Pent-Up Wage Deflation???

As expected – Janet Yellen did NOT ignite a bonfire but only emphasized that slack and capacity still remain in the US labor mkts in spite of falling unemployment and supposed job creation…..allowing her to straddle both sides of the fence -

“….five years after the end of the recession, the labor market has yet to fully recover.”

And stocks did nothing – as neither side – buyer/seller – showed any willingness to take the day. Was it just that investors/traders did not hear anything to get them excited, or was it just a reflection of the ‘dog days of summer’ as the season winds down and so many people are on vacation? Volumes continued to be very light and volatility nonexistent. Traders shrugged off the speech as a non event.

Anyone hoping for more guidance about the timing of a change in policy was left holding the bag as there was nothing to chew on and Yellen gave no clue on the FED’s thinking in the months ahead and in fact acknowledged that the FED could go EITHER WAY – admitting that the ‘slack’ is causing her to hold the line and remain accommodative, but IF the labor mkt tightens and IF inflation begins to soar then we can expect a change in policy…..in the end – the speech was not historic nor dramatic – it was as expected more of a broad based academic speech among the world’s central bankers.

Labor mkt structural changes was also a key part of the speech and Yellen made it clear that because of these changes – it makes it more difficult to interpret the data, which then complicates the decision making process allowing her to take a more neutral position on the US Underemployment rate.

The Underemployment rate or U-6 – is considered to be a broader measure of the unemployment rate and includes two groups of people that the “official U-3" does not:

The first is what they call “Marginally attached workers” - people who are not actively looking for work, but who have indicated that they want a job and have looked for work (without success) sometime in the past 12 months and the second are ‘Involuntary Part-Time workers” who want full-time work but can only find a part-time job due to economic reasons.

As of Friday the U-6 rate was double the official U-3 rate – or 12.6% vs. 6.2%. In July 2014 – there were 2.2 mil ‘marginally attached’ people and 7.5 mil ‘involuntary part time workers – add these up and you have 10 mil people partially engaged – unable to fully contribute to their households, the economy or society. So although it makes the administration feel really good by reporting a 6.2% unemployment rate – it is extremely misleading and frustrating for so many. (After about 6 months – potential employers see you as ‘damaged goods’).

Which accounts for why she threw in a new concept – one that I expect will start to get more airtime – “Pent Up Wage Deflation”.

This concept of according to Yellen, is that companies MAY HAVE TRIMMED employees - I would say - slaughtered and disemboweled employees - during and following the Great Financial Crisis, but they did not force the remaining employees to take much of a cut in their hourly rates. On the other hand, they also didn’t do much in the way of traditional raises following the end of the recession and ensuing recovery which they tell us is happening – leading to this new concept of “pent-up wage deflation.”

With a glut of applicants for jobs, companies do not feel they have to pay up or even offer benefits to compete, leading to a stagnant wage environment – especially for those that have gone from full time to part time.

So the Dovish interpretation is that we need to keep rates at zero to further help the stumbling recovery. The hawkish interpretation is that everything being equal, employers should have cut wage rates on the remaining employees and then hiked them back up during the recovery. But since they did not then, the Fed could choose to ignore the stagnant wages and raise interest rates in spite of the sluggish labor mkt.

I do not think that the mkt or traders caught the meaning of this new concept - but at some point in the future when the Fed starts using Pent-Up Wage Deflation in their daily conversation as a prelude to higher rates then that is when we will see markets react.
In the end - What difference does it make anyway? New Flash - Rates are going up! But when rates start to rise - they are not going up by anything substantial...I mean you are not going to see 1/2 point or full point moves out of the gate if and when they do so what’s the big deal?

Will it really be rising rates or increasing political tensions that cause a pullback or will it be weakening real economic data that forces investors to wake up and smell the coffee. Are long term investors going to sell their positions in big cap American blue chip stocks just because rates ticked up by 1/8th of 1 percent or Putin pushed across the border? Doubtful.

If and when the mkt pulls back - it will more than likely be because of weakening macro data - signs that the economy is stumbling again - not because of an insignificant rate rise that we have all been waiting for anyway.....If the mkt begins to fail - it is more because investors/traders have re-assessed and then re-priced the mkt based on broader fundamentals.

This morning - guess what? Futures are UP by 6 points - Go figure! That means that S&P cash should absolutely tease and tempt traders with S&P 2000 early on as the mkts continue to digest the fact that the overall theme out of Jackson Hole was - Labor mkts can NOT take higher rates yet - so - here we go sports fans......

Note that we attempted a couple of times last week only to be held in check by the Jackson Hole Summit - Since that is now over and the details are known - the mkt has removed any uncertainty that Yellen would become more hawkish....

On the Eco front - we will get - the Dallas Fed Survey - exp of 12.8, Markit US Services PMI of 58, New Home Sales of 429k representing a 5.7% increase over last month. Geo-politically the spot light remains on Russia/Ukraine and Israel/Gaza. In Europe the German IFO survey reported a slight miss putting more pressure on Uncle Mario to do something......

Overnight in Asia - Japan + 0.41%, Hong Kong +0.22%, China -0.51% and ASX -0.19%.

In Europe mkts are celebrating the fact that the ECB stands ready to launch a QE type of program IF needed....sending all mkts into the green - .... FTSE closed - CAC 40 + 1.11%, DAX +1.01%, EUROSTOXX +1.1%, SPAIN +0.90% and Italy +1.21%.

Buccatini w/Peas and Leeks

From the Piemonte region of Italy. Piemonte - is one of the 20 regions of Italy, located in the north western part of the top of the boot - it borders France, Switzerland to the north and Liguria, Lombardy and Emila Romagna - to the south and east. It is surrounded by the Alps, its capital is Torino - site of the winter Olympics in 2006. The name - Piemonte - comes from the Latin - Pedemontium - meaning at the foot of the mountain. Much of the food from this region has both French and Swiss influence and as such - uses a lot of butter and cream. This dish is easy to make and one that you will enjoy - again - I like it for spring and summer but feel free to cook it all year.....Enjoy this with a crisp chilled white wine

You will need: Buccatini Pasta, 6 leeks, garlic clove, onion, butter, lite cream, frozen petite peas, fresh grated Parmegiana cheese and s&p.

Bring a pot of salted water to a rolling boil.

Using the bottom part of the leek - up to where it turns dark green. Cut the stalks at that point. trim the bottom and then slice the stalk in half. Now slice lengthwise into thin slices. Next peel and slice the onion.

In a sauté pan - melt the butter with a splash of olive oil, sauté 1 sliced garlic clove*(optional), the onion and the leeks. Sauté slowly on med low so that the leeks and onion brown, no burn. After about 10 mins - add the frozen peas. Sauté for another 10 or 15 mins. season with s&p. Now add the lite cream and stir.

In the meantime add the pasta to the pot and return to a boil. Cook for about 8 mins or until aldente. Now add one ladle of pasta water to the onion and leek mixture. Strain pasta - reserving a mugful of pasta water. Return the pasta to the pot and add back 1/4 cup of the water to re-moisten. Stir to
absorb.

Now add the leek, onion, pea mix to the pasta - Add a handful or two of grated Parmegiana cheese and toss. If it is not moist enough - add back some more of the pasta water. Serve immediately in warmed bowls with toasted garlic bread.