Federal Reserve Meeting Minutes: Stronger than Oak

Federal Reserve Meeting Minutes: Stronger than Oak, Danielle DiMartino Booth, Money Strong LLC

Ever heard of an Alpha quote? That’s how best to classify, “Show me the money!!!”

It didn’t take you but a nanosecond to picture Jerry Maguire screaming that line into his phone. The shame, for lack of a better word, is that another quote from the same movie, that’s almost as good, will only live on to minor fame.

Getting to the not quite as famous quote requires that you navigate not one, but two scenes in the 1996 Tom Cruise blockbuster. Sports agent Maguire has landed an Odessa, Texas high school superstar quarterback. In perfect stereotypical form, the boy’s father is chief negotiator. Out Maguire drives to dusty West Texas to seal the deal, on paper, to which the father replies: “You know I don’t do contracts, but what you do have is my word. And it’s stronger than oak.” One firm handshake later, we see an elated Maguire driving off singing and pounding his steering wheel to the beat of Tom Petty’s “Free Falling.”

Of course, a betrayal follows as sure as night follows day and the father signs, yes signs, with a rival agent offering a sweeter as in “Sugar” deal. But what about the strength of that oak? A pumped-up Maguire arrives for the young star’s big moment and learns that in all likelihood Cushman Senior does sign contracts. To that Maguire bitterly retorts, “I’m still sort of moved by your, ‘My word is stronger than oak’ thing.” The moral we saw coming: Always get it in writing.

But what happens when those written words still aren’t good enough? The occasion of the release of most Federal Open Market Committee (FOMC) Meeting Minutes would seem to be a great opportunity to get a behind-the-scenes take on all those round the table machinations. Minutes of lame duck meetings – no press conference, no action – hold even greater appeal, especially if multiple dissents accompany the decision. Hence the media jockeying for instant live reaction at 2 pm EST three weeks to the minute from the moment the statement is released. Hey, it beats waiting around five years for the meeting transcripts.

Did someone mention transcripts? In 2008, Janet Yellen herself suggested – in plain English, mind you – that the FOMC deploy the Minutes as they would any other tool in their quickly dwindling toolbox of conventionality. In the event the data or the markets have not reacted to the meticulously crafted statement in the manner Fed officials intended, whip out the Minutes to reshape the public’s thinking. Rather than become a monkey on her back, Yellen’s suggestion to outright manipulate the Minutes has been embraced by her peers and the public alike; parsing the message in the Minutes has become a favorite Wall Street parlor game.

That is, until today. A massage is one thing, a machete that leaves a blood trail quite another; hence the impossible task of weaving an entirely unexpected election result (especially for those on the FOMC) into the Minutes of a meeting that took place a week beforehand. Today, in other words, we will see relatively clean minutes, the prospect of which holds a whole different kind of appeal. (It may also explain the downright deluge of Fedspeak since the election. Do you get the sense there’s an unwritten Fed policy that dictates more is more when the Minutes have been disengaged?)

Given the violent reaction in the bond market to the election, it’s bound to be killing Yellen to not nod as to how the Fed is apt to react come December 14th. But the truth is the market has already placed its bet, pegging the probability of a quarter-percentage-point hike at a neat 100 percent. That gets us to the “What’s next?” portion of the program, which is when things begin to look a little hazardous.

The brilliant (word not used with even a scintilla of hyperbole) William White was recently honored with the Adam Smith prize, the highest on offer from the National Association of Business Economics. White’s career has been long and esteemed. In 2008, he retired from the Bank for International Settlements (BIS) and is now chairman of the Economic Development Review Committee of the OECD in Paris. On a personal level, yours truly has been honored to get to know White as fellow participants at The Ditchley Foundation’s annual gatherings.

But back to that, “What’s next?” for Yellen et al. Let’s just say White has uncovered the answer. To mark the occasion of his receiving the Adam Smith award, White penned, “Ultra-Easy Money: Digging a Deeper Hole?” Gotta love the subtlety in that title.

Do yourself a favor and Google the paper and read it in its entirety. It is blessedly readable and free of econometrics, as in approachable by those outside the insular field of economics.

White has never been one to kowtow to his peers. Rather than blindly acquiesce to the notion that monetary policy can solve all the world’s problems, White rightly recognizes the elephant in the room, namely that, “by encouraging still more credit and debt expansion, monetary policy has ‘dug a deeper hole.’” White’s basic premise is that central bankers’ hubris (my word) has deluded them into believing the economy can be modelled, “as an understandable and controllable machine rather than as a complex, adaptive system.”

Prior to the financial crisis, monetary policy was “unnaturally easy” and after the crisis broke, “ultra-easy.” Put differently, the failure of lower for longer was not recognized as a failure and taken as an opportunity from which to learn and grow into a new paradigm. Rather, monetary policymakers dug the hole deeper, insisting that failure be not acknowledged, but instead institutionalized. And so policy has been lower for even longer, exit delayed time and again.

Into this breach, Yellen steps again, one year after her first stab at a rate hike. The rest of the world can be thankful she wears sensible shoes, as opposed to strappy, red stilettos, given the potentially dangerous landing for this second rate hike since 2006. Maybe the Minutes will reveal how heated the discussion was about the impending December hike and its aftermath. We can only hope.

Most of the market’s focus since the election has been on major currencies’ moves against the dollar in reaction to the near one percentage point rise in the benchmark 10-year Treasury off its post-Brexit lows. No doubt, the move in the euro has been nothing short of magnificent. The powers that be at the Bundesbank have to be sweating out the ramifications of the next potential move given the double whammy of an interest rate increase here and a losing vote for Italian Prime Minister Matteo Renzi’s referendum on December 4th.

You’d never know it given the euphoria in the stock market, but a strong dollar can be harmful to the global economy’s health. While in no way inconsequential, the euro’s weakness pales compared to that of the shellacking underway in emerging market (EM) currencies. According to the BIS, since the financial crisis, outstanding dollar-denominated credit extended to non-bank borrowers outside the United States has increased from $6 trillion to $9.8 trillion.

The game changer in the current episode is the catalyst that drove the growth in EM dollar-denominated debt, namely unconventional Fed policy. The yield drought created by seven years of zero interest rate policy and quantitative easing pushed investors to show EM debt issuers the money. In prior periods, cross border bank loans were the source of the growth. Let’s see. Is it investors or bankers who are more likely and able to panic and run?

“This raises the specter of currency mismatch problems of the sort seen in the South Eastern Asia crisis of 1997,” worries White. “The fact that many of the corporate borrowers have rather low credit ratings also raises serious concerns, as does the maturity profile. About $340 billion of such debt matures between 2016 and 2018.”

Talk about a black box of uncertainty that’s sure to dominate the discussion at the upcoming FOMC meeting. The differences between last December and now, however, cannot be captured in any model. That should prove vexing to current members of the FOMC who’d prefer to not wander blindly onto a field littered with landmines.

As White forewarns, “Future economic setbacks tied to ultra-easy money could threaten social and political stability, particularly given the many signs of strains already evident worldwide. In short, the policy stakes are now very high.”

Oh how the Fed must long for the days of yore, when it was feasible to make policy in a domestic vacuum. Though the new reality set in over a matter of years, last August’s rude reminder on the part of People’s Bank of China abruptly ended that bygone era once and for all. The Fed can jawbone all it likes, in tiptoe style in the Minutes, or in gaudy fashion in an endless parade of FedSpeak.

But the reality of it is, if the rest of the world’s economic vulnerabilities and systemic fault lines are laid bare by this December’s hike, Fed officials’ words won’t amount to much more than trash talk, kind of like their vociferous vows to raise rates four times this year. In the end, their word proved to be as strong as, well, West Texas Oak.

The Overlords of Finance

The Overlords of Finance, Danielle DiMartino Booth, Money Strong LLC

It was the best of times. And it still is. Intrepid investors who never dreamed they’d put all of their eggs in one full-boar risk asset basket have never had it so good. Stocks are up, bonds are up, emerging markets are up, real estate is up. Heck, it’s all up. As it should well be. It’s different this time. No, really. It is.

Depositors pay banks interest to hold their hard-earned savings for the first time in written history. And, as far as investors are concerned, sustained bad news is the only true form of good news. For this warped reality, we owe a debt of gratitude to the world’s central bankers who have changed the rules of the game by dispensing with the conventional in favor of the arbitrary. There is a word for such extreme power, in both noun and verb forms: Overlord, as in a person who lords over lords.

Was happening upon and being stirred to employ this all-encompassing word pure coincidence? To boast such divine inspiration would be disingenuous at best. Rather, it’s another inspiration that begat today’s theme. Liaquat Ahamed, author of The Lords of Finance, is said to have been moved to write his seminal tome after reading a 1999 Time magazine cover story titled, “The Committee to Save the World,” which featured the then three superstars of the economy: Federal Reserve Chairman Alan Greenspan, Treasury Secretary Robert Rubin and Rubin’s right hand man, Larry Summers.

As droves of acrimonious Americans can attest, “Save” is not the word that comes to mind when they see those three men’s faces.

Some of the bitterest among the economic outcasts who were ruined by the ‘Committee’s’ manipulations will never have the wherewithal to pay off their dusty subprime mortgages with their still inadequate incomes. Others among the shell-shocked didn’t want to be told to stay in the stock market. They’d been burned twice and that was enough for one lifetime. For that, they are constantly chastened for missing the second greatest bull market of all time. But tragically, for some, they just wish they could exit this world with dignity; they fear they will outlive their savings in a world where savers are punished and cash itself is an endangered species.

The truth is Greenspan, Rubin and Summers were merely clones of the “Lords” to whom Ahamed refers to in his book. It is impossible to summarize Ahmed’s book, which still stands as yours truly’s greatest literary guidepost to where we find ourselves today. If you haven’t read it, please do.

To synthesize the thrust of the book, it is perhaps best to view it as a three-way study in the perils of devaluing stores of value by force, the dangers of runaway debts and the menace of monetary myopia.

How does one devalue by force? Illustrations from the period are numerous. Some suggest the best example comes from a decision made by President Franklin Roosevelt in 1933 as his country emerged from the most savage year of the Great Depression. To counter the scourge of the day, falling prices, one commodities economist hypothesized that prices merely need to be forced upwards. This simplistic rationale accepted, Roosevelt began to devalue the dollar by driving up the price of gold.

Moving on to the ticking debt bomb, the initial debt build sprang from the unpaid bills racked up both during and after World War I. History tells us these debts morphed into the very source of the hostilities that drove the world headlong into its second world war. Germany’s inability to pay its war reparations set off a daisy chain of defaults among U.S. allies. To finally tourniquet the wound, the U.S. effectively bailed out the bad German debts.

As for the hubris of those central bankers, a 2009 New York Times book review best summed it up as follows:

“The central bankers were prisoners of the economic orthodoxy of their time: the powerful belief that sound monetary policy had to revolve around the gold standard. That is, each country’s reserve bank had to have a certain amount of gold in its vaults to back up its currency – and indeed, ‘all paper money was legally obligated to be freely convertible into its gold equivalent,’ as Ahamed says.

Again and again, this straightjacket caused central bankers to make moves, like raising interest rates, that would allow their countries to hold onto their dwindling gold supplies even though the larger economy desperately needed help in the form of lower interest rates.”

If anything, the power of the kings and queens running the world’s central banks has become even more concentrated. In a reversal of economic fortunes, today’s economy is in desperate need of higher rather than lower interest rates, of a normalization of policy to put a floor under the bloodletting in pensions, insurance companies and among retirees worldwide.

And yet, the powers that be insist they know that better than the unwashed and uneducated masses that suffer at the hands of their misguided policies. Of course the benefits of negative interest rates outweigh the costs. And whose business is it anyway if central bankers impinge on the ability of capital to determine the value of a given entity?

If you think such encroachments into the Darwinian process of price discovery invite debt creation where it would not otherwise be possible, you are right. That brings us to the parallel between then and now, to the conflagrations smoldering under the surface of the world economy that have a similar source of kindling as the World War era. That is, debt, a huge overabundance of debt. The latest figures out there suggest that global debt now eclipses $200 trillion, or about three times the global economy.

What else do we know? The short answer is not near enough. The debt buildup is not contained to a handful of profligate sovereign borrowers as was the case in the late 1990s when Indonesia, Thailand and South Korea took on unsustainable debt loads. Russia’s default was all it took to ignite the mother of all contagions.

The debt problem, if you will, is also not contained to a single sector whose ‘AAA’-rated debt spread so far and so wide as to infect the entire global financial system. That was, of course, the case with U.S. subprime mortgage debt.

Rather, the debt is simply everywhere, at least to the extent we can see and measure it. Corporate and sovereign debt, of both the developed world and emerging market varieties, are at record levels. China’s debts certainly add to that record but who really knows to what extent? It’s the ultimate black box of leverage on Planet Earth. Even household debt is a problem in many countries including right here in the United States where it’s nearly hit its prior record high.

But it’s not just the debt. It’s the speculation that the debt has inadvertently unleashed that’s the other problem. Central bankers’ collective and growing fears of those debts, which could prove to be incapable of being serviced without interest rates at zero or in negative territory and quantitative easing (QE) running at full throttle, have given way to a perverted gentlemen’s agreement of sorts.

To tap the wisdom of Jim Bianco of Bianco Research, central bank bond buying has become fungible. As long as the buying continues, it really doesn’t matter who’s picking up the QE tab. To that end, over $2 trillion in global QE purchases have taken place in the past 12 months, the fastest pace since the onset of the financial crisis.

It is here that the regime shift kicks in, the one that made possible this new and improved gentlemen’s agreement between investors, politicians and central bankers. The operating assumption is not only that QE purchases continue to take place to keep the peace in the financial markets, but rather that the debt has literally disappeared, been retired, expired, matured, monetized, vanished into thin air. Governments have simply agreed to cancel the debts into the netherworld. The supply has been expunged forever.

“That $3.5 trillion on the Fed’s balance sheet is effectively canceled,” said Bianco. “Everything will be fine as long as the marketplace believes the bonds will never return. On a global level, we will have an ever smaller supply with the same level of demand.”

In other words, investors have seen no reason to be alarmed by the growth of debt because they are netting that growth out against central bank purchases. With an aggregate of $2 trillion of bonds wiped out on an annual basis, why worry?

Do you sense you are reading this in suspended animation? Good. Because you are.

There is another operating assumption that binds this illusion, namely that inflation is extinct. Prices will never rise again care of central banks continuing to look the other way. If headline inflation is too high, pronounce that food and energy are running too hot. Caveat that this heat is transitory. But emphasize that for the moment, ‘core’ inflation, which excludes them, is what matters.

And if food and energy prices are running too cold, as has been the case of late? Well that too should be treated as anomalous. Best to focus on the headline until that abnormality passes. And so it goes, round and round.

But wait! We’ve been told central banks are keen to create the inflation that in turn inflates debts away. Haven’t we?

“The minute there’s a whiff of inflation, even the slightest whiff, the implication will be that all those bonds are alive, that central banks could start to sell bonds to tighten monetary policy,” warns Bianco. “The illusion would be shattered overnight.”

Well ain’t that a thing! Now we know why the dialogue shifted just after former chair Ben Bernanke made his way out the door in January 2014. The exit from unconventional monetary policy, you may recall, was originally set to begin with the tapering of purchases, being followed by allowing the balance sheet to run off and then prompt the first rise in interest rates – in that order.

A funny thing happened on the way to the exit, though. Bill Dudley is not only the president of the Federal Reserve Bank of New York but also the vice chairman of the Federal Open Market Committee and coveted holder of a permanent vote. Back on May 14, 2014, in a question and answer session with reporters following a speech, he literally stood the preexisting exit principles on their head.

“Delaying the end of reinvestment puts the emphasis where it needs to be — getting off the zero lower bound for interest rates,” explained New York Fed president Bill Dudley. “In my opinion, this is far more important than the consequences of the balance sheet being a little larger for a little longer.” Luckily for investors in any and every risky asset, his opinion holds a lot of sway. Dudley’s central banking peers in developed countries have followed his lead and peace on earth has held ever since.

As for those pesky financial stability concerns, we’ve been instructed to look the other way. Some have even gone so far as to suggest that the time has come to devise a new term to replace ‘bubble.’ No doubt, it’s an unseemly word given the nasty images it conjures. But what if the word ‘bubble’ is not substantial enough to capture what’s been created before our very eyes, across the full spectrum of asset classes?

“You cannot NOT worry about the Fed in this world,” warns Bianco. “The simple truth is ending reinvestment would bring the bond market to its knees.”

You connect the dots from there. Will the dollar buy more or less in the future given the path on which today’s modern day monetary myopia has placed us? Does a word even exist that’s capable of describing what the world economy would face if the orthodoxy of our Overlords of Finance collapses? That truly is the quadrillion dollar question.

Dear Job Market, Take This Indicator and Shove It!

Dear Job Market, Take This Indicator and Shove It!Dear Job Market, Take This Indicator and Shove It!

Some songs are just destined to be belted out while speeding down an open highway with the all the windows down, your hair whipping in the wind and the dust flying. Donald Eugene Lytle, aka, Johnny Paycheck, delivered one in spades with his catchy, purposely grammatically incorrect rendition of David Allan Coe’s working man’s anthem. The song, Take this Job and Shove It, which has earned cult status in the Honky Tonk hall of fame proved to be the only number one hit of Paycheck’s career.

Ironically, Paycheck didn’t change his name to fit the song; that happened 13 years earlier when he borrowed it from a top-ranked Chicago boxer whose claim to fame was his 1940 fight against Joe Lewis for the heavyweight title.

Very few of us have escaped those lyrics invading our mind from time to time. You might have been slopping sauce on one more pizza, bagging yet another bag of leaves on someone else’s lawn or plugging away at a spreadsheet for which you’d never get credit – all for meagre pay. Whatever the thankless task, you sure would have relished unleashing those words to your boss’ face. Just take this job and shove it!

The 1977 hit was so popular it went on to inspire a not so popular 1981 movie. Alas the movie of the of the same name, billed as “The comedy for everyone who’s had it up to here…” fell flat at the box office. It was the timing that was all wrong. A movie with a “job shoving” theme was unseemly considering the economy was veering headlong into a double-dip recession. The worker bees of the economy were understandably unamused by the idea of brazenly quitting their jobs.

Today, in 2016, it’s looking more and more like Janet Yellen is less than amused with her own greatest hit, The Labor Market Conditions Index. She conceived this alternative measure of the job market and debuted it to much fanfare in an August 22, 2014 speech at the Shangri La of economic confabs in Jackson Hole, Wyoming.

With that, a whole new cottage industry was born. Two gauges measuring the state of the job market, nonfarm payrolls and the official unemployment rate, ballooned into 19. Joy for the economist community in the form of 17 new raison d’etres!

How have things worked out since then?

Appreciating the historic context is an essential first step to answering that question. At its December 2012 meeting, with unemployment at 7.8 percent, the Federal Open Market Committee announced its first ever unemployment rate target of 6.5 percent. Fed economists projected that this bogey would not be reached until the end of 2015. At that point, they anticipated the rate would be inside a 6.0-6.6-percent range.

One voter in the FOMC room begged to differ. Richmond President Jeffrey Lacker dissented, recognizing the folly of the quantitative commitment. The Fed was effectively boxing itself in as financial markets would price in a rate hike the minute the threshold was visible on the horizon.

As if wearing blinders, then-Chairman Ben Bernanke predicted that the target would act, “as an automatic stabilizer,” with the added qualifier that the new policy, “by no means puts monetary policy on autopilot.”

Of course, that’s just not the way financial markets work. They are forward-looking beasts precisely because they set prices based on the inputs provided.

Hence the Fed’s panicked emergency videoconference meeting on March 4, 2014 on the heels of that year’s April jobs report, which revealed a steady unemployment rate of 6.7 percent. The markets’ conclusion: A June rate hike was imminent, a full year and a half before Bernanke had any intention of tightening policy.

Though still the subject of furious debate, the missing link from Fed economists’ models was the permanence of the decline in the labor force participation rate fed by the 2009 introduction of 99 weeks of unemployment insurance. Needless to say, politicians clamoring for easy votes extended these extraordinary benefits time and again.

By the end of 2013, 99 weeks had become all too ordinary. Millions of workers had simply dropped out, disincentivized by design. Because the unemployment rate is calculated against the number of people in the labor force, it declined much more rapidly than historic precedent suggested it would.

And so, with mis-measured inflation still too low for comfort (another full blown story for another day), policymakers backtracked on their commitment. The March 2014 FOMC meeting minutes attempted to explain: “The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run.”

The schizophrenic behavior did nothing to bolster the Fed’s credibility. To counter perceptions, the Fed, under the new leadership of labor economist Yellen, came up with yet another model. As she illustrated in great detail at that year’s Jackson Hole gathering, the LMCI would better measure the slack in the labor market without unduly “rewarding” the decline in the labor force participation rate which cast the low unemployment in too positive a light.

“Assessments of the degree of remaining slack in the labor market need to become more nuanced because of considerable uncertainty,” Yellen said, reminding the audience that in 2012 the Fed had caveated that, “factors determining maximum employment ‘may change over time and may not be directly measurable.’”

More variables, more math, more clarity? Not hardly. OK – that was a pretty extensive history lesson. But sometimes the setup is key to understanding the outcome.

Once again, the markets are heavily anticipating Yellen’s 2016 Jackson Hole speech. Will she posit that the LMCI was flawed at inception to now justify a rate hike? Her baby, so to speak, has been wailing for six straight months, the longest slide since the end of the 2009 recession.

At this year’s June 15th press conference, Yellen once again highlighted the importance of the context of the current backdrop, which has apparently rendered the LMCI, “a kind of experimental research product.” Is it any wonder the media characterized her remarks as “bipolar”?

The question is, what went wrong, if anything?

The nature of the LMCI’s components is a good starting point. As a recent Goldman Sachs report detailed, “The LMCI inputs are detrended, and the estimated trends likely ‘soak up’ some of the growth in labor market activity (such that only growth in excess of the trend contributes positively).” Yours truly added the emphasis as this ‘detrending’ is key to explaining away the alarm emanating from the LMCI.

The Goldman report goes on to say that labor market indicators tend to level off in the middle of an economic cycle even as trends continue on their established pathways, driven by momentum: “The LMCI in effect reflects a combination of the rate of change in labor market conditions – the first difference – as well as recent acceleration or deceleration – the second difference.”

Did someone mention ‘Nuanced” with a capital ‘N’?

And then there are the actual inputs. The index’s 19 indicators endeavor to capture movements not just in job creation, but underemployment, wages, worker flows and both consumer and business surveys. A few examples help to illustrate.

The National Federation of Independent Businesses queries small businesses on their hiring plans and whether it is hard to fill open positions. So fairly straight forward, forward-looking indicators.

Then you have temporary employment, which once provided a reliable signal on the direction of nonfarm payrolls to come. But temps have lost some of their predictive powers in a world increasingly dominated by firms cutting costs where they can, even if it entails classifying near-permanent employees as temporary to reduce benefit expenses.

The same goes for new help-wanted ads, which have been trending down for a year now. Not to worry, says the Fed itself, whose economists recently debunked fresh postings as unreliable given Craigslist’s near doubling of fees since the end of 2012. The rising costs associated with advertising thus distills the message in the mere four percent rise in postings through yearend 2015 in the help wanted data vs. the 48 percent rise in the job openings data series. We’re supposed to file that one in the “If you say so” file.

Finally, you have the distinct ‘job leavers unemployed for less than five weeks,’ which is buried in the household survey, and the now-beloved ‘quit rate’ from the monthly job openings data. Workers having the hutzpah to tell their employers where they can put their cruddy job is measured by the quit rate. When the rate rises, it tends to coincide with a high degree of confidence that you can storm out one door and waltz into another in a short timeframe. So a rise in unemployed for less than five weeks is thus a good thing reflecting workers’ certainty about the job market’s prospects.

While the unemployed-for-less-than-five-weeks metric has held up of late, the quits rate has fallen. So call this a wash for the moment. In addition, net hiring plans have come off their highs, concomitant with the decline in the number of job openings. These data are released with varying degrees of lag, which can be frustrating for the impatient type who’d prefer to not be sideswiped by a data miss.

That brings us to perhaps the best indicator of what’s to come, which cannot be explained away, though it too comes from help wanted ads. You may recognize the name Jonathan Basile, AIG’s Head of Business Cycle Research. As his pragmatic title suggests, he is duty bound to have a crystal clear crystal ball.

Let’s just say we should all adopt one of his favorite indicators on the labor front, the reposting of job positions. Just about every anecdote we’ve heard in recent years has touched on the dearth of skilled labor. As that slack was absorbed, it became increasingly difficult to source good talent. What to do if you can’t fill a position? Well, you repost it until it does get filled. That way you succeed in achieving your original goal of growing that top line by satisfying the incremental demand that triggered the need for a new hire in the first place.

You see where this is going. If you no longer need to repost that position while the hiring rate is falling…well you get the picture, a picture that’s come into increasing focus since repostings peaked last November.

“When companies stop reposting help wanted ads, it means they’ve given up on adding additional headcount,” Basile said. “It’s a more cautious signal about the outlook. It means their balance sheets can’t handle the additional labor costs. This is what happens when revenue and earnings headwinds bleed into the labor-intensive parts of the economy, like construction and services.”

Revenues? Earnings? Those certainly don’t sound like economic data points. They sound so much more real.

“Labor sits at the intersection of revenues and earnings because it is the biggest cost on corporate balance sheets,” Basile continued. “Many sell-side nonfarm payroll (NFP) models show labor begetting labor – labor data used as inputs to generate NFP as the output. But in business, balance sheets beget labor. You increase or decrease your headcount based on what your revenues and earnings do, the source that pays for labor. How is this left out of the equation?”

Great question. The conclusion: the earnings recession we’ve been told to ignore is, after all, relevant. Get it, got it, good.

You will recall that the bright spot in the awful GDP report was consumption. Hate to go out on any limbs here, but it’s pretty hard to consume if you don’t have a job.

“All it takes is another shock to tip this one-legged pirate of an economy over,” Basile worries. “That’s why I’m on 100% watch.”

We should probably all be watching Yellen’s math as she shoves the jobs data around until it’s contorted enough to fit her agenda’s perfect picture frame. Not so perfect are the prospects for those ungainfully employed who are apparently a figment of our collective imagination. They can only dream of a world where jobs are plentiful enough to not-so-respectfully request their employer take their job and shove it.

 


Click HERE to purchase Fed Up: An Insider’s Take on the Willful Ignorance and Elitism At the Federal Reserve
FEDUP by Danielle DiMartino Booth of Money Strong LLC

The Vanity of Central Bankers and the Common Sense Rule

The Vanity of Central Bankers and the Common Sense Rule

Some wedding gifts just keep on giving, even after the celebrated union upon which they were bestowed has failed. That would certainly be true in the case of Carly Simon and James Taylor, whose notoriously rocky marriage ended in 1983. The timing of her November 1972 wedding marked more than a vow to Taylor, it coincided with Simon’s gift to pop music and the release of “You’re So Vain,” which ripped to the No. 1 spot on the charts and still retains the ranking of 82nd highest on Billboard’s Greatest Songs of All-Time. What a generous gift!

But, was it for the duo? Might it just be possible this lasting gift bred some not so blissful turbulence in the marriage? At the time, speculation swirled around the obviously vainglorious but mystery male subject. Was it Warren Beatty, David Geffen, Mick Jagger, Kris Kristofferson, Cat Stephens or James Taylor himself? The list went on and on. As of November 2015, Simon has only divulged that Beatty was one of three the lyrics reference. Taylor is not among the remaining two mystery men.

It’s a safe bet that a Taylor of a completely different stripe is far from being a mystery man in Janet Yellen’s appreciably less torrid past. In fact, the roles might even be reversed in Yellen’s world, with a slew of economists lamenting her vanity in rejecting them. The eminent John Taylor would be first in line, given that no less than his namesake rule used for devising monetary policy has been so explicitly and publically snubbed by the Chair.

The Taylor rule debuted in 1993 and continues to grow in its appeal thanks to the simplicity with which it can be executed. Though Taylor engaged the mandatory calculus to build his model, the inputs are elegant in their straightforward real world ease of application. At the risk of being overly simplistic, the Fed should set interest rates based on targeted vs actual employment and inflation levels; an ideal interest rate is consistent with full employment which is theoretically in sync with potential economic output.

If inflation is above target or if the economy is running too hot, as in above potential, the Fed should raise rates. If inflation is too low or economic growth too slow, well then the Fed should lower rates to encourage growth. In a perfect world, inflation and economic output are neither too hot nor too cold. That just right Goldilocks place in the ether calls for a ‘neutral’ interest rate of two percent, where the fed funds rate has historically hovered.

Here, the situation becomes perplexing in that it is the very simplicity of the rule which renders it an abomination to the reigning elite. Their preference since the crisis broke has been to embrace overly complicated models and deploy obfuscation to drive interest rates to the zero bound and beyond with blind abandon.

To add insult to injury, Yellen herself has conceded that the Taylor rule has long since signaled rates were too low. This is what she had to say in a March 2015 speech:

“Even with core inflation running below the Committee’s 2 percent objective, Taylor’s rule now calls for the federal funds rate to be well above zero if the unemployment rate is currently judged to be close to its normal longer-run level and the “normal” level of the real federal funds rate is currently close to its historical average.”

How do you fix that if you’re a labor economist who just knows, knows in her bones, that zero interest rates will ultimately lure back permanently displaced workers? Why you change the assumptions, of course! And that’s just what she did.

In that same speech, Yellen went on to explain that if you substituted in her new and improved assumptions, the rule miraculously produced different results. She began with the supposition that despite how low the unemployment rate was, ‘significant slack still remained in the labor market.” She furthermore posited that it would be more reasonable to assume the historic equilibrium rate of two percent be replaced by zero based on the suggestion of “some statistical models.”

Shortly after the speech, Taylor criticized Yellen’s modifications, writing that “little or no rationale” was given to explain cutting the equilibrium rate to zero. “This is a huge controversial issue deserving a lot of explanation and research,” Taylor warned.

Taylor summed up Yellen’s approach of massaging the model as such: “This gives the appearance that one is changing the rule or the inputs to the rule to get an answer. I do not think that reason would go over well in Congressional testimony.”

And yet, so many of Taylor’s peers in the economic community continue to feed policymakers’ penchant for contorting the world into a fantastical one that only exists in those leaders’ dreams. Is it any wonder so many of today’s leaders in central banking sport God complexes?

Sadly, as has been the case so many times since the financial crisis broke, an opportunity has been squandered. A more aggressive path to normalization would have been appropriate as per Taylor’s rule and even Yellen’s own rule for gauging the fortitude of the labor market…then. Today it appears as if the current cycle has set sail for the history books. With interest rates grounded close to zero, the real question is what miracle can the Fed contrive for the attack on what’s to come?

Given anxieties are ratcheting up fast, it will be hard to comply with this next request. But try. Try to set aside those worries for a moment and look as far out into the future as you can see. Picture the following: the economy has weathered the next recession and hopefully lived to fight another day. Now ask yourself this: What lessons might we apply from today to the post-recession world of tomorrow?

As yours truly marks the one-year anniversary of her departure from the Fed this week, a new kind of rule comes to mind. Call it the Common Sense Rule. Its input is experiential in nature drawn from economies across the globe. Its deployment is simple to the extreme:

Raise the floor on interest rates to two percent and vow to never again breach that raised floor.

Will such a radical commitment ever come to pass? It’s impossible to say. But it would be a refreshing change from the norm that’s prevailed for near on 30 years. And wouldn’t it be a relief to return to a rules-based discipline instead of the smoke and mirrors of today’s undisciplined approach where contrived language, convoluted math and the always popular throwing spaghetti against the wall to see what sticks are employed with disastrous results?

Acknowledge that there is no single certainty in this world other than that of uncertainty. Or as Taylor himself wisely observed, “Uncertainty exists in the real world; you can’t ignore it whether you use rules or discretion.”

Waiting for the Godot of central banking has caused this nation undue harm by anesthetizing U.S. politicians and households to the inherent dangers of over-indebtedness. Period. End.

That said, with all deference to Ron Paul and his acolytes, the Fed does not need to be ended. We are not, nor ever shall be, a third world banana republic. Therefore, a central bank in some form is a given.

That is not to deny that the Fed is sorely in need of reform. In fact, a total re-engineering would seem to be in order, applying the same methods many of us learned in business school. Who said that in order to exact meaningful change, one must first create chaos? Let’s do just that.

Vanity has no place in central banking, nor should it. But that very weak and vainglorious predilection seems to have nevertheless crept into a group of leaders tasked with staying above the fray. We can hope that public outrage tempers the hubris driving our current monetary policymakers to such extremes. We can hold out for Common Sense ruling the day. Let there not be those among us “So Vain” that they believe it is all about them and not “We The People.”

Are America’s Workers Playing Hard to Get?

Are America's Workers Playing HARD TO GETPenelope Pussycat might not be the most iconic of Generation X cartoon characters, but she does stand alone in her capacity to confuse. Penelope, a lovely black and white fluff ball of a cat, had a seemingly inescapable penchant for finding herself the unsuspecting wearer of an unnatural and very skunk-like white stripe. A stripe which would of course render her irresistible to the resolutely romantic, albeit malodorous, Pepé le Pew. And so with the stage set, the chase would ensue to Penelope’s long-suffering protestations.

As is the case with all things in love and war, complications arose. There were exceptions, moments when the shoe would find itself on the other foot and Penelope became the pursuer and the dapper, prancing skunk the pursued. This half-century long chase has led some skeptics to ask whether Penelope was not in fact just playing hard to get all along.

The recent string of robust job gains has led others to ask whether workers have finally broken through to the stronger position of pursued as well, with employers in the hunt for their increasingly valuable skill sets.

It’s even rumored that Federal Reserve Chair Janet Yellen’s favorite gauge of labor market strength is the so-called ‘quits rate’ which rises in lockstep with the percentage of workers who feel confident enough to tell their employers where they can put their jobs (the sun doesn’t shine there). Hence the hysteria when the quits rate ticked up to 2.2 percent in December, the highest in over eight years. The conclusion: workers had finally gained the upper hand.

Suffice it to say, the party didn’t last for long. The quits rate retreated back to 2.0 percent in January (the data series is quite lagged and that is the most recent data on hand) and other forward-looking indicators suggest momentum is waning.

A superficial glance at the headline data is misleading on several levels. For starters, at 195,000, the number of jobs cranked out by the private sector slid in at 38,000 fewer positions than the past six-month average. Dig deeper, though, and you’ll note that the 4,000-job downward revision to January’s numbers masked more troublesome figures. The numbers behind that number: Temporary employment was revised downwards by 22,000 while government jobs were revised up by 23,000.

You may be familiar with the tendency of rising temporary workers portending positively for future permanent job gains. Sensing an accelerating rate of gross domestic product (GDP) growth, employers dip their toe in the water by bringing in temporary workers that can in turn be converted to permanent employees if preliminary signs of growth pan out.

The opposite is true of a slowing economy. Firms tend to reduce workers’ hours and trim temporary staff to prepare for what’s to come. “It’s easier to cut hours and contract workers when the economy is slowing, and that is precisely what the data show,” observed AIG’s Jonathan Basile following the data’s release. “Neither the workweek or temporary employment are in a recovery mode.”

To be precise, temporary job growth has decelerated to an annualized pace of 1.9 percent; it was growing at 4.6 percent a year ago. As for the workweek, it fell to 34.4 hours dragged down by a 0.4 percent decline in the manufacturing workweek. The factory sector itself defied forecasts calling for a gain of 2,000 for the month. Instead the sector shed a net 29,000 jobs, the most since December 2009.

The truly good news in the report was that so many sidelined workers endeavored to re-enter the workforce. Only 246,000 of the 396,000 re-entrants were able to find jobs thus causing the unemployment rate to tick up to 5.0 percent from February’s 4.9-percent cycle low.

As for the prospects for further gains in those actively participating in the labor market? A Morgan Stanley report noted that the number of people not in the labor force but saying they want a job fell to 2.3 percent of the working age population. That puts those who are down but not out of the workforce near an eight-year low and not much higher than the prerecession average of 2.1 percent.

The report’s takeaway: “There do not appear to be too many discouraged workers remaining who could potentially keep reentering the labor force to continue offsetting the demographic downtrend of 0.2-0.3 percent a year in the participation rate.”

And it wasn’t only the unemployment rate you read about in the paper ticking up. The underemployment rate, which adds in those who are working part-time for economic reasons, also rose off its low for the cycle. While it’s a cardinal sin in economics to equate one month to a trend, other data have been flagging today’s rising unemployment rate for some time.

“Why would unemployment stop falling?” Basile asked. “With GDP growth at or below trend for the last three quarters, including the current quarter, Okun’s Law should eventually catch up.”

The Law Basile references is the relationship economist Arthur Okun discovered to exist between the unemployment rate and GDP growth in the United States. As unemployment drops, GDP rises, which is intuitive enough. But when the economy slows, as has been the case of late, it also follows that the unemployment rate will rise.

Basile’s analysis being spot on is critical to his Street cred given he’s anything but a plain vanilla economist. As Head of Business Cycle Research, he’s tasked with sniffing out trends when they are in their infancy. That’s why he’s had his eye on the particular query inside the Conference Board survey that gauges workers’ perceptions of the job market – that of whether workers perceive jobs as harder to get.

“The ‘Jobs Hard to Get’ is a leading indicator that turns before the end of a business cycle,” was Basile’s observation. “Ask consumers about jobs and money and they can give you a good idea. They know if they have a job. They know what they make.”

As for the recent string of survey data, Basile worries that, “Jobs ‘hard to get’ troughed seven months ago implying we’re in the latter innings of the current cycle according to historic indicators.” Nine consecutive months of deterioration has historically coincided with recession.

In a seemingly heretical moment, Basile threw out one last nibble to add to all that food for thought with his unorthodox suggestion that there is a form of unemployment that is the economy’s friend. “Yes, Virginia. There is such a thing as good unemployment,” Basile quipped.

It goes like this: When the number of folks leaving their jobs are added to those who are unemployed for extremely short stints (five weeks or less) you get a feel for the underlying velocity of the labor force. If you’re sure you can get a better job and quick, you’re apt to have less anxiety about being among the unemployed. And if you do indeed replace your paycheck as quickly as you’d hoped, then your bravado is validated. Make sense?

Well, there just happens to be an economic indicator for that, one that combines these two metrics into ‘Job Leavers who are Very Short-Term Unemployed.’ It does a bang up job of explaining the last three decades of income growth, or lack thereof. And if you must know, it stopped improving three quarters ago, which indeed qualifies as a trend.

Add to this the rolling over in Conference Board help wanted online ads and it’s hard to deny the data are lining up to give credence to the notion that labor market strength has peaked and is in remission.

Of course, it helps to know where to look to get a first read. Just think of Penelope the next time you tune in to a talking head assuring viewers all is well in the job market. Especially at first glance, looks can, and do, deceive.

Last Sighting at the Machus Red Fox

Machos Red FoxDid the mafia assassinate JFK? Was Jimmy Hoffa the man behind the setup? Does the government put fluoride in our water to gain control of our minds? Was the lunar landing staged in a Hollywood studio? Is Elvis alive? Is Paul McCartney dead? Did President Roosevelt plan Pearl Harbor? Does a lightbulb exist that never burns out? Has oil peaked? Are companies brainwashing us with subliminal advertising? Are the Freemasons intent on creating a New World Order? Did aliens land in Roswell? Is everything a conspiracy, including conspiracies themselves? Will we ever know?

Conspiracy theories are a form of high or maybe low mental entertainment. Still, perhaps it’s best to let all of those sleeping dogs lie and focus on what we do know. After nearly a decade on the inside of a highly secretive institution, a.k.a. the Federal Reserve, it came as quite a shock to have several theories assumed to be dreamed up by crackpots validated by fact. Not only are Federal Open Market Committee (FOMC) meeting minutes methodically manipulated, the actual transcripts of the meetings contain overt omissions.

Bear in mind, the Fed was never legally obligated to release the full contents of the audio-recorded transcripts. In fact, it wasn’t until 1993 that the central bank bowed to Congressional pressure to be more forthright about its deliberations. Even so, the five-year lag time (ahem) between meeting and transcript release provides ample time to ensure history is properly recorded.

According to the Fed website, the FOMC Secretariat is quite the taskmaster:

“Beginning with the 1994 meetings, the FOMC Secretariat has produced the transcripts shortly after each meeting from an audio recording of the proceedings, lightly editing the speakers’ original words, where necessary, to facilitate the reader’s understanding (emphasis added). Meeting participants are given an opportunity within the subsequent several weeks to review the transcript for accuracy.”

So the transcriber has leeway to ensure the public is not confused. And participants can make sure they really meant what they said over the ensuing five-year stretch.

News that transcripts are subject to redaction highlights the importance of what is permitted to remain in the public purview. Take this insightful suggestion, recorded as having been said by now Chair Janet Yellen in a transcript from the December 16, 2008 FOMC meeting: “We could also consider using the FOMC minutes to provide quantitative information on our expectations.”

In other words, the verbiage of the minutes can be deployed in the same manner as any other tool at policymakers’ disposal. That was presumably good news to the monetary powers that were as their traditional capabilities to relieve the stresses ravaging the economy were pressing their outer limits.

Consider the historic backdrop of the meeting; it cannot be underemphasized. The economy was in full-blown meltdown mode. Lehman Brothers had failed in September followed immediately by AIG being saved. The unemployment rate had hit 6.7 percent and was rising fast: it would peak at 10.0 percent nine months later. Investment activity was plunging as was the stock market on its way to its March 2009 lows. And those home prices the very same Fed authorities said would never decline on a nationwide basis were crashing. Meanwhile, most of the world’s economies were also in recession.

As for policymakers, they stood at the precipice of the unknown. Their conventional tool of positive interest rates had been all but depleted. Recall that Yellen’s words were said at the meeting at which interest rates were voted to the zero bound. Just days before, on November 25, 2008, the Fed had announced plans to begin purchasing up to $600 billion of securities backed by mortgages to try to loosen the vise of nonexistent mortgage credit availability. Unconventional policy had officially left the launch pad.

When the December 2008 meeting minutes were released, with their usual three-week lag, they painted a harmonious picture of camaraderie and congeniality. Take this case in point which elaborates on the collective thinking behind the crossing of the policy Rubicon:

“Participants emphasized that the ultimate objective of special lending facilities and asset purchases was to support overall market functioning, financial intermediation, and economic growth. Participants acknowledged that the effective federal funds rate probably would need to remain very low for some time.

However, they also recognized that, as economic activity recovered and financial conditions normalized, the use of certain policy tools would need to be scaled back, the size of the balance sheet and level of excess reserves would need to be reduced, and the Committee’s policy framework would return to focus on the level of the federal funds rate.”

It’s hard to believe that nearly seven years have passed lending new meaning to, “remain very low for some time.” As for the federal funds rate at which banks lent each other money in the overnight market, it’s become a financial relic few contemporary bond traders can contemplate.

Not surprisingly, each FOMC minutes release is more anticipated than the last. With the markets and the economist community in sync with their expectation that the Fed is at its first major crossroads in nearly a decade, all hands are on deck.

Few doubts remain about the probability of the first increase in interest rates in nine years on December 16. Some had anticipated that the tragic assaults on the City of Lights would trigger panic in the markets sending the Fed to the sidelines. But that didn’t happen. Confounding many market watchers, the stock market rallied hard on the Monday after the attacks.

The Financial Times’ John Authers tweeted out the following in response to the surreal market behavior: “Paris attacks have had little or no impact on markets so far. Perhaps that’s a little worrying.”

Yours truly re-tweeted Authers’ post adding, “It is unsettling that nothing unsettles markets.”

God help us if the buoyancy in stock prices reflects anticipation that the European Central Bank will expand its own securities purchase campaign to offset the inevitable economic consequences of the terrorist attacks. When will markets wake up to the fact less just might be more in the end?

As for the Fed, it can and will take the opportunity of the release of the minutes of its October deliberations to crystallize its intentions. In deliberately subtle fashion, the lengthy minutes should lean away from an overemphasis on labor market metrics paying after-the-fact homage to the latest job creation figures.

By the opposite token, the persistent weakness in retail sales and manufacturing activity outside of the auto sector should be hinted at. The renewed decline in oil prices, which promises to shrink further the ranks of the handsomely compensated and keep a lid on inflation for a bit longer, can also be alluded to.

What the minutes can’t do is time travel in anticipation of future events. No acknowledgement of the attack on France can thus be on display.

The October meeting minutes are as good as the Fed’s last dance. On this stage, policymakers can reinforce the FOMC statement’s pointed message that December will mark lift-off barring a calamity in the economic data and/or financial markets.

It’s imperative to understand that the Fed is not alone in operating in obscurity. If anything, its international central banking counterparts are less transparent with regard to their decision-making processes.

But that doesn’t make business as usual all good and well. The decisions of central banks directly affect their de facto constituents, especially in a world in which they wield more power than elected officials. The individual contributors who are the building blocks of a country’s economic output can handle, and more importantly, deserve the truth.

Demanding accountability of the Fed is in no way borne of a conspiracy hatched by pot stirrers. It’s one thing for enthusiasts to relish in speculating what became of Jimmy Hoffa after that last sighting at Detroit’s Machus Red Fox restaurant. It’s a much more serious matter to be dismissive of the legitimate need to communicate clearly the method to the “magic” of central banking.