 5.0in; text-align: justify;">
<br /></div>
<div class="MsoHeader" style="tab-stops: 3.75in 5.0in; text-align: justify;">
<b><span style="font-family: "Verdana","sans-serif";">About the US slowdown and labor
‘shortage’<o:p></o:p></span></b></div>
<div class="MsoHeader" style="tab-stops: 3.75in 5.0in; text-align: justify;">
<span style="font-family: "Verdana","sans-serif"; mso-bidi-font-weight: bold;">In the US,
growth is slowing and it is not because we hit ‘full employment.’ People have
left the workforce and perceived labor markets ‘tightness’ is a supply thing
not an excess demand thing. Some workers are aging. Some are unskilled and
unsuited for the jobs of this century.
Some are just being priced-out of the market by cheaper labor abroad.
And the economic mechanism to stop this and to reignite growth in the US is
broken-broken and not being fixed. But
consider this… we have a low-skill dependent economy and lots of people
dropping out of the labor force- how do you explain that? What I mean by that
is that most of the US job growth has been in low-skill jobs. So with the
employment population ratio so low how can we say there is a labor supply
problem? Our main jobs are in bedpans, burgers and shelf re-stocking. Really?
We are running out of people to do those things? God help us… (genuflect for
real here) Oh, we are running out of
people that want to do those things or that want to do them at the prevailing
wage rate. Yes. And still wages are barely rising<b>.<o:p></o:p></b></span></div>
<div class="MsoHeader" style="tab-stops: 3.75in 5.0in; text-align: justify;">
<br /></div>
<div class="MsoHeader" style="tab-stops: 3.75in 5.0in; text-align: justify;">
<b><span style="font-family: "Verdana","sans-serif";">Crunch time<o:p></o:p></span></b></div>
<div class="MsoHeader" style="tab-stops: 3.75in 5.0in; text-align: justify;">
<span style="font-family: "Verdana","sans-serif"; mso-bidi-font-weight: bold;">We have
very unbalanced very unhealthy growth and have had it for some time. I keep
repeating that the US has run nothing but current account deficits since the
early 1980s. We do NOT have a competitive economy. So when the international
crunch comes we get crunched. <o:p></o:p></span></div>
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<br /></div>
<div class="MsoHeader" style="tab-stops: 3.75in 5.0in; text-align: justify;">
<b><span style="font-family: "Verdana","sans-serif";">Paradigm confusion And technology
dislocation<o:p></o:p></span></b></div>
<div class="MsoHeader" style="tab-stops: 3.75in 5.0in; text-align: justify;">
<span style="font-family: "Verdana","sans-serif"; mso-bidi-font-weight: bold;">The economy
is NOT best understood as being in a typical economic paradigm. We are still in
a transitional global economy where the international adjustment mechanisms are
not working-AND ARE NOT BEING FIXED. We have
a disequilibrium situation. We also are drowning under Schumpeterian waves of
‘creative destruction.’ In addition to weak demand and cheaper sources of
foreign supply we have technology putting the screws to everyone. Just last
week there was an article about how Foxconn the Taiwanese firm that operates in
China and assembles phones for Apple and Samsung (among other things) has just
displaced a large block of Chinese workers (60,000) with robots. <o:p></o:p></span></div>
<div class="MsoHeader" style="tab-stops: 3.75in 5.0in; text-align: justify;">
<br /></div>
<div class="MsoHeader" style="tab-stops: 3.75in 5.0in; text-align: justify;">
<b><span style="font-family: "Verdana","sans-serif"; font-size: 16.0pt; mso-bidi-font-size: 12.0pt;">Well
what do you THINK happens in a world where <u>CHINESE</u> labor is not cheap
enough? </span></b><b><span style="font-family: "Verdana","sans-serif";"> <o:p></o:p></span></b></div>
<div class="MsoHeader" style="tab-stops: 3.75in 5.0in; text-align: justify;">
<br /></div>
<div class="MsoHeader" style="tab-stops: 3.75in 5.0in; text-align: justify;">
<b><span style="font-family: "Verdana","sans-serif";">Riddle me that?<o:p></o:p></span></b></div>
<div class="MsoHeader" style="tab-stops: 3.75in 5.0in; text-align: justify;">
<br /></div>
<div class="MsoHeader" style="tab-stops: 3.75in 5.0in; text-align: justify;">
<b><span style="font-family: "Verdana","sans-serif";">Falling behind<o:p></o:p></span></b></div>
<div class="MsoHeader" style="tab-stops: 3.75in 5.0in; text-align: justify;">
<span style="font-family: "Verdana","sans-serif"; mso-bidi-font-weight: bold;">The US is
simply falling behind. Yet, most US corporations are doing ‘fine’ because they have
put their best and newest technologies to work in ASIA! Of course, labor is
cheaper there! Why invest in the US where costs are so high? No wonder US wages
CAN’T rise. The push to hike minimum wages in the US is the most misguided
public policy since the mandate to replace all vehicles with square wheels (OK
I made that one up…). But it is a dumb move given our circumstance and almost
as stupid as the fake policy I cite. <o:p></o:p></span></div>
<div class="MsoHeader" style="tab-stops: 3.75in 5.0in; text-align: justify;">
<br /></div>
<div class="MsoHeader" style="tab-stops: 3.75in 5.0in; text-align: justify;">
<b><span style="font-family: "Verdana","sans-serif";">Clueless in Washington (regardless
of the party)<o:p></o:p></span></b></div>
<div class="MsoHeader" style="tab-stops: 3.75in 5.0in; text-align: justify;">
<span style="font-family: "Verdana","sans-serif"; mso-bidi-font-weight: bold;">US
government and Fed policies continue to err by not realizing the constraint the
global economy places on the US economy. By putting on blinders and resorting
to old tired and irrelevant policy paradigms US policy-makers continue to come
up with the wrong analysis and the wrong remedies.<o:p></o:p></span></div>
<div class="MsoHeader" style="tab-stops: 3.75in 5.0in; text-align: justify;">
<br /></div>
<div class="MsoHeader" style="tab-stops: 3.75in 5.0in; text-align: justify;">
<b><span style="font-family: "Verdana","sans-serif";">Irrelevant Paradigms -Speed bumps on
the road to truth<o:p></o:p></span></b></div>
<div class="MsoHeader" style="tab-stops: 3.75in 5.0in; text-align: justify;">
<span style="font-family: "Verdana","sans-serif"; mso-bidi-font-weight: bold;">The May
employment report analysis is just one the most recent and of the most glaring
examples of this. Here it is in a nutshell I (don’t) think therefore I am
(wrong). I spin, therefore I get
consulting work and affect policy and I am employed. I am useful when I Spin
because I have a paradigm to blame the other party. But in fact what I am when
I do this is a speed bump on the road to truth or a long detour in the wrong
direction. And the US economy is running out of time. And time is one thing you
cannot spin, beg, borrow or steal. It simply is. We Americans have work to do and no one to
lead us. No direction to go. No clue about what to do. And we are being misled
about what is wrong. What’s worse is
that we are being divided along ideological lines when that ideology
does not address the real problem! It’s no wonder that the American public
smells a rat and has been supporting ‘out of the money’ candidates. Maybe a long
shot will come in in November. Something has to give… <o:p></o:p></span></div>
<br />
<div class="MsoHeader" style="tab-stops: 3.75in 5.0in; text-align: justify;">
<b><span style="font-family: "Verdana","sans-serif";"> <o:p></o:p></span></b></div>
</div>
FAO-OPINIONhttp://www.blogger.com/profile/11086590490267067973noreply@blogger.com0tag:blogger.com,1999:blog-2763460351111948732.post-32894786323072981802016-02-25T15:28:00.001-05:002016-02-25T15:29:34.651-05:00Evaluating the Fed...By the Numbers: Why it is Failing<div dir="ltr" style="text-align: left;" trbidi="on">
<div align="center" class="MsoHeader" style="tab-stops: 3.75in 5.0in; text-align: center;">
<b><span style="font-family: "verdana" , "sans-serif";">Why the Fed is blowing it<o:p></o:p></span></b></div>
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<b><span style="font-family: "verdana" , "sans-serif"; font-size: 11.0pt;">Incorrect
priorities lead to incorrect conclusions</span></b><b><span style="font-family: "verdana" , "sans-serif";"><o:p></o:p></span></b></div>
<div class="MsoHeader">
<br /></div>
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgrIGI3raCuDufzp10QWuY3iJ-QKE75XHpSC0NtUsuJeQcfd7ubcLjdPU8a1SOzgYa8hAFlxlC-ZUwhGNNo4k2BZm0ttf-Ljz9uKgDHEticMTNfOJ-BJusSf5Ea9Ghp0oeFigKk0cRSoF5f/s1600/Feb24.2o16IndicatorAssess.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="139" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgrIGI3raCuDufzp10QWuY3iJ-QKE75XHpSC0NtUsuJeQcfd7ubcLjdPU8a1SOzgYa8hAFlxlC-ZUwhGNNo4k2BZm0ttf-Ljz9uKgDHEticMTNfOJ-BJusSf5Ea9Ghp0oeFigKk0cRSoF5f/s320/Feb24.2o16IndicatorAssess.png" width="320" /></a></div>
<div style="text-align: center;">
<br /></div>
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<br /></div>
<div class="MsoHeader" style="tab-stops: 3.75in 5.0in; text-align: justify;">
I have
been offering piecemeal rankings week by week of the topical indicators of the
week, ranking them in their recent historic context. My conclusion has
consistently been that economic variables are far too weak to justify Fed policy.
I have weekly calculations (performed on ranked growth rates going back to 2010)
for data since late October of last year that produce this same result/conclusion
week by week without fail. And yet the Fed hiked rates in December and it continues
to assert that its program of rate hikes is still on path even though that path
might take a lower gradient. What gives? <o:p></o:p></div>
<div class="MsoHeader" style="tab-stops: 3.75in 5.0in; text-align: justify;">
<br /></div>
<div class="MsoHeader" style="tab-stops: 3.75in 5.0in; text-align: justify;">
In the
table above I have finally taken the full approach by ranking a broad set of 50
variables instead of just taking whatever was offered up new, week-by-week. Again
I rank variables on their growth rates or levels since January of 2010 to date
and I have sorted them into groups and averaged their standings to create readings
on different measures. These group rankings are revealing. And not surprisingly
they give substance to a criticism I have been levying at the Fed for some
time. But here we have data to support it and context for the Fed’s missteps. <o:p></o:p></div>
<div class="MsoHeader" style="tab-stops: 3.75in 5.0in; text-align: justify;">
<br /></div>
<div class="MsoHeader" style="tab-stops: 3.75in 5.0in; text-align: justify;">
The Fed
has a labor market centric view of the world. And, while the world outside the
labor market is unraveling, the labor variables have remained relatively strong.
This means that the Fed, with its blinders on, views what appears as a strong
economy (through the lens of that strong labor market). However, when we look
at other variables what we observe is a much weaker U.S. economy and one that
would hardly support the policy that the Fed chose to pursue in December and is
still pursing. <o:p></o:p></div>
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<br /></div>
<div class="MsoHeader" style="tab-stops: 3.75in 5.0in; text-align: justify;">
The table
above shows that the labor market variables over about the last 70 months have
an average ranking in the top 5% of their queue of data since January 2010. No
wonder the Fed sees a strong economy. However, the next strongest sector is
housing which has only a 53 percentile standing. After that it is services with
a 43 percentile standing. After services the consumer sector has a 33 percentile
standing. After the consumer sector price trends have a 26 percentile standing.
After price indicators, the general economy, including trade, has a 16 percentile
standing. With a 9 percentile standing, the factory sector comes in as the
weakest of all. There is no surprise there. <o:p></o:p></div>
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<br /></div>
<div class="MsoHeader" style="tab-stops: 3.75in 5.0in; text-align: justify;">
So the
factory sector has been weaker only 9% of the time since January of 2010. And
only two of these seven categories have rankings that push them above their medians
in what has been a disappointing economic recovery. And the strongest of these
categories is - SURPRISE - the one the Fed has chosen to target for its policy focus,
the labor market. It’s as though there is some bizarre form of Goodhart’s law
at work. The Fed chooses to target the labor market and the labor market stops
being representative of the economy. <o:p></o:p></div>
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<br /></div>
<div class="MsoHeader" style="tab-stops: 3.75in 5.0in; text-align: justify;">
The Fed
decision to make the labor market primary in its analysis of the economy is why
policy is running amok. In the last FOMC minutes the Fed even included language
defending the use of the labor market as a focus over and above GDP figures (GDP
is not used in the table above since I have only used indicators with a monthly
frequency). <o:p></o:p></div>
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<br /></div>
<div class="MsoHeader" style="tab-stops: 3.75in 5.0in; text-align: justify;">
The Fed has
set up a straw man choice (labor vs GDP) to justify the use of labor data (GDP
is too often revised). But, focusing on the labor market is not the best
forward looking indicator-and there are many other choices. We do not have to accept
the Fed’s strawman. Right now, for example, the growth in the index of leading
economic indicators leaves it ranking in the 39<sup>th</sup> percentile of its
historic queue of growth rates back to 1969. The coincident index sits in its
34<sup>th</sup> percentile. Needless to say, the LEI’s strength is not very
comforting. Of course, it has slowed like this before without signaling
recession. But this is a significant slowing and it is occurring with the Fed’s
gas pedal still nearly to the floor… and the Fed has few options to do more
should the economy sour. Since the Fed has no latitude to help should things continue
to slide, that limitation should be part of the policy decision. <o:p></o:p></div>
<div class="MsoHeader" style="tab-stops: 3.75in 5.0in; text-align: justify;">
<br /></div>
<div class="MsoHeader" style="tab-stops: 3.75in 5.0in; text-align: justify;">
As I have
said before, this the most disturbing thing about Fed policy. It is not that I think
that Fed policy is wrong. It is that, objectively, the Fed’s policy course is dangerous
since it assumes that the economy will not backslide in an environment where
everything already is backsliding except the ONE INDICATOR that the Fed has
chosen to focus upon (the job market). If the Fed has chosen badly in terms of its
focus or in terms of its forecast there is no fallback position for policy. And
several Fed members are quite dogmatically attuned to keeping rates moving up because
they are convinced that they must make up for past sins and that inflation is
gaining on them. This is the view that (1) rates were too low for too long, or
that (2) the Fed balance sheet is just too big or (3) that the unemployment rate
is just too low. This spectrum of ‘just-toos’ brings Monetarist and Keynesians
together in a love fest of agreement and gnashing of teeth over inflation risks
and so obseesed with teh past that they cannot see what is happening or appreciate
that the future might different from what they obsess over. That’s why they
call it an obsession. <o:p></o:p></div>
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<br /></div>
<div class="MsoHeader" style="tab-stops: 3.75in 5.0in; text-align: justify;">
Meanwhile
incoming data make a different point altogether.<o:p></o:p></div>
<div class="MsoHeader" style="tab-stops: 3.75in 5.0in; text-align: justify;">
<br /></div>
<div class="MsoHeader" style="tab-stops: 3.75in 5.0in; text-align: justify;">
The table
at the top shows that economic data have been weak- almost everything outside
of jobs data has been weak. What are the odds that the jobs data will lead us
out of the wilderness while everything else remains weak or gets weaker?
Probably not very good... This is where I start calling the Fed dogmatic and
accuse it of not really being data-dependent, as it claims it is, unless data
dependency means that it depends on what data they want to look at. Oh. Now I
get it. <o:p></o:p></div>
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<br /></div>
<div class="MsoHeader" style="tab-stops: 3.75in 5.0in; text-align: justify;">
Data classification used for these calculations
is<o:p></o:p></div>
<br />
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<br /></div>
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhf4qq5-SYNDXCflc3ygOaZ6Vr2PdezTkkW8kvjEt3vMc5piIjckRoKwTfQmLe6GLjnlW2IStCD07eZEFKgf5P43BQXynBCvrNNl2HYv2Kitxr_II3_chT0w2M7lbaSs2INzw5zMy2kNmbB/s1600/ListOfVariablesAndCatgoreisUsed.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="320" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhf4qq5-SYNDXCflc3ygOaZ6Vr2PdezTkkW8kvjEt3vMc5piIjckRoKwTfQmLe6GLjnlW2IStCD07eZEFKgf5P43BQXynBCvrNNl2HYv2Kitxr_II3_chT0w2M7lbaSs2INzw5zMy2kNmbB/s320/ListOfVariablesAndCatgoreisUsed.png" width="95" /></a></div>
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<o:p><br /></o:p></div>
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FAO-OPINIONhttp://www.blogger.com/profile/11086590490267067973noreply@blogger.com0tag:blogger.com,1999:blog-2763460351111948732.post-85861769626765150272016-02-21T10:59:00.001-05:002016-02-21T14:45:59.844-05:00Where is the Fed’s objectivity?<div dir="ltr" style="text-align: left;" trbidi="on">
<div align="center" class="MsoHeader" style="tab-stops: 3.75in 5.0in; text-align: center;">
<b><span style="font-family: "verdana" , "sans-serif";">Objective evaluation of last 2
week’s data<o:p></o:p></span></b></div>
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<b><span style="color: red; font-family: "verdana" , "sans-serif"; font-size: 11.0pt;">Where is the Fed’s objectivity?<o:p></o:p></span></b></div>
<div align="center" class="MsoHeader" style="tab-stops: 3.75in 5.0in; text-align: center;">
<b><span style="color: red; font-family: "verdana" , "sans-serif";">?<o:p></o:p></span></b></div>
<br />
<div align="center" class="MsoHeader" style="tab-stops: 3.75in 5.0in; text-align: center;">
So
here is a summary table:<o:p></o:p></div>
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhhj7poaQqkCkh9Ji1xo1UX-IwZa7cc1uv1WjdEiJNvibq2hiaaGC7kHaulLKkECeHPm8x3Lz-D7lLNQFD-dDT8zGHfmaXIaTnAL5SoqIUNO9KgthDPkBKRjPLiaXJkQgrXuKM3GZPw6lSu/s1600/evalPicture.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="80" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhhj7poaQqkCkh9Ji1xo1UX-IwZa7cc1uv1WjdEiJNvibq2hiaaGC7kHaulLKkECeHPm8x3Lz-D7lLNQFD-dDT8zGHfmaXIaTnAL5SoqIUNO9KgthDPkBKRjPLiaXJkQgrXuKM3GZPw6lSu/s320/evalPicture.png" width="320" /></a></div>
<div style="text-align: center;">
<span style="font-family: "times new roman" , "serif"; font-size: 12.0pt;"><br /><!--[endif]--></span></div>
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I focus on
the RANK of the 12 mo. percent change of all data since May of 2011. We rank
each series on its growth over that period. Based on that frame of reference,
all monthly reports from the last 2-weeks, average a standing in their 25<sup>th</sup>
percentile. They have been this low or lower since May of 2011 only one
–quarter of the time. Price data have been this low or lower 29% of the time.
Activity data have been this low of lower 21% of the time. MFG data have been
this low or lower 12% of the time. Inventory
growth has been this low or lower only 1.8% of the time. U of M sentiment has
been this low or lower only 17% of the time.</div>
<div class="MsoHeader" style="tab-stops: 3.75in 5.0in; text-align: justify;">
<o:p></o:p></div>
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<br /></div>
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These all
are very weak readings! What the heck is the FED looking at? <o:p></o:p></div>
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<br /></div>
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<b>Recession signals- Not yet<o:p></o:p></b></div>
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Does any
of this signal recession? No.<br />
<br />
The economy is in recession only about 6% of the
time. But readings that are in or at the bottom quartile of their range are not
reassuring readings. And to be clear the Fed is planning to hike rate with these
indicators on weakening trends. That is what is most outrageous and
disconnected from reality. It’s not just these levels of the growth rates; it’s
the growth plus its momentum. Seven of 20 indicators were lower month to month
in their most recent observation. Nine of them are lower year over year. Eleven
indicators (out of 20!) are actually below their respective 20<sup>th</sup> percentiles.
Only one is above its 80<sup>th</sup> percentile – that is real negative
asymmetry. These are extremely skewed results – skewed to weakening.<br />
<o:p></o:p></div>
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<br /></div>
<div class="MsoHeader" style="tab-stops: 3.75in 5.0in; text-align: justify;">
And some
these are important reports like industrial production, retail sales, the index
of leading indicators, consumer sentiment, the NFIB survey and others. It’s not
a collection of dribs and drabs of data.<o:p></o:p></div>
<div class="MsoHeader" style="tab-stops: 3.75in 5.0in; text-align: justify;">
<br /></div>
<div class="MsoHeader" style="tab-stops: 3.75in 5.0in; text-align: justify;">
<b>No wiggle room/No Room To Move Vs the vast
expanse of space on the upside<o:p></o:p></b></div>
<div class="MsoHeader" style="tab-stops: 3.75in 5.0in; text-align: justify;">
With the
Fed having virtually no wiggle room to ease, as this economic slippage continues,
it is an outrageously dangerous strategy for the Fed to not at least announce
that policy is on hold. The ‘MINI-MAX’ rule says when policy is in an uncertain
environment it can be a good strategy to act so as to MINIMIZE the effects of a
policy decision SHOULD the wrong policy direction be chosen. Where do you think
the Fed stands relative to this rule?<o:p></o:p></div>
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<br /></div>
<div class="MsoHeader" style="tab-stops: 3.75in 5.0in; text-align: justify;">
Dead
WRONG. But hey, maybe the Fed policy tilt actually is right? Maybe it will draw
to an inside straight and all will be forgiven…and then again maybe not. That’s
why the ‘mini-max’ rule was developed because…MAYBE NOT. What is the Fed’s forecasting record like anyway?<o:p></o:p></div>
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<br /></div>
<div class="MsoHeader" style="tab-stops: 3.75in 5.0in; text-align: justify;">
There is
NOTHING dangerous about slowing the tightening cycle… should the economy continue
to grow and if inflation pressures were to mount the Fed has so much room
(infinite) to move on the upside compared to almost no room on the downside-
there is no risk (Queue John Mayall. ‘Room to Move’ <a href="https://search.yahoo.com/search?fr=mcafee&type=C211US532D20150312&p=song+%27romm+to+move%27">Here</a>). The Fed is driving close to the edge
here...and for what reason? <o:p></o:p></div>
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<br /></div>
<div class="MsoHeader" style="tab-stops: 3.75in 5.0in; text-align: justify;">
<b>Smell the handwriting on the wall…<o:p></o:p></b></div>
<div class="MsoHeader" style="tab-stops: 3.75in 5.0in; text-align: justify;">
I find
this policy obstinacy an astonishing choice. Especially since GLOBAL forces are
pushing BACK at inflation. I have called the Fed dogmatic. Some call it
ideological, some say it has hubris. Others call it arrogant. All of these descriptions
express frustration with a Fed that refuses to smell the handwriting on the
wall (I’m just guessing here that they can’t read it)... <o:p></o:p></div>
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<br /></div>
<div class="MsoHeader" style="tab-stops: 3.75in 5.0in; text-align: justify;">
<br /></div>
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<br /></div>
<div class="MsoHeader" style="tab-stops: 3.75in 5.0in; text-align: justify;">
<b><u>Frustration with the Fed mounts<o:p></o:p></u></b></div>
<div class="MsoHeader" style="tab-stops: 3.75in 5.0in; text-align: justify;">
There is a
group of economists –of no particular ideological purity- that is increasingly
frustrated with a Fed that embarked on a tightening policy, lacking the
justification that it had set for itself to move. <o:p></o:p></div>
<div class="MsoHeader" style="tab-stops: 3.75in 5.0in; text-align: justify;">
<br /></div>
<div class="MsoHeader" style="tab-stops: 3.75in 5.0in; text-align: justify;">
<b>Let’s pretend?<o:p></o:p></b></div>
<div class="MsoHeader" style="tab-stops: 3.75in 5.0in; text-align: justify;">
Still, it
moved and now it has momentum. A policy choice was made and now the Fed wants
to stick to it and it is seemingly reluctant to pause and admit that it may have
made a mistake and moved too soon like so many other central banks before it IN
THIS VERY CYCLE. Is the Fed really whistling past the graveyard because it
thinks it can protect its reputation by compounding one bad decision with
another? This is a high stakes riverboat
double or nothing Fed policy gamble, and there is no payoff commensurate with
the risk that the Fed is taking. So…why is it doing this? Under most
circumstances ‘Let’s Pretend’ is not a policy option.<o:p></o:p></div>
<br />
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<br /></div>
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FAO-OPINIONhttp://www.blogger.com/profile/11086590490267067973noreply@blogger.com0tag:blogger.com,1999:blog-2763460351111948732.post-7676701685696215512016-02-18T14:42:00.003-05:002016-02-18T14:42:53.529-05:00Having read the news…On February 18, 2016 <div dir="ltr" style="text-align: left;" trbidi="on">
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<b><span style="font-family: "Verdana","sans-serif";">Having read the news…<o:p></o:p></span></b></div>
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<b><span style="font-family: "Verdana","sans-serif";">I’d love to turn…you…off? <o:p></o:p></span></b></div>
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<br /></div>
<div class="MsoHeader" style="tab-stops: 3.75in 5.0in; text-align: justify;">
<span style="font-family: "Verdana","sans-serif"; mso-bidi-font-weight: bold;">The morning
news does not make a ‘good read.’ The FOMC minutes released yesterday show a
seriously conflicted Fed that seems to have lost its way. The more that the Fed
protests that is not on a pre-set course, the more it looks like it is, based
on reports it releases to the public. <o:p></o:p></span></div>
<div class="MsoHeader" style="tab-stops: 3.75in 5.0in; text-align: justify;">
<br /></div>
<div class="MsoHeader" style="tab-stops: 3.75in 5.0in; text-align: justify;">
<span style="font-family: "Verdana","sans-serif"; mso-bidi-font-weight: bold;">With the
Fed lacking a serious backbone, the OECD has injected a sense of urgency into
the mix. It is not clear that this is aimed at the Fed or at the US but other
countries are acting or preparing to act. The U.S. (i.e. FED) alone has dug its
heels in and refused to even give a clear signal that will leave its tightening
path- and has more clearly declined to step up any stimulus- However let me ass
that the use of fiscal policy is dead almost everywhere outside of China
(genuflect, I said ‘China’). <o:p></o:p></span></div>
<div class="MsoHeader" style="tab-stops: 3.75in 5.0in; text-align: justify;">
<br /></div>
<div class="MsoHeader" style="tab-stops: 3.75in 5.0in; text-align: justify;">
<span style="font-family: "Verdana","sans-serif"; mso-bidi-font-weight: bold;">The Fed’s
die has been cast even as the Fed argues that it remains open minded. And this
is a Fed that wants to pride itself on transparency. no No NO. This is the same
old Fed. It is shrouded by the use of obscure language and wedded to issuing a
new policy statement each month, but one that reads more or less like the one
issued before it. And it wants to have its wiggle room on language but also to
speak clearly and directly...it wants to have its cake and eat it too, while
extolling the metis of a high protein diet.<o:p></o:p></span></div>
<div class="MsoHeader" style="tab-stops: 3.75in 5.0in; text-align: justify;">
<br /></div>
<div class="MsoHeader" style="tab-stops: 3.75in 5.0in; text-align: justify;">
<span style="font-family: "Verdana","sans-serif"; mso-bidi-font-weight: bold;">The Fed’s
choice in the ‘minutes’ to rely more on labor market data because GDP is often
revised sets up a straw man that ignores other reports perhaps best summarized
by the weak MFG ISM and the weakening Non-MFG ISM. Whatever the reality behind the Fed’s bizarre
choices, there seems to be a few voices of reason at the Fed but we have heard
few of them in public recently. As for Janet Yellen we seem to have progressed
from having strong Fed chairman like Volcker and Greenspan to a consensus
builder in Bernanke to one who is afraid to speak anything other than what the
committee already has decided. Janet Yellen may be our first Japanese Chair as
she acts as though she has no power and has been coopted by the opinions of the
committee. Her statements about negative rate prospects were classic Yellen:
one day saying that the committee had considered and rejected that course at
one point and the next day saying that she was not taking anything off the
table. Now that’s leadership! At least it is what passes for it from Ms.
Yellen. Policy by committee is one of the worst possible. Committees need strong leadership. I,
increasingly, get the sense that this one does not have it. <o:p></o:p></span></div>
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<br /></div>
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<br /></div>
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<br /></div>
<div align="center" class="MsoHeader" style="tab-stops: 3.75in 5.0in; text-align: center;">
<b>The News<o:p></o:p></b></div>
<div class="MsoHeader" style="tab-stops: 3.75in 5.0in; text-align: justify;">
<br /></div>
<div class="MsoHeader" style="tab-stops: 3.75in 5.0in; text-align: justify;">
<b>OECD</b>…Governments in the U.S., Europe
and elsewhere should take “urgent” and “collective” steps to raise their
investment spending and deliver a fresh boost to flagging economic growth, said
the OECD.<o:p></o:p></div>
<div class="MsoHeader" style="tab-stops: 3.75in 5.0in; text-align: justify;">
<br /></div>
<div class="MsoHeader">
<b>ECB view</b>- The euro zone's modest
economic recovery was progressing but risks are on the rise and there were also
signs that low energy prices could feed into the price of other goods and
services, the European Central Bank said on Thursday.<o:p></o:p></div>
<div class="MsoHeader" style="tab-stops: 3.75in 5.0in; text-align: justify;">
<br /></div>
<div class="MsoHeader" style="tab-stops: 3.75in 5.0in; text-align: justify;">
<br /></div>
<div class="MsoHeader" style="tab-stops: 3.75in 5.0in; text-align: justify;">
<b>Wal-Mart</b>- Wal-Mart cut its sales
forecast for the current year because of the stronger dollar and store
closures, as it reported core sales growth in its U.S. business that was softer
than expected for the holiday quarter. <o:p></o:p></div>
<div class="MsoHeader" style="tab-stops: 3.75in 5.0in; text-align: justify;">
<br /></div>
<div class="MsoHeader" style="tab-stops: 3.75in 5.0in; text-align: justify;">
<b>Nestle…</b> Shares in Nestlé dropped more
than 4% after the Swiss food giant reported its slowest sales increase in six
years and held back from buying more of its shareholders’ stock.<o:p></o:p></div>
<div class="MsoHeader" style="tab-stops: 3.75in 5.0in; text-align: justify;">
<br /></div>
<div class="MsoHeader">
<b>Like to watch?...</b> Swiss watch exports
continued to decline at the beginning of the year, figures from the Federation
of the Swiss Watch Industry showed Thursday. Watch exports fell notably by 7.9
percent year-over-year in value terms in January to CHF 1.5 billion. All main
price segments recorded significant decreases.<o:p></o:p></div>
<div class="MsoHeader">
<br /></div>
<div class="MsoHeader">
<b>Bridgewater’s founder offers this</b>… Ray
Dalio, founder of the world's largest hedge fund Bridgewater Associates, says
the next big monetary and fiscal move should include an airdrop of money from
helicopters to stimulate the U.S. economy.<o:p></o:p></div>
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<br /></div>
<div class="MsoHeader" style="tab-stops: 3.75in 5.0in; text-align: justify;">
<br /></div>
<br />
<div class="MsoHeader" style="tab-stops: 3.75in 5.0in; text-align: justify;">
<br /></div>
</div>
FAO-OPINIONhttp://www.blogger.com/profile/11086590490267067973noreply@blogger.com0tag:blogger.com,1999:blog-2763460351111948732.post-16671319279292309072016-02-16T17:14:00.003-05:002016-02-16T17:14:49.267-05:00Central banks, rabbits, printing presses and dead ends<div dir="ltr" style="text-align: left;" trbidi="on">
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<b><span style="font-size: 14.0pt; mso-bidi-font-size: 12.0pt;">Central banks, rabbits, printing presses and dead ends<o:p></o:p></span></b></div>
<div align="center" class="MsoHeader" style="tab-stops: 3.75in 5.0in; text-align: center;">
<b><span style="font-size: 14.0pt; mso-bidi-font-size: 12.0pt;"><br /></span></b></div>
<div class="MsoHeader" style="tab-stops: 3.75in 5.0in; text-align: justify;">
<span style="font-size: 11.0pt; mso-bidi-font-size: 12.0pt;">The Wall Street Journal has
an article about money and the printing presses. At the end it quotes Ben Bernanke for his ultimate
belief in the printing press. <a href="http://www.wsj.com/articles/streetwise-markets-putting-faith-in-qe4-1455581461">Here</a>.
But should we join him in that belief? <o:p></o:p></span></div>
<div class="MsoHeader" style="tab-stops: 3.75in 5.0in; text-align: justify;">
<br /></div>
<div class="MsoHeader" style="tab-stops: 3.75in 5.0in; text-align: justify;">
<span style="font-size: 11.0pt; mso-bidi-font-size: 12.0pt;">Money supply continues to
perform more or less normally. Monetary velocity has slowed but that in and of
itself is not particularly odd. <o:p></o:p></span></div>
<div class="MsoHeader" style="tab-stops: 3.75in 5.0in; text-align: justify;">
<br /></div>
<div class="MsoHeader" style="tab-stops: 3.75in 5.0in; text-align: justify;">
<span style="font-size: 11.0pt; mso-bidi-font-size: 12.0pt;">What is most peculiar in an
historic context, but totally understandable by today’s standards, is that the
money multiplier no longer works. Under the old system we would see banks get
fully ‘loaned out.’ That is, they would loan funds until the banking system’s
excess reserves were negligible. But now
the amounts of excess reserves in the system are vast. The Fed has pumped up
its balance sheet and there are billions of billions of excess reserves that
are not being lent. This is the ultimate example of what economists call
pushing on a string. And it is now NORMAL- not a special case of sorts. So do the
printing presses still work? <o:p></o:p></span></div>
<div class="MsoHeader" style="tab-stops: 3.75in 5.0in; text-align: justify;">
<br /></div>
<div class="MsoHeader" style="tab-stops: 3.75in 5.0in; text-align: justify;">
<span style="font-size: 11.0pt; mso-bidi-font-size: 12.0pt;">Banks do not lend funds because
they now have strict capital requirements to make loans. Loans not only need to
be funded with deposits but they to be backed by capital and the bank needs to
pass stress tests imposed by the Fed based on what is on its balance sheet. Because
of the capital requirement, banks are more careful about making loans. For one
thing bankers will not engage in so called ‘riskless arbitrage’ and blow up their
balance sheets as they once did. Bank loans are the way money is created. If
banks make loans more slowly, then money creation itself will slow. Banks make
loans under much more restrictive conditions these days. And bank loans have
more competition these days, too, as banks are being paid returns on the excess
reserves they own. Banks can hold excess
reserves and earn the return on reserves nearly risk free. That raises the hurdle
for risky lending as well. <o:p></o:p></span></div>
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<div class="MsoHeader" style="tab-stops: 3.75in 5.0in; text-align: justify;">
<span style="font-size: 11.0pt; mso-bidi-font-size: 12.0pt;">Not all bank reserves become
money supply in this model. They do not get turned into M2 assets/liabilities.
And a wedge is created between the Fed’s balance sheet growth and the growth of
conventional monetary assets held by the public. When Bernanke talks about the printing
presses saying that they will have an eventual impact, it depends on what he means
by ‘the printing press.’ Since the reserve channel is not functioning and that
does not seem to be particularly temporary ‘the printing press’ is not bank
reserve growth. <o:p></o:p></span></div>
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<span style="font-size: 11.0pt; mso-bidi-font-size: 12.0pt;">It is not clear how much monetary
stimulus matters in this environment. QE worked by removing safe assets and
forcing the public to acquire riskier assets. It pushed rates lower through
asset purchases LSAP (large scale asset purchases) - at least for a while-
there were at least announcement effects. And while some have said that QE has
many of the same effects of a traditional Fed policy easing, those similarities
appear to be fleeting and there are side effects from QE. If this were a drug,
I’m not so sure that the FDA would so easily approve it. In short there is no one
for one equivalent between QE and a cut in the Fed funds rate. <o:p></o:p></span></div>
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<span style="font-size: 11.0pt; mso-bidi-font-size: 12.0pt;">Negative rates of interest
are being considered apparently in the U.S. (‘not off the table’ to use Yellen’s
lexicon) and are being used in some countries.
That distortive policy seems particularly dangerous. Central bankers are
getting desperate and have done their best to try portraying some novel policies
as analogs to tried and true conventional policies. This is just like in the
financial crisis when the private sector employed derivatives that were poorly
understood while they pretended they had been fully vetted and were
well-behaved. I think markets are also coming to this point of view regarding central
bank behavior especially since the BOJ implemented negative rates and got the
opposite exchange rate reaction that it expected. <o:p></o:p></span></div>
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<span style="font-size: 11.0pt; mso-bidi-font-size: 12.0pt;">It is now clear that some of
these novel policies are starting to show their quirks and how they are different
rather than the same as traditional policy. And markets are frightened. Central
banks seem to be overstepping the boundaries of their understanding. Are they going
down the rabbit hole? Have they reached a dead end and have all the different
ways that central banks have to run the printing presses stopped working?<o:p></o:p></span></div>
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FAO-OPINIONhttp://www.blogger.com/profile/11086590490267067973noreply@blogger.com0tag:blogger.com,1999:blog-2763460351111948732.post-69185214751781816612016-02-14T15:33:00.001-05:002016-02-14T15:33:36.488-05:00Tweedle Dee Dee Tweddle Dee Fed<div dir="ltr" style="text-align: left;" trbidi="on">
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Tweedle Dee Tweedle De Dum</div>
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Tweddle Your toes Tweedle your thumbs</div>
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Side on the sidelines when things get tough</div>
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Decide to act when its not soon enough</div>
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Tweedle Dee De, Tweedle de Fed</div>
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Tweedle time away until you are dead</div>
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Tweedle the short run don't make up your mind</div>
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Until the data kick your behind </div>
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Why this? see below</div>
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The WSJ reports as follows: about Janet Yellen... "</div>
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But she reiterated her view that a contraction isn’t imminent. “There is always some chance of a recession in any year, but the evidence suggests expansions don’t die of old age,” Ms. Yellen said. “It is not what I think is the most likely scenario.”</div>
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She also emphasized that the Fed is staying flexible on the outlook for rates, noting several times that interest rates aren’t on a “preset course.” Yet she added that it’s premature to say whether recent developments have shifted the balance of risks to the downside."</div>
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FAO-OPINIONhttp://www.blogger.com/profile/11086590490267067973noreply@blogger.com0tag:blogger.com,1999:blog-2763460351111948732.post-42255530137905815022016-02-12T19:16:00.000-05:002016-02-13T17:10:48.905-05:00Fed Policy Magnifies Risks for the Global Economy As Well As At Home<div dir="ltr" style="text-align: left;" trbidi="on">
<div class="MsoNormal">
The risks step up...</div>
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I don't know if there will be a contraction this time around, but if
policy does not swerve, conditions will get more dangerous. The Fed should at least be
pursuing a Mini-Max strategy, guarding against making the biggest mistake
instead of dogmatically pursuing a course of action that it has no idea
if it is correct. (tighten because we are already on the golden path to 2%
inflation and full employment...Amen.) Fed policy is magnifying economic risks. Usually we do not think of that as the Fed's job...</div>
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<br /></div>
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I'm not sure if the Fed got that policy on stone
tablets from Mosses, but they act like it. Maybe someone named Mosses was stoned and gave it to them? That seems more likely. The policy looks more like a golden calf they
are worshiping than something handed down by an agent of God... <o:p></o:p></div>
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<br /></div>
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Fed policy is focused on the labor market. Really? ...a
lagging or coincident variable at best. And it seems to put that market on a pedestal to the exclusion of all else. Really? Does the puny US job market trump the global surplus? How is that possible? A market consisting largely of services-workers insulated partially from international competition will call the shots. I don't think so. <o:p></o:p></div>
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This is high risk high stakes double or nothing all chips in
the middle policy. There is nothing prudent here. And yes I am talking about central bank policy. Staying the policy course with the economy and market as rattled as they are is dangerous at a time that downturn is the most dangerous thing that could happen to this economy. <o:p></o:p></div>
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Yes, I am worried. I do not think stock markets are
irrational. The BOJ move to negative rates that left the yen STRONGER (OOPS!)
has shocked everyone. Now markets see that central bankers do not have rabbits
to pull our of hats. Maybe they don't even have hats. Maybe they reach in and
grab a rattlesnake by the tail instead. These policies are risky. <o:p></o:p></div>
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<br /></div>
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No one speaks of it this way but these are the financial
(policy) innovations that are the equivalent of the hybridized mortgage
products that caused the blow-ups the last downturn. (Did you see THE BIG SHORT??) </div>
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<br /></div>
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These are policies that
are untested using tools that are untried. What's worse is that they are
untested in any business cycle and yet there they are being put in use as
though they are understood. And by CENTRAL BANKERS!!! Oh Yeah! </div>
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<br /></div>
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Just like any other rate cut so what if it
winds up below zero....?? (the culinary equivalent of 'tastes just like
chicken!!- but is it nutritionally? ) These policies may not be successful. Or
might make things worse. Its like an alien space ship landed and we are going
to begin randomly to press buttons. HMMM is this one to take-off or is it for
the death ray??? Just press, it...everything will be fine. <o:p></o:p></div>
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<br /></div>
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And so the central bankers are running out of things to do,
things to try and, of course, running out of things they really understand, nothing is safe
anymore. And now markets know it... NO more putting a brave face on. The
over-sized shoes and the seltzer bottle are on full display along with the red
noses - Bozos one and all. <o:p></o:p></div>
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<br /></div>
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The oil market is a mess and out of control. With fracking
and technology, supply has found a way and you can't put that toothpaste back in
the tube. The Saudis long knew their role in OPEC as they have oil for the long run: it was to contain oil prices and
keep innovation at bay. They blew it. They just blew it. Oil now is a loose
cannon of excesses. <o:p></o:p></div>
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<br /></div>
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China is in a terrible debt overload and has a difficult
policy switch to accomplish. Everyone who can wants to leave China because of
the environmental disasters policy has made. Money is just gushing out like
someone cut a monetary artery on Grey's anatomy. Clamp! I said CLAMP! What? No Clamp??? Dang...</div>
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<br /></div>
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When Stevie-baby Roach said they knew what they
were doing in China he was just blowing smoke up all our.. well hind-quarters... He was
Morgan Stanley's shill for China (non-executive Vice Chairman- what a title). No one stood up to the Chinese. Stevie cheered them on and encouraged all of us to trust them and to invest there. Thanks for that Stevie! So now they have this mess and we have a
mess too. <o:p></o:p></div>
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<br /></div>
<div class="MsoNormal">
The South China Sea Gambit is just a natural result of
failed domestic policy in China. It is text book foreign policy
diversion. Create an international event to bring the people together
behind you. China wants conflict in the South China Sea. It will not settle
anything. It wants an 'event.'<o:p></o:p></div>
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<br /></div>
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and on it goes... <o:p></o:p></div>
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Don't you think?<o:p></o:p></div>
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<br /></div>
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<br /></div>
<div class="MsoNormal">
Obama's giving Bernanke the Bum's rush out if office to
replace him with Yellen looks more and more like a fool's move. Listen to what
Ben is saying these days- he does not think we are on 'The Path'. This is not The Matrix.
'The Path' is not the same as 'The One'. Yellen does not have the
judgement of the Matrix's Lawrence Fishburne. The Fed is stabbing in the dark. As the knight in the room
of chalices in the movie 'India Jones and the last Crusade' said <she><she><she> she<she> <she> <she>has not chosen wisely...<o:p></o:p></she></she></she></she></she></she></div>
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No lie... <o:p></o:p></div>
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<br /></div>
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<o:p>Janet!!!</o:p></div>
<div class="MsoNormal">
Janet, time to choose wisely. Time to stop really blowing it. You need to stand up to the
hawks. You need to change your mind. You need to stop sleep-walking. You need to drop the Fed-speak and deal with issues. You need to look at all the data not just the stuff that makes you comfortable... You need to make policy to protect the economy from the Fed making the worst mistake possible... Terrible testimonies. Clumsy
Q&A answers. Stop with the bureaucratic babble and Fed-speak. Speak English! Address issues. Throw some FOMC members pressuring you to hike rates under the bus. Do it now. Just DO IT. Maybe Nike will sponsor you... <o:p></o:p></div>
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FAO-OPINIONhttp://www.blogger.com/profile/11086590490267067973noreply@blogger.com0tag:blogger.com,1999:blog-2763460351111948732.post-1191308830702221352016-02-09T13:19:00.001-05:002016-02-09T13:19:18.895-05:00Central bankers make inspector Cluseau look smart <div dir="ltr" style="text-align: left;" trbidi="on">
Japan's negative yield conundrum:<br />
Negative yields on a (Japanese) ten year note...That does not bode well for expectations that Japan is getting inflation back to 2%. I wonder what the BOJ thought when it went to negative short rates, since lower rates seem to imply ongoing low inflation. Now- of course- if the short rate is negative and the yield curve steepens you have your cake and eat it too. That's what the BOJ wants. But that is not happening.<br />
<br />
Instead, like the Fed it is Ready! Shoot! Aim!!! Fed policy which is geared to keeping rate hikes in play will keep the dollar strong and that will keep the economy weak and inflation low- NOT at 2%... Ready! Shoot! Aim! In short it is no way to achieve your inflation objective.<br />
<br />
What the heck do these central bankers think they are doing? Just anything that comes to their mind? I have never before seen so much policy at cross purpose to the central banks' ostensible policy objective. Is the Fed really about normalcy? Do you put rates at normalcy when the economy is still wounded and no where near normal? On what planet does that make sense?<br />
<br />
Planet Pink Panther?</div>
FAO-OPINIONhttp://www.blogger.com/profile/11086590490267067973noreply@blogger.com0tag:blogger.com,1999:blog-2763460351111948732.post-72680035180960720932016-02-08T16:01:00.002-05:002016-02-08T16:01:19.086-05:00Yellen to testify twice this week- be prepared <div dir="ltr" style="text-align: left;" trbidi="on">
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<b><span style="font-size: 14.0pt; mso-bidi-font-size: 12.0pt;">Yellen to testify twice<o:p></o:p></span></b></div>
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<b><span style="font-size: 14.0pt; mso-bidi-font-size: 12.0pt;">It went so nice she did it twice? Not likely…<o:p></o:p></span></b></div>
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<div class="MsoHeader" style="tab-stops: 3.75in 5.0in; text-align: justify;">
<span style="font-size: 11.0pt; mso-bidi-font-size: 12.0pt;">The Fed Chairman’s twice yearly
testimonies one set of two testimonies before the Senate Banking Committee and
the other before the House Financial Services Committee, is a legacy of the old
Humphry-Hawkins legislation. The Fed
reports twice-yearly to each of these committees usually in testimonies that are
back-to-back or nearly so, one early in the year, the other after mid-year.
This week they will be on Wednesday and Thursday<o:p></o:p></span></div>
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<div class="MsoHeader" style="tab-stops: 3.75in 5.0in; text-align: justify;">
<span style="font-size: 11.0pt; mso-bidi-font-size: 12.0pt;">This year there may be
fireworks. The Senators are the better-prepared while House of Representatives
has a lot of members who are only tangentially acquainted with finance and
really know far less about the Fed than they should for being members of this
‘oversight’ committee. For many of the members this is a chance to score political
points and rake the Fed over the coals for ideological issues. <o:p></o:p></span></div>
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<span style="font-size: 11.0pt; mso-bidi-font-size: 12.0pt;">This year ideology should
loom large as the Fed is being blamed for the stock market sell-off as a result
of its attempt to get back to normalcy. The argument is that the excessively
long period of excessively low rates boosted stocks and now that it is ending,
the temporary boost to stocks is going away making the Fed responsible for the
sell-off (Martin Feldstein holds this belief). To another set of Fed
detractors, the problem is simply Fed policy and raising rates at a time that
is inappropriate. To yet another group it is the Fed hiking rates at a time and
under conditions that are not the conditions that the Fed said would have to
exist in order to raise rates- to this group the Fed rate hikes have shattered
Fed credibility as inflation is too low and is nowhere near 2% and far from
being credibly on a path to 2%.<o:p></o:p></span></div>
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<div class="MsoHeader" style="tab-stops: 3.75in 5.0in; text-align: justify;">
<span style="font-size: 11.0pt; mso-bidi-font-size: 12.0pt;">There are other related issues
here that are intertwined and complicated. There is the issue of Fed
communication and Fed credibility. For example the Fed has a policy statement
and it also has member speeches. The public is confounded about which of these
represents policy. Last year a number of members (most of them, actually) had declared
that they thought interest rates would finally go up by year end. Despite the
Fed not seeming to have the conditions for a rate hike it laid out in its post
meeting policy statements all year long, it did hike rates in December.<o:p></o:p></span></div>
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<span style="font-size: 11.0pt; mso-bidi-font-size: 12.0pt;">Some in markets had cast the
event of a hike or no hike as a Fed credibility issue. Many argued that since
members were ‘expecting a hike’ if a hike were not forthcoming, Fed credibility
would suffer. Yet in a speech in Lima, Peru, before an IMF meeting late last
year, Fed Vice Chair, Stanley Fischer, had noted that Fed speeches about
expected policy actions represent member expectations - not policy. Policy is
made in the Fed policy statement released after each meeting. Apparently it is
also made in the Yellen Press Conference as it was there that Janet Yellen last
year suggested that a further tightening of the labor market could be taken as
evidence than inflation would be rising to the Fed’s goal of 2% even if
inflation itself were lagging. Fed Governor Lael Brainard had pushed back
against that notion. The making of Fed policy and its communication to the
public has become quite complicated. It seems it can no longer be singularly expressed
as the Fed’s post meeting policy statement. And that IS confusing. And it’s fair to say that even among Fed
experts you are likely to find different assessments of what the Fed is telling
us that constitutes policy. <o:p></o:p></span></div>
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<br /></div>
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<span style="font-size: 11.0pt; mso-bidi-font-size: 12.0pt;">These various descriptions
about Fed policy illustrate how confusing Fed communication has become. Let me
add to the mix another significant complication, the Fed’s so-called SEP. Four
times a year the Fed polls FOMC members and memorializes their averages and
central tendencies as well as providing a time series of the member’s
independent outlooks for selected economic variables. Even Fed officials themselves
seem to have different ways to refer to this exercise. It is not a ‘Fed’
forecast. It is the personal view of Fed members based on what each thinks the
right monetary policy should be given the conditions each member sees. As such
these scenarios provide us with some information but also add to the confusion
of where the Fed stands and how much these scenarios influence Fed policy among
other existing Fed communications. <o:p></o:p></span></div>
<div class="MsoHeader" style="tab-stops: 3.75in 5.0in; text-align: justify;">
<br /></div>
<div class="MsoHeader" style="tab-stops: 3.75in 5.0in; text-align: justify;">
<b><span style="font-size: 11.0pt; mso-bidi-font-size: 12.0pt;">Wednesday Thursday February 10 and 11, 2016<o:p></o:p></span></b></div>
<div class="MsoHeader" style="tab-stops: 3.75in 5.0in; text-align: justify;">
<span style="font-size: 11.0pt; mso-bidi-font-size: 12.0pt;">Against this background
Yellen will testify to the House and Senate Committees. In addition she will
undoubtedly be grilled over just what policy is and how it views the ongoing
state of affairs with the economy and markets. The NASDAQ is hitting its lowest
reading since June 2014 ahead of this testimony. Everybody will be tuning in on
this one. It’s a presidential election year putting the Fed even more on the
hot-seat.<o:p></o:p></span></div>
<div class="MsoHeader" style="tab-stops: 3.75in 5.0in; text-align: justify;">
<br /></div>
<div class="MsoHeader" style="tab-stops: 3.75in 5.0in; text-align: justify;">
<span style="font-size: 11.0pt; mso-bidi-font-size: 12.0pt;">There is a lot here for Yellen
to defend or simply explain. These have not been the Fed’s brightest days. There
is a lot of dogma in Fed policy, too. By dogma I mean that the Fed is making
policy now for the conditions it believes will occur in the future based on its
view of the world and its view of ongoing economic progress. Policy is not reacting to or doing much for the
economy’s current needs. Martin Feldstein thinks this is just the right approach.
Is it? That question is intrinsically unanswerable at the moment because we will
need to see the future and how it pans out to know if the Fed really is doing
the right thing today. For today Fed policy is uncomfortable and has been made
with too many warts to boot. <o:p></o:p></span></div>
<div class="MsoHeader" style="tab-stops: 3.75in 5.0in; text-align: justify;">
<br /></div>
<div class="MsoHeader" style="tab-stops: 3.75in 5.0in; text-align: justify;">
<span style="font-size: 11.0pt; mso-bidi-font-size: 12.0pt;">We could see Janet Yellen
this week looking more uncomfortable than she ever has looked. The stakes
remain high. <o:p></o:p></span></div>
<div class="MsoHeader" style="tab-stops: 3.75in 5.0in; text-align: justify;">
<br /></div>
<br />
<div class="MsoHeader" style="tab-stops: 3.75in 5.0in; text-align: justify;">
<b><span style="font-size: 14.0pt; mso-bidi-font-size: 12.0pt;"> <o:p></o:p></span></b></div>
</div>
FAO-OPINIONhttp://www.blogger.com/profile/11086590490267067973noreply@blogger.com0tag:blogger.com,1999:blog-2763460351111948732.post-37919009354438565092016-02-05T17:03:00.000-05:002016-02-05T17:03:15.323-05:00The Job Report in Fed Context- Or Bull-riding <div dir="ltr" style="text-align: left;" trbidi="on">
<div class="MsoNormal">
<b>Is the show run by dogma and is the phrase 'data dependency' just for show?</b></div>
<div class="MsoNormal">
<b><i><br /></i></b></div>
<div class="MsoNormal">
<b><i>In some sense... to the Fed the jobs report means
almost nothing.</i></b><o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
What I mean by that is that Fed officials are now speaking
to us much more in 'Fed Speak' about what they expect; The new reality is what their 'model' is
telling us - and the job report simply is NOT part of their model. <o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<b>Models and tracking</b><o:p></o:p></div>
<div class="MsoNormal">
So, for the jobs report to 'MEAN SOMETHING' it has to address a Fed official with a model and throw that member's model 'off
track'. Let's just say if you have ever seen bull-riding, staying on a bull is
about as hard as throwing a model off track. Models have huge standard errors
and given the vagaries of the data a lot of things can keep an economist saying
"my model is still on track," "my model is still on track,"
"my model is still on track"...when it isn't. <o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<b>Models and Ideology</b><o:p></o:p></div>
<div class="MsoNormal">
Models of course are imbued with the ideology of their maker.
So the model also represents that ideology and since it is believed by the model's creator it also represents the prevailing dogma of its estimator. While users will tell
you that their models change and are flexible for all practical purposes that
is not true. What you have is a continually re-estimated (and re-based
model) undergoing some very minor changes each time it is run while the main characteristics stay
in place. So incoming data really have to do something spectacular to put a
model's forecast in doubt. And, since so many of these Fed members use models
for their outlook... let's remember that models really never project a
recession ahead of time. They won't see it coming... <o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<b>Models...and reality</b><o:p></o:p></div>
<div class="MsoNormal">
I fact I think they call these things models because they
are like the women on the fashion runways. The way they can wear clothes is
just a way that real people simply can't. They wear this stuff on the runway
then sell it to normal people who wonder how come this looks like this on me?
The same can be said about economic data that is claimed to look so
consistently fine within a Fed official's model, but appears quite different to
the unemployed man-on-the-street. And this is not just a case of illusion...
<o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
So as we look at the employment report, what do we see
looking through the lenses of these sorts of models?<o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
1. The unemployment rate is falling- <b>check</b> that fits
with my tightening model<o:p></o:p></div>
<div class="MsoNormal">
2. Average hourly earnings rose and are up 2.5% Yr/Yr - <b>Check</b>
that fits with my labor market tightening inflation is on track Phillips curve
is not a dead model - It is not dead! What? You buried it? DIG IT UP!! NOT Dead!!<o:p></o:p></div>
<div class="MsoNormal">
3. Jobs grew again in manufacturing and the gain was in the
top 10% of all changes in MFG jobs since jobs began to grow in this recovery. <b>Check</b>-
that fits with my, 'hey this manufacturing sector is not as bad as people say' model ...go chuck the ISM.<o:p></o:p></div>
<div class="MsoNormal">
4. The labor force participation rate rose AND the
unemployment rate still dropped- <b>Check </b>Labor market is still really
strong. The Household reports knows...Rising participation rates are the manna from
heaven we have been waiting for. There is a God and he still likes economics...<o:p></o:p></div>
<div class="MsoNormal">
5. Hours worked rose 0.4% in the month and that is real
solid/strong <b>CHECK-a-roonie</b><o:p></o:p></div>
<div class="MsoNormal">
6. The service sector slowed and its puny gain this month stands in the bottom 12% of all changes in private services jobs since jobs
began to grow in this recovery. <b>Ok... Check</b> so there is some slowing in
services but still enough job growth overall to drive the unemployment rate
lower. Still, consistent with my overall tightening model. <o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
and we could go on...but I'll stop here<o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<b>Models, jobs and context</b><o:p></o:p></div>
<div class="MsoNormal">
Above you see how easy it is to keep your view and to see
confirmation in the monthly numbers. Some things fit more seamlessly than others...As for AHE, there is minimum wage
legislation that kicks in on the first of the year requiring another batch of
wage re-boots and that will bounce wages higher. Maybe the average hourly earnings gain has some regulatory fluff in it? Job growth was still centered
in low wage industries...but also construction and manufacturing this month
-and government employment fell. The job gains in MFG are hard to fathom, they are
not present in the ISM, but there they are there in non-farm jobs, at least for now. Bad seasonal
factors? Who can say? But SOMETHING here is inconsistent... And of
course there is a job growth slowdown in January even it it is not yet a
multi-month slowing...there is a weak MFG ISM there was a sharp pullback in the
Non MFG ISM. When we try to square the employment results with other similarly
topical reports we don't get full corroboration. <o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
That should be another reason to not simply feed this gunk
into your model. Garbage in, garbage out as they say. <o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<b>Wealth and wealth (poverty) effects</b><o:p></o:p></div>
<div class="MsoNormal">
Moreover, the international signals are still weak. The
dollar has been pulled to and fro and it seems to have finally sided with the
notion that the rate hike in March may still be on. Oil is slipping, stocks fell (as of this writing anyway). The market remains a dynamic if
confused discounting mechanism. Ignore it or assert that it is disconnected from
the real economy at your own peril. There is a massive loss in wealth taking
place... IT IS REAL. As I wrote yesterday after the European Impressionist art auctions
tanked- that was real. There was less wealth supporting that market and it showed.
What's next? WHAT'S NEXT?? God help me for asking but is it...will it be real
estate? Please say NO!<o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<b>Still in the eye of the storm and it is a - GLOBAL- not just
International storm</b><o:p></o:p></div>
<div class="MsoNormal">
One problem we may have is being still in the eye of the
storm making the current data reports too-recently affected by events to have
fully reacted to them. Whatever is the case here, it is clear that there is a
lot of confusion. The Fed for now HAS NO ASSESSMENT of risk. We all are waiting for
the Yellen monetary policy testimonies (Formerly Humphrey-Hawkins) before Congress to see if the Fed's message
will change. For the reasons I express above I think it may not have changed by
much. The Fed language may be a bit more equivocal, but in all cases the Fed remains
accommodative to a rate hike in March. The Fed has been careful not to take any
action that might push that off. Perish the thought...<o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<b>Dogma IS what DOGMA DOES</b><o:p></o:p></div>
<div class="MsoNormal">
And that is why I continue to see Fed policy as based on
DOGMA. There is no reason to stick with a March rate hike. A hike has not been
promised. The economy is out of sorts. There may still be legacy strength in
the job market even as it cools...Jobs are a lagging, not a leading, variable. Challenger layoffs are up to the 10th highest
in December in the last 21 years after ranking much lower in earlier months. Jobless claims are drifting higher, the ISMs
both are weak and weakening stocks are volatile and lower overall. There are
lots of reason to be circumspect. What is so sacrosanct about getting four rate
hikes in this year? Really? Keeping that door open in the wake of this turmoil is
making the Fed look more and more like the <b>show is run by dogma</b> and that
<b>statements of being data-dependent are just for show.</b>
<o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
We will come to know the jobs report better as more months
reveal themselves. It is reasonable to think that there has been some shift.
The ISMs are saying so. January was ambiguous- something for everybody. That
does not mean we are not at a point of inflection or something more severe.<o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
Cheers <o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
I hope you find the above discussion useful. It is my
impression that it is more useful at this point than a PowerPoint full of
slides about trends that may be shifting.<o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; mso-ansi-language: EN-US; mso-bidi-language: AR-SA; mso-fareast-font-family: Calibri; mso-fareast-language: EN-US; mso-fareast-theme-font: minor-latin;">RAB</span></div>
FAO-OPINIONhttp://www.blogger.com/profile/11086590490267067973noreply@blogger.com0tag:blogger.com,1999:blog-2763460351111948732.post-50000907868321950302014-01-24T16:47:00.002-05:002014-01-24T16:48:57.884-05:00In the spot light: … CHINA and beyond<div dir="ltr" style="text-align: left;" trbidi="on">
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<br />
<div class="MsoNormal" style="text-align: justify;">
<b>China and beyond...</b></div>
<div class="MsoNormal" style="text-align: justify;">
I still think that China is one
of the most mis-analyzed countries in the world. It goes back to Richard Nixon
who “opened China” and excited entrepreneurs around the world who dreamed of
selling just one item to everybody in China and getting rich. How did that work
out?<span style="mso-spacerun: yes;"> </span>China was not that kind of place.
The Chinese were poor; the Chinese were not going to buy anything from you. The
Chinese were going to work and sell things to you. Capital around the world was
going to locate in China. Chinese workers would make things, take your job and
sell things to you, lending you the money to buy from them and to get into deep
debt at the same time. That is the fact it was not Nixon’s dream.</div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
Freak trade</div>
<div class="MsoNormal" style="text-align: justify;">
This is the great paradox of
China that no one seems to have grasped. Entrepreneurs in America now think
it’s fair game to pick up a factory and re-locate in China displacing workers in
the United States and producing at cheaper prices overseas. This game works if
the international trade game is fair. We have a watchdog organization that took
over from GATT (The General Agreements on Tariffs and Trade), an organization
called the WTO to enforce free trade rules.<span style="mso-spacerun: yes;">
</span>But, in this new regime, no one looks at exchange rates. In this new
regime no one minds persisting and excessive current account deficits or
surpluses. So in this game currencies get misaligned and trade occurs over long
periods -at persistently misaligned exchange rates. That is NOT free trade: its
freak trade.</div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
China, of course, has been one of
the main contributors to the international trade game played on this uneven
ground. Even though China is a large developing nation, during the period when
it developed and attracted huge capital flows from abroad it oddly ran
persistent current account surpluses and built up gigantic foreign-exchange
reserves. This is a country that was supposed to be trying to develop. Instead
of using its resources to improve the lot of its people it simply piled up
money at the central bank. And, as an example of the kind of development it
encouraged, the proportion of consumption in GDP fell dramatically. China was
interested in increasing its share of world output. It was completely uninterested
in improving the welfare of its people. It kept its exchange rate too low. It
paid its workers badly. It polluted and violated international law.</div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
Because of its low costs all was
forgiven and China became a Nirvana for firms looking to cut costs and become
more competitive. But don’t mistake this for something that it’s not. This was
not free trade. This kind of investment is not fair under the rules of
international trade. Since the exchange rates were ‘cooked’ trade was not
occurring under optimal free trade conditions –as if I have to point that
out…but I do..</div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
In the chart below we show the US
current account deficit as a percentage of US GDP. In it you can see that after
the 1980s something rather dramatic happens with US trade. Prior to that time recessions
put the US current account into surplus. The 1991 sharp and brief US current
account surplus was the last that we have seen. Because of China and other
countries that sought export-led growth and pegged their currencies to the
dollar at rates that were advantageous to them, the US was no longer able to
run current account surpluses under any situation. Even in the dear dark days
of the financial crisis when the current account contracted sharply as US
demand dried up… the deficit as a percent of GDP remained around 2.5% to 3% - a
figure we used to think of as huge..</div>
<div class="MsoNormal" style="text-align: center;">
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" width="400" /></div>
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<br /></div>
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During this period when the US
was running large and persistent current account deficits, it’s important to
note that the exchange rate system was not operated to dissipate the US
deficits. Nor did they operate to dissipate the Chinese surpluses. Nor did they
dissipate the surpluses in any other country that had employed the technique of
export-led growth. Exchange rates were controlled and since the US is the
center country in the system, every other country picked its exchange rate
against the US. Countries have been willing to give up improved purchasing
power in order to gain improvements in output and export penetration. And, this
has thrust the US into deeper debt and made the US less rich, less profitable
and less competitive.</div>
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<br /></div>
<div class="MsoNormal" style="text-align: justify;">
The financial crisis ruined much
of the US economy and other economies as well and made it clear that they could
no longer create the kind of growth they had in the past. China, whose economy
is so big and dependent on exports, suddenly was stymied. Its never-ending
export growth game had, in fact, come to an end.</div>
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<br /></div>
<div class="MsoNormal" style="text-align: justify;">
Because of the realization that
the Western world could no longer absorb the huge flow of Chinese exports,
because the US deficits were too big and its debt was too high and unemployment
rates had skyrocketed, China was forced to look internally for its growth
solution. This brings China to where it is today.</div>
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<br /></div>
<div class="MsoNormal" style="text-align: justify;">
China has been engaged in this
broad game of structural change. No longer able to achieve its growth targets
by siphoning off domestic demand abroad, China now has to develop its own
domestic demand and this is going to change the game dramatically. In order for
China to develop its domestic demand it’s going to have to pay its workers. If
you don’t pay your workers they don’t have any free income to generate any
domestic demand. And if China pays its workers it is going to lose his
competitive advantage. And this is the game that has been in progress in many
other countries in Asia. Recently others in Asia have become lower cost centers
than China. This also explains why China’s growth targets are harder to make,
because the game has changed and China is trying to develop demand at home and
its own service sector.</div>
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<br /></div>
<div class="MsoNormal" style="text-align: justify;">
Because of this, I don’t see the
weakness in China, a weakness that is represented by some minor backtracking in
its manufacturing purchaser index, as meaningful to the global economy. China
is not the export dependent juggernaut that it once was. And so a backing off
of China’s growth does not reflect the weakening in global growth. Instead, it
reflects an irregularity in China’s ability to develop its own domestic demand.</div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
Even now as we have been forced
into this change by events beyond our control (or at least by events we chose
not to control) we have still not re-balance the world economy. Germany now has
the largest current account surplus in the world. When Germany grows, because
it’s the most important economy in the European Monetary Union, its growth
boosts the EMU growth rate; but its growth is not necessarily helping Germany’s
fellow EMU members. In fact German growth may be a detriment to growth in its
fellow EMU members as a highly competitive German economy swoops in to take the
modicum of domestic demand that is there in fellow EMU nations, leaving less
for domestic companies in its fellow EMU countries.</div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
How did this happen?</div>
<div class="MsoNormal" style="text-align: justify;">
Under a system of fixed exchange
rates based on the gold standard, a persistent current account deficit causes a
country to lose gold. The US would never have allowed China to amass the kind
of surpluses it did were we on the gold standard– especially the bilateral surpluses
against the United States. Under that system the US would have raised its
interest rates to keep capital at home and that hike would’ve slowed the
economy and slowed the demand for foreign goods, reduced domestic inflation and
improved US competitiveness. US growth and development would’ve been restrained
in order to keep our gold reserves intact. There likely would’ve been other
political developments to try to restrain China (and others) from predatory
export practices. But under a fixed rate system their rates would also be
FIXED.</div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
Under a fluctuating exchange rate
system, a country that builds a surplus should see its currency appreciate, with
that currency rise eventually undercutting its competitiveness and causing its surplus
to be reduced, leaving the country with higher purchasing power. The deficit
country would see its currency drop; that would cause imports to be more
expensive and exports to be cheaper. Those forces would help to equilibrate a current
account deficit. These things simply haven’t happened because exchange markets
are BROKEN.</div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
If you say bad things about free
trade, they revoke your PhD in economics. As a result everyone has been a
cheerleader for this expansion in world trade. However, if you look at what has
happened during this period you find that trade did not occur under the
conditions we associate with free trade. Exchange rates did not behave the way
they would under a system of market-determined exchange rates. Current account
positions do not conform with the ongoing economic conditions in various
countries. Current account surpluses and deficits persisted for periods far
longer than one would expect if the system of exchange rates were market
determined. Surplus country currencies did not rise. Deficit country currencies
did not fall. There were no ‘equilibrating forces.’ And as a result of this
China and some other Asian countries became the persistent low-cost providers
and capital accumulated there instead of accumulating in other places. As a
result China and other Asian countries have developed remarkably. Some of the
more traditional core developed countries have been starved of the kind of
investment that they should have been able to attain. They now suffer lower
growth rates as a result.</div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
The impact of these export flows
and capital investment shifts was blunted at first because as China exploded with
growth, it also invested funds abroad in its target export markets.<span style="mso-spacerun: yes;"> </span>The free availability of capital covered up
the erosion in US competitiveness. But eventually the excess capital that was
floating around in the US got into the inexorable mess it was bound to find. There
was way too much capital in the United States and not enough productive
investments to absorb it. Crazy mortgages allowed unqualified buyers to
purchase lavish properties, at least for a while. </div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
Aftermath</div>
<div class="MsoNormal" style="text-align: justify;">
What we are left with in the
aftermath is an economy that is no longer very competitive. The US has a very
high rate of unemployment and we have workers lacking the skills that they need
to compete in the global economy. Our educational system has gone to pot
because we care more about preserving the jobs of teachers rather than making
sure that they really educate students. Our political parties support these
various interest groups and attract contributions from corporations that want
to continue to place the factories overseas where the labor costs are still
cheaper – while that game is still in play.</div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
Democrats and Republicans would
prefer to point fingers of blame at one another rather than to look in the
mirror and place the blame where it belongs. We have a bipartisan system and
we’ve got into this mess under a combination of Democrat and Republican
administrations. To me it’s a clear signal that our economy has been failed by
our leaders. That 47% of the people who file federal tax returns and pay no
federal income tax is a sure sign this economy is not generating the kind of
jobs it used to. And with our dependence on buying goods from abroad,
stimulating demand isn’t an option since demand stimulus will only stimulate
output from overseas. What we need to do is to stimulate output United States.
That’s a much more difficult job.</div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
In part that means putting rules
in place that will keep factories here. This is not an argument for trade
restrictions or investment restriction. This is an argument to make exchange
rates fair. This is an argument to make sure the countries that run surpluses
do not run them forever. This is an argument to make sure that the dollar,
which is the central currency in our international trading system, is fairly
valued in all of its bilateral pairs. It’s also a warning that developing our
energy sector and reducing our current account deficit by reducing energy
imports and increasing energy exports does not by itself change any of this.
The US non-oil trade deficit, which excludes oil and oil products from exports
and imports, is still worsening. That’s a sign of still fading US
competitiveness.</div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
It’s a lot easier to find boogie
men than it is to find solutions. In my view China has been a pariah of
international trade. It has been allowed to develop under the fiction of international
free trade and the pressure from US corporations that were looking to exploit
the cheap labor in China regardless of the cost of that on America. Even Wal-Mart,
a company that has no operations in China has continued to seek a strong dollar
because it’s wanted to access cheap goods in the Chinese market to sell to its
customers. </div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
The political pressure for this continues.
US businessmen see it as their right and responsibility to save money by moving
capital equipment into China to take advantage of low costs. But now China
labor costs arising. And if China’s exchange rate also rose to reflect its
wealth and undercut this competitiveness we would find China a much less
attractive place to be. If China plays by the rules its ability to continue this
game will be limited. And now circumstances are forcing China to play this game
differently. And so it may be that the competitive pressures on US firms in the
future will be less but we still have the legacy of past investment in China to
deal with.</div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
When you look at the US economy
you see jobs as a problem. But jobs do not spring forth out of the head of
Zeus. They come from businesses, businesses that locate in United States,
expand or develop de novo when circumstances warrant. When it comes to US competitiveness
no one has been minding the store. Our two political parties have been much
more interested in satisfying the global interests of US multinational
corporations than forcing them to pay attention to their obligations at home.
Having pressured China earlier on its exchange rate could have – could have,
but did not – change the way corporate America saw its incentives. Once Nixon
opened the China firms viewed China as a safer place to do business; the new
game was on. </div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
When Japan developed and when its
exchange rate was forced higher Japan naturally sought to extend its factories
into the Asian region around it, where it felt comfortable. US firms did not
have the same comfort in that area. But eventually as the area developed, their
comfort level improved.</div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
Previously, US interests had been
focused on Latin America. Here’s a revelation: Latin America is not Asia. In
Latin America consumers love to spend money. Business was much more lax and
less ready to be highly productive. When you lent money to Latin America demand
boomed. When you lent money in Asia supply boomed… and American jobs
disappeared.</div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
Economics is largely about
understanding how these large systems interact with one another. And forgetting
the attributes of free trade and using that name to justify so much, does a
great injustice to the US economy and to the science of economics. We still
have no foreign-exchange police. It’s clear that markets do not perform this
function. In a country like China the currency is not market-determined. And so
the exchange rate result that you get needs to be part of the bargaining
process- not part of the unilateral fiat. </div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
To me China is simply an example
of something gone very wrong. And even for the Chinese it has not gone terribly
right. China has amassed a great deal of capital. Its workers are not
well-paid. Its consumption is a small part of its GDP. Its property right
enforcement is suspect. Piracy is commonplace. Trade-marks are not protected.
Its investment capital has been poorly put to work in public structures as
buildings and bridges are constantly collapsing. China is mired in terrible
pollution. China is a classic example of a country that has developed far too
fast. Its banks are banks in name only and God only knows the value of the stuff
on their books that they call assets.</div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
But China’s supercharged growth
phase is over. In America there is a new richness in energy that’s been
discovered and possibly can be harnessed to recharge the economy. However, it
also can be misused. And it can be developed in a way that will make it seem as
though the economy has been righted even when it hasn’t. I don’t see anything
in the political sphere that makes me think that our politicians have learned
any lesson or that they are any different than they have been... I don’t see
that they are being better-policed by the public to pursue the public interest
instead of their own personal interests.</div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
I am concerned that the economy
that produces jobs for half its people that are of such low quality that taxpayers
can’t afford to pay federal income tax is an economy that has failed. </div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
I am further concerned that when
an economy fails this way someone looks to rearrange the deck chairs on the
Titanic by increasing taxes on those who have been successful. </div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
For a time, there is probably no
other choice. But as a tactic it undermines capitalism just as surely as having
jobs that are too poor for half the population undermines capitalism. If capitalism
is not fair to the people in its country the system will not endure. You can
look across America at cities that have been governed by Democrats persistently
or by Republicans persistently and you will find that poverty has hardly been
eliminated. Some states have huge debt bills and as far as I can see little to
show for it.</div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
We need to rethink what we’re
doing. We need to live within our means. The same old same old is not going to
cut it. That China will be less of a competitor in this new environment is only
a small bit of solace. The bigger challenge is for us at home. We have
challenges of fairness, of equal opportunity and of improving our
competitiveness. And this is not some sop to ethics. It’s a realization that if
an economic system isn’t fair, it can’t last and it won’t last. And we already
have the trappings of a system against which people are rebelling.</div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
Capitalism is a very subtle
thing. People need to sign onto it and believe in it in order for it to work.
You don’t think about all the little things that make it work; there many
things you simply accept. And when you stop accepting these things, you no
longer see the system as fair and you stop obeying its rules. And that’s when
things get out of hand. </div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
<div class="MsoNormal" style="text-align: justify;">
I’m worried that were getting
close to this boundary. The tax share of GDP is already historically high and
yet we’ve got Obamacare in the works and we have an aging population that is
going to put even more strain on government finances. The solution is not more
taxes or higher taxes on the higher income members of the population. The
solution is better productivity, more growth, and more jobs. The solution is
better education. And these are solutions that will take a great deal of time
to implement. And so I’m concerned that that figure that Mitt Romney uncovered
in his lost bid for the presidency is already at 47%. What’s next?</div>
<div class="MsoNormal" style="text-align: justify;">
<br /></div>
</div>
FAO-OPINIONhttp://www.blogger.com/profile/11086590490267067973noreply@blogger.com2tag:blogger.com,1999:blog-2763460351111948732.post-71173475196709835892013-07-31T18:42:00.001-04:002013-07-31T18:42:59.879-04:00Fed policy statements compared-June and July <div dir="ltr" style="text-align: left;" trbidi="on">
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The chart below is the most important new piece of information we had on the
economy in quite a long time. Released today ahead of the FOMC meeting or as it
was in progress. It shows that the economy was relatively stronger in 2012 than
we thought and that the deceleration in the 2013 is much more severe than what
we thought. As such it would be surprising if the Fed did not become more
concerned about its projecting that the job market is going to do better since
over the last 24 months private sector job growth has averaged 196,000 persons
per month. When the economy was going 3% that made sense, now that the economy’s
year-over-year growth rate is under 1.5% it would be prudent to question if such
job market growth can continue. Yet, the Fed did not go there today. In fact,
it seems to have gone in the opposite direction.</div>
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<br /></div>
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width="320" /></div>
<div class="MsoHeader" style="tab-stops: 3.75in 5.0in; text-align: justify;">
<br /></div>
<div class="MsoHeader" style="tab-stops: 3.75in 5.0in; text-align: justify;">
Economists
are being raked over coals frequently for their microscopic parsing of the
changes the Federal Reserve statements. However, when the Fed makes the kind of
very small changes from statement to statement you’d be foolish to not realize
that the Fed is trying to communicate something to us. In the second paragraph
the Fed makes what appears to be an extraordinarily small change in language
which seems to have a relatively large effect on what the paragraph means.</div>
<div class="MsoHeader" style="tab-stops: 3.75in 5.0in; text-align: justify;">
<br /></div>
<div class="MsoHeader" style="tab-stops: 3.75in 5.0in; text-align: justify;">
<span style="mso-spacerun: yes;"> </span>The Fed used to say that it anticipates
inflation will grow ‘<span style="color: #548dd4;">at or below its 2% objective’</span>.
However the Fed has been under pressure from James Bullard who dissented last
meeting but did not dissent at this meeting. He had urged the Fed to not ignore
the inflation undershoot and risk from it. So interestingly, this month the Fed
changed the language, it now reads as follows:<span style="color: red;"> The
Committee recognizes that inflation persistently below its 2 percent objective
could pose risks to economic performance, but it anticipates that inflation
will <u>move back toward its objective over the medium term. </u></span></div>
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<br /></div>
<div class="MsoHeader" style="tab-stops: 3.75in 5.0in; text-align: justify;">
I have to
say I find this change disturbing. The Fed seems to have changed its forecast
or assessment of the economy for the sake of creating language that removes
Bullard’s dissent. The Fed language now says that it realizes that inflation
persistently below 2% could pose an economic risk, acknowledging the criticism
that Bullard launched at the last meeting, but sets it aside by saying that it
expects inflation will move back towards its objective over the medium-term. That
does take-care Bullard’s criticism and also the concerns and I had registered
in line with Bullard’s criticism at the last meeting. However, it’s completely
different from saying that it expects inflation to remain at or below 2%, also
over the medium-term…which is what the passage used to say. Which is it? Does
the Fed really believe inflation will stay below 2% or go back up to 2%?</div>
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<br /></div>
<div class="MsoHeader" style="tab-stops: 3.75in 5.0in; text-align: justify;">
I believe
this is the first time in a long time that we’ve caught the Fed red-handed, with
hand in the cookie jar. The Fed has just changed some language and it’s totally
changed the way it claims that it sees the evolution of inflation. This plays
into our worst fears: that the FOMC policy statement is a statement intended to
justify whatever policy the Fed wants to implement rather than laying out a
true roadmap that it intends to follow and to be governed by. That in fact was
essentially the gist of the Bullard criticism last meeting.</div>
<div class="MsoHeader" style="tab-stops: 3.75in 5.0in; text-align: justify;">
<br /></div>
<div class="MsoHeader" style="tab-stops: 3.75in 5.0in; text-align: justify;">
In the
fifth paragraph the Fed makes the following change in language which is an
extremely small tweak with another big impact: “<b style="mso-bidi-font-weight: normal;">To support continued progress toward maximum employment and price
stability, the Committee <span style="background: yellow; color: red; mso-highlight: yellow;">today reaffirmed its view</span> that a highly accommodative stance of
monetary policy will remain appropriate for a considerable time after the asset
purchase program ends and the economic recovery strengthens</b>”. </div>
<div class="MsoHeader" style="tab-stops: 3.75in 5.0in; text-align: justify;">
<br /></div>
<div class="MsoHeader" style="tab-stops: 3.75in 5.0in; text-align: justify;">
The
highlighted yellow language replaces the word “<span style="color: #548dd4;">expects</span>”.
Why would I make a big deal out of that? Of course it is a big deal! It’s a big
deal because the Fed made the change. Look at how little of this statement was
altered! Why would they make THAT change? Clearly the Fed thinks it is significant
to say that it ‘reaffirmed its view’ rather than to say that it ‘expects’. <b style="mso-bidi-font-weight: normal;">The Fed apparently now has a view that does
not reflect its expectation!</b> And, oh, does that make MY head hurt. I really
don’t want to haul out my dictionary or find someone with a PhD in English to
carefully ‘Splain’ to me like Ricky might to Lucy what this means. It seems clear
that the Fed has had another FOMC mud-wrestling match that has resulted in the
English language being taken to the mat. And now it appears that there is more
dissent within the Fed about keeping this highly accommodative stance of policy
for considerable time after the asset purchase program ends. Why else would
they change the language? </div>
<div class="MsoHeader" style="tab-stops: 3.75in 5.0in; text-align: justify;">
<br /></div>
<div class="MsoHeader" style="tab-stops: 3.75in 5.0in; text-align: justify;">
<b style="mso-bidi-font-weight: normal;">Does this mean that forward guidance is
being attacked from within</b>? What else could it mean? Isn’t this view the
whole notion behind the extended accommodative forward guidance the Fed has?</div>
<div class="MsoHeader" style="tab-stops: 3.75in 5.0in; text-align: justify;">
<br /></div>
<div class="MsoHeader" style="tab-stops: 3.75in 5.0in; text-align: justify;">
Put on
your thinking cap! Something is afoot at the Fed. Policy is hanging by the
thinnest threads of hair splitting verbiage. And you thought that you needed to
know ‘math’ to be an economist! A PhD in English might help- or not. It makes
me wonder if Plosser, George, Fisher and Lacker are drawing support from other
members of the committee. Also I wonder if Bernanke is losing influence now
that he is being made a lame duck by Obama. This, of course is not evidence of
Yellen gaining since this is a shift away from her desired policy. I wonder if
Yellen is being handcuffed by the fact that she is under the microscope as a
potential Bernanke successor?<span style="mso-spacerun: yes;"> </span>The Fed,
and its balance of power, appears to be in play.</div>
<br />
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Minutes from June 19 2003 Meetings</div>
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<span style="font-size: 10.0pt;">Information received since
the Federal Open Market Committee met in May suggests that economic activity
has been expanding at a moderate pace. Labor market conditions have shown
further improvement in recent months, on balance, but the unemployment rate
remains elevated. Household spending and business fixed investment advanced,
and the housing sector has <s>strengthened further</s>, but fiscal policy is
restraining economic growth. Partly reflecting transitory influences, inflation
has been running below the Committee's longer-run objective, but longer-term
inflation expectations have remained stable.</span></div>
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<span style="font-size: 10.0pt;">Consistent with its statutory
mandate, the Committee seeks to foster maximum employment and price stability.
The Committee expects that, with appropriate policy accommodation, economic
growth will proceed at a moderate pace and the unemployment rate will gradually
decline toward levels the Committee judges consistent with its dual mandate.
The Committee sees the downside risks to the outlook for the economy and the
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<span style="font-size: 10.0pt;">To support a stronger
economic recovery and to help ensure that inflation, over time, is at the rate
most consistent with its dual mandate, the Committee decided to continue
purchasing additional agency mortgage-backed securities at a pace of $40
billion per month and longer-term Treasury securities at a pace of $45 billion
per month. The Committee is maintaining its existing policy of reinvesting
principal payments from its holdings of agency debt and agency mortgage-backed
securities in agency mortgage-backed securities and of rolling over maturing
Treasury securities at auction. Taken together, these actions should maintain
downward pressure on longer-term interest rates, support mortgage markets, and
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<span style="color: black; font-size: 10.0pt;">The
Committee will closely monitor incoming information on economic and financial
developments in coming months. The Committee will continue its purchases of
Treasury and agency mortgage-backed securities, and employ its other policy
tools as appropriate, until the outlook for the labor market has improved
substantially in a context of price stability. The Committee is prepared to
increase or reduce the pace of its purchases to maintain appropriate policy
accommodation as the outlook for the labor market or inflation changes. In
determining the size, pace, and composition of its asset purchases, the
Committee will continue to take appropriate account of the likely efficacy and
costs of such purchases as well as the extent of progress toward its economic
objectives.</span></div>
<div style="background: white;">
<br /></div>
<div style="background: white;">
<span style="color: black; font-size: 10.0pt;">To
support continued progress toward maximum employment and price stability, the
Committee <s><span style="background: yellow; mso-highlight: yellow;">expect</span></s><span style="background: yellow; mso-highlight: yellow;">s</span> that a highly
accommodative stance of monetary policy will remain appropriate for a
considerable time after the asset purchase program ends and the economic
recovery strengthens. In particular, the Committee decided to keep the target
range for the federal funds rate at 0 to 1/4 percent and currently anticipates
that this exceptionally low range for the federal funds rate will be
appropriate at least as long as the unemployment rate remains above 6-1/2
percent, inflation between one and two years ahead is projected to be no more
than a half percentage point above the Committee's 2 percent longer-run goal, and
longer-term inflation expectations continue to be well anchored. In determining
how long to maintain a highly accommodative stance of monetary policy, the
Committee will also consider other information, including additional measures
of labor market conditions, indicators of inflation pressures and inflation
expectations, and readings on financial developments. When the Committee
decides to begin to remove policy accommodation, it will take a balanced
approach consistent with its longer-run goals of maximum employment and
inflation of 2 percent.</span></div>
<div style="background: white;">
<span style="color: black; font-size: 10.0pt;">Voting
for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C.
Dudley, Vice Chairman; Elizabeth A. Duke; Charles L. Evans; Jerome H. Powell;
Sarah Bloom Raskin; Eric S. Rosengren; Jeremy C. Stein; Daniel K. Tarullo; and
Janet L. Yellen. Voting against the action was James Bullard, who believed that
the Committee should signal more strongly its willingness to defend its
inflation goal in light of recent low inflation readings,</span><span style="color: black; font-family: "Arial","sans-serif"; font-size: 10.0pt;"> and
Esther L. George, who was concerned that the continued high level of monetary
accommodation increased the risks of future economic and financial imbalances
and, over time, could cause an increase in long-term inflation expectations.</span></div>
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Minutes from July 31, 2013 Meeting </div>
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<span style="font-size: 10.0pt;">Information received since
the Federal Open Market Committee met in June suggests that economic activity
expanded at a modest pace during the first half of the year. Labor market
conditions have shown further improvement in recent months, on balance, but the
unemployment rate remains elevated. Household spending and business fixed
investment advanced, and the housing sector has <span style="color: red;">been
strengthening</span>, <span style="color: red;">but mortgage rates have risen
somewhat and fiscal policy is restraining economic growth. </span>Partly
reflecting transitory influences, inflation has been running below the
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<span style="font-size: 10.0pt;">Consistent with its statutory
mandate, the Committee seeks to foster maximum employment and price stability.
The Committee expects that, with appropriate policy accommodation, economic
growth will pick up from its recent pace and the unemployment rate will
gradually decline toward levels the Committee judges consistent with its dual
mandate. The Committee sees the downside risks to the outlook for the economy
and the labor market as having diminished since the fall. <span style="color: red;">The Committee recognizes that inflation persistently below
its 2 percent objective could pose risks to economic performance, but it
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medium term.</u></span></span></div>
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<span style="font-size: 10.0pt;">To support a stronger
economic recovery and to help ensure that inflation, over time, is at the rate
most consistent with its dual mandate, the Committee decided to continue
purchasing additional agency mortgage-backed securities at a pace of $40
billion per month and longer-term Treasury securities at a pace of $45 billion
per month. The Committee is maintaining its existing policy of reinvesting
principal payments from its holdings of agency debt and agency mortgage-backed
securities in agency mortgage-backed securities and of rolling over maturing
Treasury securities at auction. Taken together, these actions should maintain
downward pressure on longer-term interest rates, support mortgage markets, and
help to make broader financial conditions more accommodative.</span></div>
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<span style="font-size: 10.0pt;">The Committee will closely
monitor incoming information on economic and financial developments in coming
months. The Committee will continue its purchases of Treasury and agency
mortgage-backed securities, and employ its other policy tools as appropriate,
until the outlook for the labor market has improved substantially in a context
of price stability. The Committee is prepared to increase or reduce the pace of
its purchases to maintain appropriate policy accommodation as the outlook for
the labor market or inflation changes. In determining the size, pace, and
composition of its asset purchases, the Committee will continue to take
appropriate account of the likely efficacy and costs of such purchases as well
as the extent of progress toward its economic objectives.</span></div>
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<span style="font-size: 10.0pt;">To support continued progress
toward maximum employment and price stability, the <span style="color: red;">Committee
today reaffirmed its view</span> that a highly accommodative stance of monetary
policy will remain appropriate for a considerable time after the asset purchase
program ends and the economic recovery strengthens. In particular, the
Committee decided to keep the target range for the federal funds rate at 0 to
1/4 percent and currently anticipates that this exceptionally low range for the
federal funds rate will be appropriate at least as long as the unemployment
rate remains above 6-1/2 percent, inflation between one and two years ahead is
projected to be no more than a half percentage point above the Committee's 2
percent longer-run goal, and longer-term inflation expectations continue to be
well anchored. In determining how long to maintain a highly accommodative
stance of monetary policy, the Committee will also consider other information,
including additional measures of labor market conditions, indicators of inflation
pressures and inflation expectations, and readings on financial developments.
When the Committee decides to begin to remove policy accommodation, it will
take a balanced approach consistent with its longer-run goals of maximum
employment and inflation of 2 percent.</span></div>
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<span style="font-size: 10.0pt;">Voting for the FOMC monetary
policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice
Chairman; James Bullard; Elizabeth A. Duke; Charles L. Evans; Jerome H. Powell;
Sarah Bloom Raskin; Eric S. Rosengren; Jeremy C. Stein; Daniel K. Tarullo; and
Janet L. Yellen. Voting against the action was Esther L. George, who was
concerned that the continued high level of monetary accommodation increased the
risks of future economic and financial imbalances and, over time, could cause
an increase in long-term inflation expectations.</span></div>
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FAO-OPINIONhttp://www.blogger.com/profile/11086590490267067973noreply@blogger.com3tag:blogger.com,1999:blog-2763460351111948732.post-4974760218905963152013-07-30T08:38:00.001-04:002013-07-30T17:44:38.334-04:00Why is policy being run by morons and Bozos? Yes bipartisan BOZOS no innocents here <div dir="ltr" style="text-align: left;" trbidi="on">
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<span style="font-size: small;">The real policy dilemma</span></div>
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<span style="font-size: small;"><br /></span></div>
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<span style="font-size: small;">When you follow policy issues and hear someone say were going to talk about the real policy dilemma you probably think in this environment it's going to be something critical about the Federal Reserve chairman selection process. That process has devolved into a name-calling credential-comparing circus largely involving Larry Summers and Janet Yellen. There's very little in the way of substance other than the name-calling that brands Summers is an egotist and Yellen as a policy dove. Could their whole careers really be boiled down to be as simple as that? And while that is something that bothers me it's not my point.</span></div>
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<span style="font-size: small;"><br /></span></div>
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<span style="font-size: small;">So next, you probably think it's about fiscal policy. Long-term fiscal policy remains a mess current tax collections have stepped up causing the recent budget deficit to shrink more than expected and as a result the President is no longer aiming at any kind of budget reduction. The Republicans are still concerned about the long run budgetary consequences. While I am concerned about fiscal policy and I think the long run is a mess, that's not the issue I'm after either.</span></div>
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<span style="font-size: small;"><br /></span></div>
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<span style="font-size: small;">I'm after the neglected and not well understood problem of why the economy has not been able to get a real recovery going. And, curiously enough, that's not substantially about either fiscal policy or monetary policy.</span></div>
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<span style="font-size: small;"><br /></span></div>
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<span style="font-size: small;">What it's about is US- United States' -<span class="Apple-converted-space"> </span><b>competitiveness.</b></span></div>
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<span style="font-size: small;"><br /></span></div>
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<span style="font-size: small;">I am more than a little concerned that people including some economists are focused on the energy finds in America and think that this will be the basis for an improvement in our manufacturing sector and in our competitiveness. I'm quite concerned that if we are able to develop this energy-find and that if it does help to lower energy costs, that will simply compensate for the higher costs of doing business we have elsewhere. Then, when our energy largess runs off we will find that we haven't addressed the underlying problem at all. And that's the real problem: why we are not competitive.</span></div>
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<span style="font-size: small;"><br /></span></div>
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<span style="font-size: small;">Developing domestic energy has contributed to some improvement in the US balance of payments. As the economy has grown we have not sucked in as many oil imports as we would have without the improvement in domestic energy production. But our trade deficits remain large. They are large as a percent GDP. We are still looking at better than 30 years since the US has had any kind of a significant surplus on our current account.</span></div>
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<span style="font-size: small;">How will we ever get back to surplus or balance?</span></div>
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<span style="font-size: small;">Looking at a nation's welfare, monetary economists look at the terms of trade. The terms of trade refers to the ratio of export to import prices. That ratio reflects the terms under which trade is conducted. The higher are export prices relative to import prices the more export earnings are able to pay for our imports. On the other hand when import prices rise relative to export prices imports become relatively more expensive and are an added burden on the economy's balance of payments.</span></div>
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<span style="font-size: small;">But that only looks at the price ratios. And what's interesting is that in order for exports to be competitive prices have to be low compared to global competition. So while we might want export prices high because they represent increased purchasing power from the exports we sell, set export prices too high we might not sell anything.</span></div>
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<span style="font-size: small;">In a nutshell that describes the allure as well as the peril of a too-strong dollar. Over the last 20 to 30 years, as Asian economies have hyper-developed, they have focused more on using exports as way to stimulate domestic economic growth. They have focused more on the potential to increase export sales, and export sector employment because of increased export sector output than they have on trying to get the most for the exports that they sell. This is somewhat less than profit maximizing behavior but you can see the tremendous growth it has fueled in Asia as country after country has tapped into the domestic demand in the United States and in Western Europe. Instead, of having to balance their own economy with supply and demand they have been able to hook their export stream into one of our able-bodied arms and drained off some of our lifeblood like a donor participating in a blood drive at the Red Cross.</span></div>
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<span style="font-size: small;">Only have more or less watched this happen and let it go. Republicans have watched it. Democrats have watched it. No one has really been too worried about it. American companies, instead of moving out of the industrial North into the right to work states in the South, or, instead of migrating jobs south of the border to Mexico, have picked up factories lock stock and barrel and located them in Asia where wages are even lower. And because these corporations are powerful I think they've had a substantial effect of keeping American politicians quiet. </span></div>
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<span style="font-size: small;">This is been done in a system that has masqueraded under the mislabel of floating exchange rates buttressing free trade.</span></div>
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<span style="font-size: small;">Exchange rates in fact have been very controlled by the countries in the pursuit export led growth. Asian countries have stockpiled foreign-exchange reserves which is the price they have had to pay-to keep buying excess dollars-in order to keep their currencies from running up as they sold more to the US than they bought from it. And when exchange rates are determined by governments rather than by markets you do not get a free trade result.</span></div>
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<span style="font-size: small;">We can see that clearly in the United States where current account deficits, raw deficits, or deficits relative to GDP continue to be huge and surpluses are scarcer than hens' teeth. </span></div>
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<span style="font-size: small;">This is not a result that emanates from free trade. This is not a result you expect if you have freely fluctuating exchange rates. This is a result you would never expect if you had a gold standard and if the countries that ran persistent current account surpluses were amassing gold reserves that they were taking from you - YOU!. Could you imagine the US allowing China, Korea, Taiwan, and earlier, Japan to have accumulated so much of our gold under a fixed exchange rate system?</span></div>
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<span style="font-size: small;">Under a fluctuating exchange rate system current account balance is supposed to be restored as a country were running a surplus is supposed to see its currency rise. The country running the deficit is supposed to see its currency fall. This more or less automatic market mechanism has been undercut as export oriented countries have continued to buy the dollars to keep the dollar stronger than it should be so that they can maintain a competitive advantage and continue to pump their export goods into the US market.</span></div>
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<span style="font-size: small;">Economists have largely been blasé about this effect. Many have argued that were getting real goods and the exporters are getting only pieces of paper. True. But these pieces of paper represent payments that we owe to them while our exports are nowhere close to earning the revenue we need to pay them back. </span></div>
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<span style="font-size: small;">No one seems focused on this problem. No one seems to be aware that it even exists. However, I'm very concerned that it is what's at the bottom of the growing inequality in America. And that's a big problem because the President is talking about how he is trying to fashion policy initiatives to solve the problem and one of the things that he wants to do is to draw targets on the back of rich people. Does that even make sense?</span></div>
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<span style="font-size: small;">I international trade there is a very elegant two-factor model called the Heckscher-Olin model that describes comparative advantage and other conditions tha arise when nations trade. Trading nations use two inputs, call them labor and capital, to create their output. One of the implications of this theory is that you'll get something called factor price equalization even if only one of the factors of production is mobile. Not both of them, just one of them. </span></div>
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<span style="font-size: small;">Factor price equalization is just what it sounds like. It means that the factor prices referring to the return to capital and the return to labor will be equalized between the trading nations under conditions of free trade even if only one of the factors of production is mobile. And we have seen how much capital has been able to flow to Asia – most recently to China – making it quite clear that capital is internationally mobile.</span></div>
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<span style="font-size: small;">It's not much of a stretch to argue that what has happened is since Nixon opened China and since China has developed and capital has poured in is that the process of factor price equalization has been set in motion. And with wages in China so low is it surprising that wages in the United States have not been rising? or tha real wages have been eroding? Or that unemployment is high and stubborn? Is it surprising that the return to less skilled labor has been held in check? Is it surprising that more skilled laborers, that entrepreneurs, that people with business talent, have been relatively better paid in a world where the pool of unskilled labor has expanded so sharply and skilled labor is relatively scarce?</span></div>
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<span style="font-size: small;">I think the President has sunk his teeth into an issue that isn't what it seems.</span></div>
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<span style="font-size: small;">Blaming rich people a.k.a. successful people for being successful is not really the issue here. I don't mean to protect those whose compensation packages have gone to the moon. But the main point here is that there has been a real wedge driven between skilled and unskilled labor by international trade and it has to do with trade rules that do not conform with the principles of free trade and with an exchange rate system that in no way supports what academic models of free trade really address or suppose. </span></div>
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<span style="font-size: small;">And because corporate America has largely learned to benefit under this system and can earn its profits either here or there, it has been effective in keeping both political parties from attacking this model. It hasn't just been the fear of attacking China that has kept politicians at bay it has been corporate America. But this model is destructive and it's doing destructive things to America and no amount of education, or, investment, or jaw boning about the rich taking advantage of the poor, is going to solve the problem. Because the problem is emanating from an economic system that is in place and that continues to pump out the same results year after year.</span></div>
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<span style="font-size: small;"><b>It's not going to stop because you elect a Democrat President. It's not going to stop because you elect a Republican President. And its not going to stop unless you elect someone who sees the problem and vows to fix it. And right now that person doesn't exist.</b></span></div>
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<span style="font-size: small;">The closest we have (had), actually is Mitt Romney who saw trade as a big problem. And although people are fond of making fun of Mr. Romney and have his indecision about whether he's a conservative or moderate his position on this issue seems to be the most enlightened one among any recent political candidate. His unearthing of the 42% figure is one of the most astonishing things in American politics that has ever been uncovered and promptly swept under the rug. </span></div>
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<span style="font-size: small;">Romney discovered and made it known that fully 42% of our population that filed income tax returns was paid so poorly that it did not pay any federal income tax. Democrats came to their defense, arguing that the people pay property taxes and sales taxes and FICA and other taxes. But at the end of the day so does everyone else. Republicans backtracked on the issue a little bit because the point seemed somewhat mean-spirited to go after people on some of the welfare programs who clearly were needy.</span></div>
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<span style="font-size: small;">But both of those reactions miss the point. The point of the 42% figure is the 42% figure! I don't glorify it; I don't disparage it. I simply look at it. What it says to me is that every politician of every color, of any partisanship that has held any office in America recently has been part of an abject failure to the American economy and people. When the economy turns out jobs that are so bad that so many people can't afford to pay federal taxes that's a travesty. It's a failure of everyone who's been in office. It's a failure of the Democrat model. It's a failure the Republican model. It's a failure of our system of democracy.</span></div>
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<span style="font-size: small;"><b>There is no one in American politics today that is committed to fix this problem. The President's idea is to tax the rich. Does it make sense to tax the 58% that already are paying all the taxes to have them funnel more money to the 42% who are paying no taxes? I mean they are wealthier but does this really make sense? When more people show up to the party do you cut the pizza slices in half or do you order more pizza?</b></span></div>
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<span style="font-size: small;">The President wants to cut pizza slices in half. I want to grow the size of the pie. </span></div>
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<span style="font-size: small;">To do that we have to improve the competitiveness of America. And that is certainly going to step on the toes of some of the people who are currently successful under the way the economy currently is running.</span></div>
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<span style="font-size: small;">It's quite clear that one of the big problems would be swept aside if countries could be forced not to stop running persistent current account surpluses. When the dollar is the reserve currency and countries target their exports on the US market and target their bilateral exchange rate in order to effect their trade objectives the dollar winds up being higher than it should. The US current account deficit is bigger than it should be. And it stays there persistently. Capital flows continue coming to the US as foreigners purchase dollar assets in order to peg their currencies low and keep the dollar strong. The advantage is that the dollar has stronger purchasing power than it should. So people with jobs are able to purchase goods from abroad cheaply. But because the dollar is strong there are not as many jobs and there are more people who go looking for them and are unsatisfied.</span></div>
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<span style="font-size: small;">That's exactly where we are today. Many economists do not see the exchange rate as the root of this evil. But I do. And, there such an elegant logical case to explain and justify it in the realm of conventionally known economic theory. I just don't see how you can dismiss it except to say that people don't want to deal with it. US corporations don't want to change it. US politicians do not want the confrontation. And, in fact, it is much more lucrative for traditional Democrats and Republicans to point the finger and blame at the other guy for the problem.</span></div>
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<span style="font-size: small;">International cooperation and reform is always hard to come by. One of the fundamental asymmetries in international trade is that it's always the deficit country that's forced to adjust not the surplus country. And as long as the dollar is the reserve unit other countries will peg against the dollar and the US will not be able to peg against them. So countries that choose a weaker exchange rate will be able to attain it. But that doesn't mean that the resulting US current account deficits won't become threatening or damaging either to the US or to the world economy.</span></div>
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<span style="font-size: small;">We can see from the last G 20 meeting that there is no taste to handle any of these problems having to do with trade warfare or formulating a better international currency system with any sorts of rules or obligations. </span></div>
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<span style="font-size: small;">To the extent that the US is adjusting and containing its deficit, as it is one of the deficit countries, it's because of the high debt that is crimping consumption. US consumers simply can't spend money the way they used to. It's because of the lack of competitiveness has led to a high rate of unemployment. And now with financial institutions somewhat beleaguered, they are lending money much less readily so that debt-fueled spending cannot be sustained by the consumer. The development of a domestic energy resource has allowed relatively more the US energy demands to be met by domestic output. But all of that is essentially a passive a reactive adjustment rather than the kind of proactive pro-growth sustainable adjustment that the US economy needs.</span></div>
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<span style="font-size: small;">In fact the debt problems in the US and in Western Europe finally are affecting China, causing it to change its export-ed growth model because it can't export the way it used to. China has been forced to develop its own domestic demand which means it's going to have to actually pay its workers which means it will have to undercut its own competitiveness in order to fuel its growth. There may be some limited opportunity for China to try to keep wages low in export industries and raise them elsewhere but that's only a partial solution since China cannot continue to export as it used to. Europe simply can't continue to absorb goods at that pace either. China has some of its own debt worries to face too, as it tries to achieve a more balanced and sustainable basis for growth.</span></div>
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<span style="font-size: small;">But it should be clear as I describe this situation, that what has happened is that these pronounced systemic imbalances have caused countries to do things that have stopped what I would regard as<span style="font-size: large;"><b> the madness of their past policies.</b></span> </span></div>
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<span style="font-size: small;"><b>This is not an enlightened approach to a problem that's been discovered. This is a problem that has been dealt with because of systemic repercussions through an unregulated blow back.</b></span></div>
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<span style="font-size: small;">This is exactly what the late economist Herb Stein used to refer to when he used to say don't worry if the situation is unsustainable because, if its unsustainable, it won't be sustained! But of course the repercussions of not dealing with problems that we can see are festering and that can't be sustained is that they will remedy themselves in a way that might be even more painful. And that should be a lesson for our politicians except they are too busy fighting one another and setting the other one up as the straw horse that you should fight against – or vote against.</span></div>
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<span style="font-size: small;">Within the European Monetary Union Germany has been accused of using the same tactics.... of having essentially a fixed exchange rate system and of running inflation rates that are so low that its competitiveness improved compared to everyone else in the system so that Germany came to dominate the European Monetary Union as its most competitive economy and did so largely by restricting the rise of the compensation to labor. German labor acquiesced to this largely because Germans were willing to forgo improvements in their standards of living in order to get assurances that inflation would be kept under control having developed an extraordinary distaste for hyperinflation during the interwar period.</span></div>
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<span style="font-size: small;">But whatever the reason or whatever the tactic, allowing countries to pursue export led growth is a bad idea. Allowing countries to accumulate ever larger foreign-exchange reserves so that they can peg their currencies to achieve trade objectives is also a bad idea. And at some point it's an idea that will have to be put to an end.</span></div>
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<span style="font-size: small;">Because of the last financial crisis and the problems that it's created with world banking system problems and the repercussions for policymakers everyone is distracted looking at the minutia of how to recalibrate international banking laws to make the banking sector say for the economy. In Europe there's a focus on debt and how to reduce debt and how to keep the European Monetary Union together. In the US there is is hand wringing about the policies of the central bank, about fiscal policy, about too big to fail and other aspects of bank regulation, and about class warfare... but mostly it's about Democrat-Republican issues. They keep us so busy we can never look at the real problem. </span></div>
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<span style="font-size: small;">The real problem is how can we make America more competitive? The real problem isn't how can we blame the rich and pry more money out of their pocket. The real question isn't, are the people poor because they deserve it? It's hard to argue that 42% of the population deserves it- isn't it? Clearly there something systemic that's wrong and our policymakers are pointing their finger's in the wrong direction.</span></div>
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<span style="font-size: small;">Will anybody figure it out?</span></div>
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<span style="font-size: small;">Before it's too late?</span></div>
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FAO-OPINIONhttp://www.blogger.com/profile/11086590490267067973noreply@blogger.com0tag:blogger.com,1999:blog-2763460351111948732.post-4273145836648724422013-07-25T19:33:00.001-04:002013-07-25T19:33:33.971-04:00Clear communication at the Fed: The impossible dream?<div dir="ltr" style="text-align: left;" trbidi="on">
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<b>Clear communication at the Fed: The impossible dream?</b></div>
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The Wall Street Journal has a new article on the Fed and how it intends to try to improve its easy money communications policy.</div>
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Fat chance.</div>
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<a href="http://online.wsj.com/article/SB10001424127887323971204578628090326782804.html?mod=WSJ_hpp_LEFTTopStories" style="color: #1155cc;">http://online.wsj.com/article/SB10001424127887323971204578628090326782804.html?mod=WSJ_hpp_LEFTTopStories</a></div>
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Let me try to make this as simple as possible. </div>
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The Fed will never succeed in making its communications clearer or even understandable because its policy is inconsistent and in fact involves basic contradictions. Even if it confronts that, it will not be able to make its policy choice clear..</div>
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<b>'Forward guidance' is the first oxymororn in the Fed's arsenal</b>: The Fed has offered us several different kinds of' forward guidance'. It has said that it will keep interest rates low for an extended period of time. It has said it will keep interest rates low essentially at zero until a specific period of time. It then changed that point in the future to which it promised to keep interest rates that low. And, recently it has replaced this policy with something new called 'forward guidance' that offers a profile for the Fed funds rate - a very specific profile. </div>
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Now, here comes the 'Magic'</div>
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On one level the Fed calls this 'forward guidance' that is supposed to help us make decisions about the future because it has laid out this<span style="color: #f6b26b;"><span class="Apple-converted-space"> </span><b>f</b></span><span style="color: #ff9900;"><b>uturistic yellow brick road</b><span class="Apple-converted-space"> </span></span>for us to follow.</div>
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The contradiction is that even this 'forward guidance' is of a conditional nature and not what it seems. The Fed is not pledging to keep interest rates on this path, it is simply saying that it's the Fed's most likely view but that if the economy turns out to be different than policymakers anticipate POLICY will be different too- but it downplays that potential fork in the road. </div>
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In other words the Fed's 'forward guidance' doesn't seem to be any different than the typical economist forecast which says well on one hand this could happen on on the other hand that could happen. The Fed wants us to focus on 'this' hand and on 'this hand' only.</div>
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But beyond that, anyone who has paid any attention to the Fed or to what I've written above, is aware that 'forward guidance' should come with a subscript: the letter "t." This is because the the Fed's 'forward guidance' is only the Fed's 'forward guidance' that exists at a particular period, t.. And as we can see (and have seen, in fact) the Fed already has changed the nature of its forward guidance several times in the past.</div>
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So since the Fed's 'forward guidance' that it's offering us now, admittedly is conditional, and since the Fed already has exhibited substantial changes in the way it's characterized its 'forward guidance' in the past, why should we consider 'forward guidance' a tool at all - that is other than a broken tool? And, how can the Fed possibly change its communications to make this oxymoron clearer – that is unless it were to give up on the idea of 'forward guidance' altogether?</div>
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When Mario Draghi tried to adopt forward guidance at the European Central Bank a day or so after he expressed his intention to keep interest rates low for an extended period of time using almost exactly the old language that the Fed had used, Jens Weidmann, head of the Bundesbank, said quite specifically that 'forward guidance' would not keep the ECB from raising rates if monetary policy rules and price stability required it.</div>
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So what good is it anyway? The ECB exchange cuts right to the quick of it; doesn't it?</div>
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There is nobody at the Fed issuing this kind of blunt clarification or countermanding statement to Fed Chairman Bernanke. But it should be quite clear that the Fed is trying to deal from the top of the deck and the bottom of the deck at the same time. And this is why its communication message goes astray.</div>
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There may be some academic framework in which 'forward guidance' has some application and in the end can work. I suppose if you and pose the idea that 'forward guidance' exists and has credibility you can move ahead to solve equations based upon its existence. But in the real world the Fed cannot really provide true 'forward guidance'. In the real world 'forward guidance' is necessarily conditional and once 'forward guidance' is conditional it ceases to exist or to be useful or evento be guidance (it might well be misguidance). </div>
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Moreover, once 'forward guidance' has been offered in the past and has changed it undermines the impact and the potential usefulness not to mention the outright lack of veracity in trying to use it EVER again.</div>
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Except to this Fed...</div>
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I think that the Fed has an intellectual model of 'forward guidance' that is inapplicable to the real world and it doesn't understand that. I think when we recognize the intrinsic pitfalls of the policy of 'forward guidance' outside of an academic framework we begin to understand why the Fed communicates its policy intention so badly.</div>
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<b>Problems beyond forward guidance and its flawed yellow brick road</b></div>
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In addition to all that messiness, we have the other wishy-washy aspects of Fed policy that have to do with an unemployment rate threshold that is not a trigger and may not be meaningful whatsoever. And as the Chairman begins to wander off into that weird Wonderland of guidance that once again doesn't exist (telling us what may happen when/if unemployment goes below 6.5%) it's no wonder that people get confused. On one hand the Fed seems so eager to please to provide us with benchmarks but on the other hand it recognizes that it can't provide us with benchmarks unless it's sure that they are going to serve the stated purpose it wants to put them to. At that point the Fed confronts a dilemma.So it has given us meaningless numbers!</div>
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Therefore, every time the Fed tries to tell us something that's very specific it winds up having hedge it with caveats and conditional statements that have to be elaborated and clarified at a later date. This is why Fed communication strategy can never be successful. It's just not possible.</div>
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This all traces back to Ben Bernanke embracing the dual mandate with a two-pronged objective. Even Yogi Berra knows that when you come to the fork in the road, you should take it. Not Ben. He wants them both.</div>
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The Fed has long had this same policy mandate but under Paul Volcker and continuing under Alan Greenspan the Fed had argued that it pursued its goal of maximum sustainable growth best when it achieved price stability.In that it successfully had hammered the two tines of that fork into a single cutting edge. But Bernanke unbundled the strategy to reveal two separate prongs of short run objectives. He brought open conflict back to policy. </div>
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He opened a can of worms, worms that continue to crawl across the table at the FOMC each meeting. These worms are not trained nor controllable and they continue to be the basis for the Federal Reserve trying to give us guidance on policy that simultaneously tugs it in different directions.</div>
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To make matters worse the Fed seems to have its own separate judgment or conscience working in the background apart from its stated policy metrics. The Fed seems to be wary of the size of its balance sheet at long last and wants to address that even though its policy metrics do not conform to that desire </div>
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So right now even with the unemployment rate well above the Fed's threshold level of 6.5% (whatever the heck that means) and with inflation under-shooting its long run target (2%) and even decelerating, the Fed Chairman is trying to point everyone to the prospect - in fact, what he deems as the likelihood- of the Fed trimming back on its quantitative easing later in the year.</div>
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That seems to be 180 degreees wrong, doesn't it?</div>
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To justify this at the last meeting's press conference the Fed Chairman finally told us that the factors that govern quantitative easing are different from those that govern the Fed's ordinary policy, effectively trying to drive a wedge between the fact that the factors governing ordinary policy are calling for the Fed to ease further while the Fed is trying to guide us toward a policy that will see it easing by less using QE. (All this completely ignores the fact that QE was adopted to solve the Zero Bound issue and was viewed at first as an extension of the Fed funds policy. So why QE forces now move it in the opposite direction of the Fed funds rate's governing forces is no small trick)</div>
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Only Jim Bullard among FOMC members seems to be bothered by the fact that the Fed's inflation objective is calling for it to do something very different from what it's doing.</div>
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As you can see I think the main problem with Fed policy has nothing to do with economics and everything to do it logic. Any logician could look at this and understand the conflicts inherent in what the Fed is trying to do.</div>
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The Fed by this time has drunk too much of its own Kool Aide and cannot see how foolish its own policy really has become. </div>
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When I was a youngster I remember learning the meaning of the expression that 'you can't have your cake and eat it too'. I think it's an expression that the Fed needs to confront and come to an understanding about. Because, when it comes to 'forward guidance' the Fed very much wants to have its cake and eat it too. It wants that in many other aspects of policy as well as I hope I have made clear above. </div>
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At least I hope it is clearer than the Fed's communication policy. And I hope it clarifies the problems with the Fed's communications policy.</div>
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FAO-OPINIONhttp://www.blogger.com/profile/11086590490267067973noreply@blogger.com1