Thursday, August 21, 2014

Jackson Hole
Central bankers like to get together on a regular basis at nice locales. They do so every year in late August at Jackson Hole, Wyoming. This annual conference brings together the top honchos of the major central banks. They tend to focus their discussions on the hot issues of the day. This year’s topic is “Re-Evaluating Labor Market Dynamics.” The program for the August 21-23 meeting will be posted today at 6 p.m., MT. Last year’s topic was “Global Dimensions of Unconventional Monetary Policy.”

On Wednesday, Bloomberg’s Simon Kennedy reported:
Every time then-Federal Reserve Chairman Ben S. Bernanke spoke at the annual monetary policy symposium in the shadow of Wyoming’s Teton mountains since 2007, stocks rallied. With Janet Yellen set to make her first speech to the conference as central bank chief on Aug. 22, investors may be setting themselves up for a fall, according to Steven Englander, global head of G-10 foreign exchange strategy at Citigroup Inc.
Kennedy noted that from 2007 to 2012, Fed Chair Ben Bernanke’s keynote speech was bullish, with the S&P 500 up an average 1.3% that day. Bernanke skipped last year’s meeting. Englander was quoted as saying that Fed Chair Janet Yellen’s speech could be a letdown: “We worry that dovishness is increasingly anticipated and that by the time we get to her talk anything less than ‘full dovishness’ will be a disappointment.”

I’m not worried. As I noted yesterday, I expect that the “Fairy Godmother of the Bull Market” won’t let us down. In a June 30, 2009 speech, Yellen said that the lesson of history, particularly of the Great Depression, is that premature monetary tightening can be disastrous. I’m sure she still thinks so, and might very well say so again on Friday.

Yellen is a Yale PhD macroeconomist with particular interest in the labor market. She is also a liberal and believes that the labor market needs all the help it can get from the Fed. I doubt that she picked the topic for discussion at Jackson Hole, but I’m sure the folks at the Kansas City Fed, which has been hosting the conference since 1978, did so to please the boss.

Yellen’s liberal bias was plain to see in the statement issued after the July 30 meeting of the FOMC. It noted: “Labor market conditions improved, with the unemployment rate declining further. However, a range of labor market indicators suggests that there remains significant underutilization of labor resources.” The previous statement following the June 18 meeting noted: “Labor market indicators generally showed further improvement. The unemployment rate, though lower, remains elevated.” This change in wording clearly reflects Yellen’s focus on the negatives rather than the positives in the labor markets.

I believe that American consumers are in better shape than Yellen believes. However, if she insists on helping them out with more ultra-easy money than they really need, then stock investors will continue to benefit as well. Again: Thank you, Fairy Godmother!

ECB President Mario Draghi will follow Yellen with the keynote luncheon address on Friday. It’s unlikely that he will drop any new “whatever-it-takes” bombshells, as he did on July 26, 2012. It’s unlikely that he will hint at the possibility of a Fed-style quantitative easing given the legal issues surrounding this program. Instead, he will most likely stress that the ECB’s recent easing moves, including TLTRO lending to the banks starting next month, should help to revive growth in the Eurozone. Unlike Yellen, he is likely to say that monetary policy can’t fix all of our problems, including structural ones in the labor market.
(Based on an excerpt from YRI Morning Briefing)

Tuesday, August 19, 2014

'Fairy Godmother' Will Speak on Friday
Investors may be looking forward to Fed Chair Janet Yellen’s speech at Jackson Hole on Friday. I’ve often affectionately called her the “Fairy Godmother of the Bull Market.” Stock prices tend to rise after she speaks about the economy and monetary policy. That happened often when she was a Fed governor, and has continued now that she is Fed chair.

A few Fed watchers are speculating that the upcoming speech would be a good opportunity for Yellen to signal that she is ready to normalize monetary policy, i.e., hike the federal funds rate. So they are expecting a hawkish speech. I disagree. In a June 30, 2009 speech, Yellen said that the lesson of history, particularly of the Great Depression, is that premature monetary tightening can be disastrous:
If anything, I’m more concerned that we will be tempted to tighten policy too soon, thereby aborting recovery. That’s just what happened in 1936 when, following two years of robust recovery, the Fed tightened policy because it was worried about large quantities of excess reserves in the banking system. The result? In 1937, the economy plunged back into a deep recession. Japan too learned that hard lesson in the 1990s, when both monetary and fiscal policies were tightened in the mistaken belief that the economy was rebounding.

These episodes teach us a valuable lesson that we should heed in the present situation. Let this not be another 1937, but a time when policymakers have the wisdom and patience to nurse the economy back to health. And, when the economy does come back, let it be built on a foundation of sound private investment and sustainable public policies. Only then can we be confident that we can escape destructive boom-and-bust cycles and build a more permanent prosperity. Thank you very much.
Thank you, Fairy Godmother!
(Based on an excerpt from YRI Morning Briefing)

Wednesday, August 13, 2014

Labor Market De-Slacking
Fed Chair Janet Yellen is no slacker. She is a hard worker for sure. You’ll never see a photo of her at the golf course. She would like everyone who wants a job, and wants to work hard, to have the opportunity. She intends to keep interest rates near zero for as long as necessary to do the job. The economy seems to be moving faster toward Yellen’s goal of eliminating slack in the labor market. June’s JOLTS report and July’s NFIB survey of small business owners, which were both released yesterday, certainly confirm this assessment.

Of course, Fed Chair Janet Yellen has said that she won’t be completely satisfied with the progress in the labor market unless wages are rising at a faster pace. That’s not happening so far. During her March 19 press conference, she said:
The final thing I’d mention is wages, and wage growth has really been very low. …. In fact, with the productivity growth we have and 2 percent inflation, one would probably expect to see, on an ongoing basis, something between--perhaps 3 and 4 percent wage inflation would be normal. Wage inflation has been running at 2 percent. So not only is it depressed, signaling weakness in the labor market, but it is certainly not flashing.
Back in July, I suggested that Yellen should read a very interesting 7/21 article posted on Bloomberg titled, “Yellen Wage Gauges Blurred by Boomer-Millennial Shift.” The conclusion is that demographic shifts in the labor markets may keep a lid on wage inflation, which would make it a poor indicator of labor market conditions:
As today’s middle-aged Americans grow older, they are leaving their prime working years behind, trading big salaries for part-time gigs or retirement, just as an even larger group of young people come into the labor force at entry-level salaries. The seismic shift may be one reason behind the sub-par wage growth that Yellen says still shows ‘significant slack’ in the job market.
I concluded then, as I still believe:
If she continues to put too much weight on this demographically flawed indicator, monetary policy may stay too easy for too long (as it has already, in my opinion). What’s wrong with that if wage inflation remains subdued, and so does price inflation? Nothing really, I suppose, unless it all leads to lots more financial bubbles that should have been averted with the more immediate normalization of monetary policy.
(Based on an excerpt from YRI Morning Briefing)