The rise in long-term rates last week has been stopped by additional lousy economic news from August: retail sales and industrial production shrank versus forecast gains.
However, the big game is still the central banks. The Fed will not hike rates this week, but for U.S. bond and mortgage yields to decline, we need new action by the ECB (European Central Bank) and BOJ (Bank of Japan), and both appear paralyzed.
Thus explore new horizons in Fed-bashing. First my own.
What can the Fed really do?
I am of course a Fed-fan, or at least a believer in the need for active intervention, especially its new post-bubble duty as credit regulator. But the power to intervene demands extraordinary judgment, itself dependent on skepticism of theory, no matter how well-established or cherished.
One of my Fed heroes has been Eric Rosengren, Boston Fed, who in the summer of 2008 was the first to see that the collapse of credit markets had more than offset a year of intensive Fed easing.
Hell hath no fury like a jilted fan. Rosengren lately has embraced tightening on the tired theory that if not now, then too fast later.
Worse, his latest: “…While it is important to acknowledge the presence of global risks, market indicators have so far provided little evidence of outsized risk.” His italics.
Dear sir: were it not for the hysterical intervention by foreign central banks, there would be no markets today. Global risk is more outsized today than any time since 1930, and probably more so because so many fewer people are able to grow their own food.
[Tweet “Global risk is more outsized today than any time since 1930”]
The National Federation of Independent Business (NFIB) survey of small business this month found an all-time high 39 percent of business owners citing the political climate as a reason not to expand. Might that climate also have something to do with the overall August slowdown?
The most persuasive Fed-bashing came from inside, Governor Lael Brainerd saying the unspeakable: While “the unemployment rate has fallen from 8.2 percent to 4.9 percent, inflation has undershot our 2 percent target now for 51 straight months.”
The hawks have no defense against her stark recitation of their error in forecast and theory. She has made an excellent case that risks are asymmetric: We can always slow the economy if necessary, but if we do so by accident now…black hole ahead.
Household income gains
This week brought some very good news: real household incomes (family and individual) jumped more than 5 percent in 2015, even lower earners rising well, overall the largest gain on record. There was no distortion by change in household size, and we’ll wait for analysts to determine the influence of increases in the minimum wage.
The business right wing instantly responded: Stop that! Forbes: “Given unemployment under 5 percent and strong income gains reported, it is hard to see any justification for the Federal Reserve to delay a second rate hike.”
Back in the old days, 10 years ago and before, only bankers wanted the Fed to punish success, angling to be paid back in dollars more valuable than the ones they had lent. But today, general business commentary seems to advocate Fed hikes.
That’s an illusion: investment houses dominate business commentary, and those managers are desperate to justify fees when today cash and bonds pay nothing. Fed hikes would make life lucrative for some of their clients. Sure, low rates can hurt investors, but not those who took Bernanke’s and Buffett’s advice and bought stocks. Investment is seldom passive, safe, and rich.
To complete this affliction of leadership and the comfortable, quote the monarch of J.P. Morgan, Jamie Dimon this week: “I’d love to be President, but it’s too hard.”
We used to expect a lot of the elite, and the elite of itself. Used to.
Ten-year T-note in the last year, a ton of support at 1.70 percent.
Ten-year T-note in the last year, a ton of support at 1.70 percent.
The Fed-sensitive 2-year T-note in the last year
The Fed-sensitive 2-year T-note in the last year, traders seeing no Fed threat way off into next year.
This news really is good, but a glance at the chart brings instant suspicion of both data and durability ahead.
The top 10 percent did best (might have more to do with ability than privilege or stealing), but the best news is the gains all the way to the lowest deciles.
And across all racial groups.
The overall NFIB stalled more than one year ago.
And so did plans to hire.
Lou Barnes is a mortgage broker based in Boulder, Colorado. He can be reached at lbarnes@pmglending.com.
