FedSpeak: Lost in Translation

Bill Murray, who has never been one to be stumped for words, is considered to be a veritable master of improvisation. Few appreciate that the star comedian and accomplished actor has also proven himself to be a fair philosopher.

On July 25, 1980, exactly three months and 10 days after Jean Paul Sartre’s death, the comedy classic Caddyshack premiered. It was then that moviegoers nationwide first experienced Murray’s amazing gift for that renowned improvisation. It took all of six days for his character’s role to be filmed. One scripted line notwithstanding, every word Murray’s groundskeeper character Carl Spackler uttered was off the cuff. In one particularly memorable scene, Spackler came eye to eye with an infuriatingly fond and furry rodent and warned:   “In the immortal words of Jean Paul Sartre: ‘Au revoir, gopher.’”

When asked in a 1984 interview about his uncanny ability to think in front of the camera, Murray waxed perfectly philosophical: “I don’t believe that you can give the same performance every take. It’s physically impossible, so why bother? If you don’t do what is happening at that moment, then it’s not real. Then you’re holding something back.” Over 50 feature films later, the world is a better place for his never having held anything back.

At the opposite end of the spectrum lie Federal Reserve speakers, most of whom appear to be suffering from an inability to contain themselves to the detriment of their audiences. So damaging is FedSpeak, so to speak, that it’s become the Fed’s greatest liability, chipping away at what little credibility monetary policymakers have left in reserve.

Perhaps what is most disturbing about today’s stretch of FedSpeak is how it parallels with the months preceding the Great Recession. Over the last few weeks, Fed officials appear to be mystified at the tea leaves staring back at them from the bottoms of their cups despite there being no question of ambiguity.

The most recent spate of broadcast obliviousness began shortly before Memorial Day. San Francisco Fed President John Williams, Yellen’s protégé and confidante, remarked that he anticipated that 2016 would likely resemble 2015 with, “strong domestic growth, especially in the service sector (with) some subtraction from growth because of the strong dollar and weakness abroad.”

Williams’ Council on Foreign Relations interview ended with his opining that quantitative easing could be deployed once again in the event of recession as it had been successful in, “improving financial conditions and boosting the economy. So we could go back to that.” (The stock market must be woefully disappointed he won’t vote again until 2018.)

Next up, in a perfectly timed CNBC interview taped the Thursday before the May jobs report, Charles Evans, Chicago Fed’s resident uber-dove, observed that timing was not of the essence with respect to future rate hikes. As for the possibility of a ‘Brexit,’ he played it down: “I’m not sure it plays an important role in our policy making beyond us just monitoring the U.S. data and general global financial conditions and having confidence that things are still on a good track.”

Among the gems voiced in the wake of the disastrous data, Boston Fed President assured a Finnish audience that it was his, “expectation that economic conditions will continue to gradually improve, which in turn would justify further actions to normalize policy, continuing a gradual return to a more normal rate environment.”

As for the Chair herself, in the weeks that preceded the payroll report, Janet Yellen pushed up market expectations for a June 15th rate hike to 34 percent from 28 percent with assurances that it would be reasonable to raise interest rates in, “the coming months.”

Then, in what can only be described as a quick flip, Yellen summarily dismissed the specificity of a time frame conceding that the jobs report left policymakers “wrestling” with fresh doubts: “Is the markedly reduced pace of hiring in April and May a harbinger of a persistent slowdown in the broader economy?”

Step back for a moment and ask yourself one question: What data are this army of 1,000-plus PhDs studying?

There is nothing subtle in the marked deceleration in the run rate of job creation. Two years ago, monthly job gains averaged 260,000. By the time 2015 had ended, that average had slid to 221,000. Narrow it down to the last twelve months and gains slow to 200,000. And over the last six months? 170,000. Last three? 116,000 dragged down by downward revisions of 59,000 positions in February and March. As for the merry month of May, that would be 78,000 including the striking Verizon workers. P.S. Temporary jobs fell by 21,000 last month.

Set aside all of the unemployment rates in their various forms; they’re beyond misleading given the unreliability of the denominator used to calculate them, as in the ever shrinking and decidedly un-dynamic labor force. A rudimentary observation of monthly job creation tells you everything you need to know, no existential crisis necessary, no grappling gray area to wrestle. Period.

The alarming lack of acuity in gleaning trends confoundingly reaches much deeper when you consider the leading indicator data to which all Fed economists have access. It’s not as if they’re cut off from the same information that helps their private sector peers guide their clientele.

Take AIG’s Jonathan Basile. He’s a unique economist among economists in that it’s his express mandate to detect trends, as opposed to the dreaded one-month aberration, before they emerge onto the scene. As Head of Business Cycle Research, Basile literally dissects the entrails of data releases for relationships and signals. One would have to presume (hope?) that the Fed too had such an individual, perhaps even a few, also directed to detect emergent economic developments.

Back on March 29th of this year, Basile heard an alarm bell ringing in the distance. It had been seven months since survey respondents had indicated that jobs were easier to get than in the prior month. The next three to six months would thus present a test to the economy that could well be on the precipice of recession. His warning: “We’re going to get a downside surprise in nonfarm payrolls in the next few months, something in the double digits.”

In late April, Basile worried that something would have to give seeing as jobless claims were at the lowest level since Nixon was in office while expectations for rising unemployment, which have since receded a bit, were at a 26-month high. At the time, he added that the number of mergers being called off, coupled with the rolling over in announced deal size could well validate concerns about a rise in joblessness. “OK, so we haven’t seen a better streak of low jobless claims since 1973,” Basile concurred. “The way I see it though, the only way for jobless claims to go from here is up.”

And then we got the bombshell of consumer credit increasing by $30 billion in March led by households tapping their credit cards at the fastest pace since 2001. I raised the data point with Basile at the time, which in turn set off yet another alarm bell sending him back to a relationship that hadn’t flared up since the onset of the last recession. A quick look at the data verified that households’ income expectations six months out and credit card usage had indeed begun to move in opposite directions, a telltale sign of budgetary stress.

In mid-May, Basile noted a shift in the “pain trade” in jobless claims. Beginning in January 2015, energy states had been in the unfortunate position of suffering the largest annual change in jobless claims. But that run finally ended in May, leaving Michigan in the dismal driver’s seat though Michigan is hardly alone. Some 24 states showed initial jobless claims were higher than a year ago leading Basile to quip, “We haven’t smelled breadth this bad in some time.”

The final straw came down on June 1st with the release of the Conference Board’s May data on Help Wanted Online ads. After a flat March and April, May suffered a sizeable falloff in online job openings, which slid by 285,800 to 4.8 million, the largest decline since the Great Recession. The Conference Board’s chief economist Gad Levanon said that May continued, “a pattern of weaker demand in 2016,” adding that, “we are now seeing some clear signs of softness in labor demand.”

Corroborating the Michigan move, the data showed losses were widespread across all states and major metropolitan areas. The March and April weakness would also be subsequently confirmed by the downward revisions announced to March and April payroll gains. And finally, companies have stopped reposting help-wanted ads, a sign their balance sheets can no longer withstand the additional labor costs that they could have just a few months back, as clear an inflection point as any.

“More and more I’m convinced the Fed wants to raise rates so it has water in the tank to put out the next fire,” Basile worries. “That said if the Fed raises rates this summer, it will be a policy mistake.”

Add it all together and Yellen’s favored “kitchen sink” labor market indicator, the Labor Market Conditions Index (LMCI), says it all. The index of 19 job market gauges fell to -4.8 in May, sliding by the most since the 2009 recession. Meanwhile, March and April were – you guessed it – revised downwards, further into negative territory.

Do you see any gray area? Or do you instead worry that Fed officials are willfully blind when they run their mouths as if everything is going to be just right.

In an effort to describe how beyond clueless Fed speakers seem to be of the destructive power of FedSpeak, one can once again borrow from Bill Murray’s screen moments. To quote his Ghostbuster character Peter Venkman, “Why worry? Each of us is wearing a nuclear accelerator on his back.”

“With respect to the potential response from the Fed, we are seeing writ large how much they have bungled the exit from their extraordinary experiment,” warned Bookmark Advisors’ Peter Boockvar. But it goes beyond bungling. Not only has the Fed failed to act, its policies have actually created the very impediments to growth the economy now faces.

In the real words of Bill Murray from a 2012 interview, “It’s extremely powerful to say no; it’s really the most powerful thing to say.” It would be nice to be on the other side of Fed officials having long ago harnessed the power of the word ‘no’ rather than staring down the barrel of an abundance of acquiescence.

To borrow one more line from Murray, this time from his Lost in Translation character who finds himself struggling with the foreign culture of Tokyo’s nightlife, “What kind of restaurant makes you cook your own food?”

My slight variation on this question to Fed officials who remain woefully out of touch with the damage their policies have inflicted is, “What kind of central bank doesn’t have to eat its own cooking?”

January Retail Sales: Let Them Eat Bacon!

Last June, Jeralean Talley, who had been the oldest known living person in the world, passed away in Detroit at the grand old age of 116.  That left Susanna Mushatt Jones, also 116, and the second known living person born in the 1800s, to assume the throne. When asked about the secret to her longevity, the sprightly supercentenarian replied that she ate four strips of bacon every morning. She has a sign in her kitchen that reads, “Bacon makes everything better.”

Jones’ devotion to bacon may have amused the media, which had only just regaled the consuming masses with the results of a study that found bacon and other processed meats exacted untold damage on the human body, presumably resulting in shorter life spans.

Judging from recent retail sales behavior, the public has sided with Jones. “The bacon business appears to be immune to the consumer trend toward healthier cuisine,” noted Ellen Zentner, chief economist at Morgan Stanley in her group’s annual deep dive report into consumption trends.

As for what else has been insusceptible, The Liscio Report’s Philippa Dunne noted that home improvement sales were not only revised up sharply from December but tacked on another neat gain in January taking the growth rate over last January to 1.7 percent. Sales at the Home Depots and Lowe’s of this world likely signal the continued stunted mobility among many Americans who still owe more on their home than it is worth.

That factor aside, there was this little thing called a historic snowstorm that swept the East Coast in January, “Home improvement is just plain strong, seemingly without the help from the weather,” Dunne observed. Blizzard smizzard!

All in all, retail sales have been healthy for the past two months of reported data, reversing a string of disappointments. “Core sales,” which feed gross domestic product, net out autos, gasoline and home improvement sales; they rose at a 3.1 percent seasonally adjusted rate, which is a nice improvement from December’s 2.2-percent pace.

Aside from bacon and home improvement, some of the greatest growth categories headed into 2016, measured by their momentum in the second half of 2015, suggest consumers are keen to spend their hard earned dollars on “experiences” rather than “things.” The heretofore stronger dollar has had a hand in bolstering this trend as evidenced by strength in luggage, foreign travel and hotel billings.

When “things” do find their way into the shopping basket, they tend to enrich those great experiences. Apple watches showed up in the numbers, as did cellphones and all of those jazzy gadgets to help us keep track of our fitness levels, or lack thereof.

Glancing back to the tremendous de facto tax cut that made its way into households’ pockets last year, the decline in gasoline prices, Millennial motorcycles sales clocked the largest percentage-point gain among all categories tracked in the year ended December 31st. Following closely behind their two-wheeled cousins and as has been widely reported and impossible to miss on the nation’s highways, drivers have flocked to SUVs and hit the road in big style. 2015 marks the most vehicle miles driven in one year on record.

But there could be traffic ahead. Every month, the University of Michigan releases a treasure trove of valuable insights on the state of the U.S. consumer, including sentiment reported by different income brackets.

Some mirror-imaging has taken place of late. The stock market rout that started late last summer sapped the confidence at the top third on the income scale. During those same months, the bottom third of paycheck recipients were relatively giddy possibly reflecting higher minimum wages and lower pump prices. Reverse moves took place at the end of 2015 – the stock market’s temporary recovery buoyed sentiment among high earners while the onset of layoff announcements potentially depressed those populating the bottom third (no one ever said minimum wages were a free lunch.)

As for the good news in the rising saving rate, be careful to not glean too much from that particular metric. Luxury sales and stock market performance move in lockstep to one another. That stands to reason — some 40 percent of retail sales are derived from the top income quintile. It follows that the saving rate is also disproportionately influenced by this cohort.

“Any shift in behavior among this group (the top quintile) moves spending in the aggregate,” Zentner explains. “Following three straight years of double-digit growth in the S&P 500, stock prices fell in 2015 and so did spending among the wealthy, driving up the saving rate.”

Zentner’s colleague, Morgan Stanley’s lead retail analyst, Kimberly Greenberger, has cleverly coined the term “luxury recession” to describe the recent decline in high-end goods and sees the trend continuing into 2016. As is by script, pleasure aircraft and foreign auto sales were the worst two performing sectors in the durable goods space last year.

At the opposite end of the income spectrum, in a just-released survey, a third of Americans lament that they can’t afford to save for the three-percent minimum down payment on a home. Partly to blame is that mortgage lending standards have yet to return to where they were when the housing boom was sweeping the nation – an unequivocal good thing.

As for where credit has flowed more freely than it ever has, look no further than the auto sector. Janet Yellen was keen to highlight the robustness in car sales in her Congressional testimony earlier this week. That said, it’s no mistake that she failed to point out that one in five loans have gone to subprime and deep subprime borrowers, those least able to shoulder a pricey car payment. Maybe she hadn’t yet seen the data, also released this week, that defaults on car payments are only within three-hundredths of a percentage point from their 2007 highs, driven by subprime weakness.

In the meantime, the entrails of today’s University of Michigan preliminary release on consumer sentiment will not be available until the end of the month. The decline in the headline sentiment figure to the lowest reading since October, though, is likely an indication of the resumed slide in the stock market. Are high-roller shoppers staging a retreat? If that’s the case and for those with dry powder, this weekend’s Miami Boat Show might just present a great opportunity for buying a yacht on the cheap.

Back to Philippa Dunne and her partner Doug Henwood at Liscio, this dynamic due assesses the strength of the U.S. household using an unconventional but highly reliable gauge, state tax collections. They’ve been using this measure for so long that they easily recognize signposts when they first creep into view in their collective windshield.

“We sometimes joke that when our state tax contacts themselves turn the tables and get in touch with us about the results of our surveys, that’s an indicator in itself,” Dunne and Henwood report.

It might not be a joking matter that of late they have in fact been getting those unsolicited calls from their contacts who are voicing a growing concern about weakness in sales tax collections.

If the U.S. consumer truly is the only thing that stands between the U.S. economy and recession, we’d best hope the stock market comes roaring back and in a hurry.