Wage Growth Tracker – Wage Inflation is Already here
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I am often critical of central banks these days, and especially the Federal Reserve. But that doesn’t mean I think the entire institution is worthless. While quite often the staff at the Fed puts out papers that use convoluted and inscrutable mathematics to “prove” something that only works because the assumptions used are garbage, there are also occasionally good bits of work that come out. While it is uneven, I find that the Atlanta Fed’s “macroblog” often has good content, and occasionally has a terrific insight.
While continuing to tout an economic recovery that is being missed by far too many, the government and economists say one thing and then move toward the other. The unemployment rate claims one economic version that is talked about openly, but then there are “little things” that various official capacities seek to carry out suggesting they realize full well the discrepancy. The most obvious is the FOMC’s reluctance to do much more than talk about rate hikes.
In the US, there hasn’t been the same growing favor to revisit fiscal “stimulus” as elsewhere but that isn’t to say there isn’t any activity.
President Obama’s economic advisers and outside experts say the nation’s much-celebrated housing rebound is leaving too many people behind, including young people looking to buy their first homes and individuals with credit records weakened by the recession.
In response, administration officials say they are working to get banks to lend to a wider range of borrowers by taking advantage of taxpayer-backed programs — including those offered by the Federal Housing Administration — that insure home loans against default.
On the surface, it seems as banking had gone from being too far forward during the housing bubble and lending skewed way too much toward NINJA to now the opposite in being far too strict. Governments, as always, want it both ways as if it could possibly divine the difference – to have quite robust lending but without any tomfoolery. To move the pendulum back, part of this new push is being undertaken by the Justice Department, as if the law bureau fits within what is clearly “clogged transmission” of monetary policy. The reason for that is certainly a relic from the housing bust, as the Obama Administration is using Justice as a platform to assure banks that there would be no legal repercussions if another housing bust came around again. It’s not quite a “get out of bubble free” card, but perhaps as close as there will ever be offered.
We can learn a lot from the chart below, which shows the performance of economically-sensitive stocks relative to the S&P 500. After the S&P 500 bottomed on February 11, cyclicals (XLY) took the lead off the low as economic confidence started to improve. Notice the steep slope of the ratio off the recent low (see green text). The confident look has morphed into a more concerning look as the S&P 500 has continued to rise over the last month (orange text), which tells us to keep an open mind about a pullback in the stock market.
A similar picture emerges when we examine the high beta stocks (SPHB) to S&P 500 ratio below.
There were some fireworks this week. Gold went up on Tuesday (it was a shortened week due to Easter Monday), from a low of $1,215 to $1,244 over the day, a move of over 2 percent. Silver moved from $15.02 to $15.44, almost 3 percent. What happened on Tuesday to drive this move down in the dollar? (We always use italics when referring to gold going up or down, because it is really the dollar going down or up).
Janet Yellen happened, that’s what.
Our Federal Reserve Chair spoke to the Economic Club of New York. We won’t parse her words, but we can see what effect they had on the markets. Markets were up. The S&P surged 45 points, well over 2 percent. The British pound was up almost 2 percent. There was speculative mania, if not irrational exuberance, everywhere. Well almost everywhere. Crude oil was down almost 7% for the week.
When Pavlov trained his dogs to salivate at the sound of the dinner bell, he had to actually serve food. It would not have worked without the reward.
Thus, we remain puzzled at the market salivation at prospects of a greater money supply (or what passes for money nowadays, the irredeemable paper dollar). Why do speculators buy gold and silver at every Fed hint of greater money supply to come? Pavlov’s dogs had only the most rudimentary theory. Dinner occurs after that ringing sound. The market has a sophomoric theory. Higher prices will come after that printing sound. At least that’s the hope, which apparently springs eternal.
We thought we would graph the weekly money supply (MZM is Money of Zero Maturity), one of the measures tracked by the St Louis Fed and overlay the price of gold. We started the graph in April 2011, exactly 5 years ago. It happens to be just prior to the peak in the price of gold, but we don’t think we are cherry-picking the date. A five-year data set ought to be enough to show the trend or lack thereof, as we see in money supply growth and gold price growth respectively.
It’s not as if we’re lacking history as to how this works. Some two decades ago the Greenspan Fed’s “asymmetrical” (baby-step “tightening” measures versus aggressive rate slashing and market support) policy approach emboldened speculation and nurtured precarious Bubble Dynamics. “Asymmetrical” then took on a whole new meaning during the post “tech” Bubble backdrop, as the Greenspan/Bernanke Fed held rates at 1% in the face of double-digit mortgage Credit and house price inflation. Confidence that the Fed (and Washington) would never tolerate a housing bust proved fundamental to prolonged excesses that ensured a historic Bubble.
Credit is inherently unstable. Market-based Credit is potentially highly destabilizing. And I would strongly argue that the proliferation of market-based Credit within a global backdrop of unfettered “money” and Credit is a recipe for catastrophe. This is the heart of the problem that officials refuse to acknowledge.
As noted in yesterday’s post, doing the work in the weekend report changed me. Maybe just by an increment as I had been thinking I was inching closer to a Greenspan era (esque) bullish view. Well, not so fast.
The market’s fundamentals vs. price stinks to the high heavens and corporate management and Wall Street analysts are busy revising expectations down. If you put on a tin hat you might think that ‘they’ are putting in the fix this earnings season in order to rip the cover off the ball. If you don’t put on a tin hat you might think that this graph + an extended stock market + an extended sentiment backdrop + hedge funds going all in might = high risk.
What I think is that my portfolios are at their 2016 highs and I am going to raise cash this week. And I also think I still hold SPY short. In fact, I know I do. 😉
Commercial traders of T-Bond futures have been increasing their net short position in a big way in recent weeks, and Friday’s COT Report showed a renewed upward acceleration. Normally I find that prices and the commercials’ net position are positively correlated. If prices rise, the smart money will short more. If prices fall, they’ll turn into buyers. OK, got it.
The economic reports since the last update present a dichotomy. While there has been an improvement in the surprises – more better than expected reports – the overall tone of the reports has been fairly negative. Part of the explanation for that is the plethora of regional Fed reports over the last two weeks, almost all of which showed significant improvement. That contrasts somewhat with the real manufacturing data we received. The Durable Goods report in particular was quite weak, down 2.8% – and better than the -3% expectation. Ex-transportation orders were down 1% and core capital goods orders were down 1.8% (but down just 0.1% year over year).
According to Challenger, Gray & Christmas, layoffs in the US were up 32% in March 2016 over March 2015. Compared to both January and February this year, March was somewhat better but overall for Q1 published layoffs were also 32% more on a year-over-year basis. It wasn’t a very good quarter. Some of that is expected given the death of “transitory” as an effect on oil production which can no longer deny reality. While it is easy to chalk up this potential economic setback to that particular sector, there is much more going on: