"Re-Evaluating Labor Market Dynamics"
Jackson Hole, Wyoming - August 21-23, 2014
Janet Yellen due to take the stage at 10:00 creating much anticipation - What will she say? Will she address why she thinks there is still so much slack in the labor market? Will she continue to calm investors or will she create new volatility allowing traders to have a field day? Like I said on Monday - the topic is not a barn burner....but it is important to discuss - is it structural, frictional or a cyclical problem?
Structural unemployment is defined as unemployment arising from technical change such as automation, changes in output due to changes in products that people demand or a broad demographic change such as an aging population. (Think Baby Boomers).
Frictional unemployment is defined as the unemployment that occurs because of people moving or changing jobs - this is important to understand because it is completely voluntary - meaning that the worker has chosen to do something else vs. being forced.
Cyclical unemployment is defined as workers losing their jobs due to business cycle fluctuations - in the normal boom and bust cycles in the economy.
Of these 3 - frictional unemployment is the one that individuals can control and is not one to be concerned about for the broader economy - because you CHOSE to move and you have a new opportunity (usually a sign of a healthy, robust economy).
Structural & Cyclical Unemployment are much more difficult to manage - For the most part - Yellen and her counterparts (including the clowns we call Congress) believe that current unemployment is cyclical and can be managed by aggressive monetary policy.....Hmmmm? How's that working for you?
But if it appears that the problem is more structural - then strap in - because that is much more difficult to manage. Throwing money at structural unemployment is like flushing it down the toilet - you can't fix an aging population or changes in output due to demand with monetary policy - so pay attention to the speeches today.....
If we keep hearing 'cyclical' then look for the FED and other central banks to remain dovish .....mkts will love this.....and if we hear that the issue is structural -then look for policy to be more hawkish - strap yourself in and listen for the announcement:
"Ladies and Gentlemen, the Captain has turned on the Fasten Seat Belt sign signaling that we may experience some turbulence ahead - Flight attendants please take your seats - In the event of an emergency, a life vest is located in a pouch under your seat...."
'Econ 101 - It's all about Supply & Demand' - slow economy = low demand for workers and with a high supply of potential workers - employers do not have to pay up....thus the whole Wage Inflation Index conversation......a rise in the wage index would be a good thing as it would signal increasing demand - but a stagnant wage index would indicate slowing demand......
"Everybody's Making Less Money Now Than They Were When The Recovery Began" - Sentier Research's latest release shows that REAL median household income is down 3.1% since June 2009 (recovery began) and is 4.8% below the December 2007 level (recession began) .
So - we must ask - Is it a structural problem or a cyclical problem?
This morning WSJ headlines with: "In Jackson Hole, Central Bankers and Easy Money Collide" - Sluggish growth confronts officials gathering in Wyoming.
Officials must confront a global economy that continues to disappoint.
China Struggling - PBoC to cut rates
Japan stumbling - BoJ to do more QE
Germany contracting - causing the ECB to employ negative interest rates
UK - performing the best but the BoE still reluctant to raise rates
and in the US - well it's all coming up roses but the FED continues to keep rates at zero.
Markets pushed higher yesterday - another day of extremely low volumes - with the S&P 500 hitting a new record high and coming within 8 points of 2000. Economic data continues to surprise investors and yesterday was no different - with strong numbers on US home sales, jobs, and some solid global manufacturing reads. As noted above - With global central banks remaining highly accommodative, the path of least resistance for mkts remains to the upside.
Here at home - the massive balance sheet that the FED has created over the past 6 yrs when QE started in late 2009 correlates perfectly with what the mkt has done. The Federal Reserve balance sheet of assets was under $500 billion in 2009 - S&P was at 666 - and has now grown to $2.6 trillion - S&P at 1990.
What people fear is that the rise in the Fed asset balance sheet correlates directly with the rise in stock prices. Each time a new QE infusion started the mkts took off and each time a QE program ended the mkts pulled back hard. So what is going to happen when QE comes to an end and what is going to happen when the Fed begins to reduce their balance sheet? Just like buying all these assets effectively put money into the markets, selling them back to the public will be like taking money away from the mkts. And this is the real quandary for the FED.
US futures went from being higher in early morning trade to now being down 2 pts...at 1987....as Ukraine/Russia steal the spotlight. The Russian aid convoy has crossed the border without permission - Interfax reports this as Ukraine seeing this an 'invasion'.
Look - it is Friday and the mkt was teasing with a new record - Vlad and his cronies have been getting short into this rising mkt and needs to stir it up a bit... What better way to cause a pullback than push the geo-political button? Look for this news to 'maybe' steal a bit of the spotlight off of Jackson Hole as investors remain anxious over an increase in tensions. Either way - we can still taste S&P 2000.
Just FYI – Grana Padano – is one of the most popular cheeses in Italy. It has a distinctively grainy texture and comes from the Pianura Padana region (Po Valley, Northern Italy). It is a semi-fat hard cheese which is cooked and ripened slowly – minimum time to ripen is 9 months for Grana Padano and up to 20 + months for Grana Padano Riserva – which is more grainy, crumbly and fully flavored.
Season your rib-eye with s&P and massage with a touch of olive oil…allow to rest at room temp for 15 or 20 mins.
Heat your grill – Place the rib-eye on the grill and sear for 3 mins and then flip over and cook for another 3 to 5 mins – depending on thickness – but for this you should use a thin sliced rib-eye…..
Place on a warmed plate and cover with fresh arugula, chopped red onion (optional) and slices of the Grana Padano. Serve immediately with a house Chianti. There is no dressing on the arugula – this dish is about simplicity.
Buon Appetito.
Jackson Hole, Wyoming - August 21-23, 2014
Janet Yellen due to take the stage at 10:00 creating much anticipation - What will she say? Will she address why she thinks there is still so much slack in the labor market? Will she continue to calm investors or will she create new volatility allowing traders to have a field day? Like I said on Monday - the topic is not a barn burner....but it is important to discuss - is it structural, frictional or a cyclical problem?
Structural unemployment is defined as unemployment arising from technical change such as automation, changes in output due to changes in products that people demand or a broad demographic change such as an aging population. (Think Baby Boomers).
Frictional unemployment is defined as the unemployment that occurs because of people moving or changing jobs - this is important to understand because it is completely voluntary - meaning that the worker has chosen to do something else vs. being forced.
Cyclical unemployment is defined as workers losing their jobs due to business cycle fluctuations - in the normal boom and bust cycles in the economy.
Of these 3 - frictional unemployment is the one that individuals can control and is not one to be concerned about for the broader economy - because you CHOSE to move and you have a new opportunity (usually a sign of a healthy, robust economy).
Structural & Cyclical Unemployment are much more difficult to manage - For the most part - Yellen and her counterparts (including the clowns we call Congress) believe that current unemployment is cyclical and can be managed by aggressive monetary policy.....Hmmmm? How's that working for you?
But if it appears that the problem is more structural - then strap in - because that is much more difficult to manage. Throwing money at structural unemployment is like flushing it down the toilet - you can't fix an aging population or changes in output due to demand with monetary policy - so pay attention to the speeches today.....
If we keep hearing 'cyclical' then look for the FED and other central banks to remain dovish .....mkts will love this.....and if we hear that the issue is structural -then look for policy to be more hawkish - strap yourself in and listen for the announcement:
"Ladies and Gentlemen, the Captain has turned on the Fasten Seat Belt sign signaling that we may experience some turbulence ahead - Flight attendants please take your seats - In the event of an emergency, a life vest is located in a pouch under your seat...."
'Econ 101 - It's all about Supply & Demand' - slow economy = low demand for workers and with a high supply of potential workers - employers do not have to pay up....thus the whole Wage Inflation Index conversation......a rise in the wage index would be a good thing as it would signal increasing demand - but a stagnant wage index would indicate slowing demand......
"Everybody's Making Less Money Now Than They Were When The Recovery Began" - Sentier Research's latest release shows that REAL median household income is down 3.1% since June 2009 (recovery began) and is 4.8% below the December 2007 level (recession began) .
So - we must ask - Is it a structural problem or a cyclical problem?
This morning WSJ headlines with: "In Jackson Hole, Central Bankers and Easy Money Collide" - Sluggish growth confronts officials gathering in Wyoming.
Officials must confront a global economy that continues to disappoint.
China Struggling - PBoC to cut rates
Japan stumbling - BoJ to do more QE
Germany contracting - causing the ECB to employ negative interest rates
UK - performing the best but the BoE still reluctant to raise rates
and in the US - well it's all coming up roses but the FED continues to keep rates at zero.
Markets pushed higher yesterday - another day of extremely low volumes - with the S&P 500 hitting a new record high and coming within 8 points of 2000. Economic data continues to surprise investors and yesterday was no different - with strong numbers on US home sales, jobs, and some solid global manufacturing reads. As noted above - With global central banks remaining highly accommodative, the path of least resistance for mkts remains to the upside.
Here at home - the massive balance sheet that the FED has created over the past 6 yrs when QE started in late 2009 correlates perfectly with what the mkt has done. The Federal Reserve balance sheet of assets was under $500 billion in 2009 - S&P was at 666 - and has now grown to $2.6 trillion - S&P at 1990.
What people fear is that the rise in the Fed asset balance sheet correlates directly with the rise in stock prices. Each time a new QE infusion started the mkts took off and each time a QE program ended the mkts pulled back hard. So what is going to happen when QE comes to an end and what is going to happen when the Fed begins to reduce their balance sheet? Just like buying all these assets effectively put money into the markets, selling them back to the public will be like taking money away from the mkts. And this is the real quandary for the FED.
US futures went from being higher in early morning trade to now being down 2 pts...at 1987....as Ukraine/Russia steal the spotlight. The Russian aid convoy has crossed the border without permission - Interfax reports this as Ukraine seeing this an 'invasion'.
Look - it is Friday and the mkt was teasing with a new record - Vlad and his cronies have been getting short into this rising mkt and needs to stir it up a bit... What better way to cause a pullback than push the geo-political button? Look for this news to 'maybe' steal a bit of the spotlight off of Jackson Hole as investors remain anxious over an increase in tensions. Either way - we can still taste S&P 2000.
Sliced Rib-Eye w/Arugula & Grana Padano
There are only a couple of ingredients….Thin sliced rib eye, s&p, olive oil, fresh arugula, sliced red onion and shaved Grana Padano.Just FYI – Grana Padano – is one of the most popular cheeses in Italy. It has a distinctively grainy texture and comes from the Pianura Padana region (Po Valley, Northern Italy). It is a semi-fat hard cheese which is cooked and ripened slowly – minimum time to ripen is 9 months for Grana Padano and up to 20 + months for Grana Padano Riserva – which is more grainy, crumbly and fully flavored.
Season your rib-eye with s&P and massage with a touch of olive oil…allow to rest at room temp for 15 or 20 mins.
Heat your grill – Place the rib-eye on the grill and sear for 3 mins and then flip over and cook for another 3 to 5 mins – depending on thickness – but for this you should use a thin sliced rib-eye…..
Place on a warmed plate and cover with fresh arugula, chopped red onion (optional) and slices of the Grana Padano. Serve immediately with a house Chianti. There is no dressing on the arugula – this dish is about simplicity.
Buon Appetito.
Recommended Content
Editors’ Picks
EUR/USD edges lower toward 1.0700 post-US PCE
EUR/USD stays under modest bearish pressure but manages to hold above 1.0700 in the American session on Friday. The US Dollar (USD) gathers strength against its rivals after the stronger-than-forecast PCE inflation data, not allowing the pair to gain traction.
GBP/USD retreats to 1.2500 on renewed USD strength
GBP/USD lost its traction and turned negative on the day near 1.2500. Following the stronger-than-expected PCE inflation readings from the US, the USD stays resilient and makes it difficult for the pair to gather recovery momentum.
Gold struggles to hold above $2,350 following US inflation
Gold turned south and declined toward $2,340, erasing a large portion of its daily gains, as the USD benefited from PCE inflation data. The benchmark 10-year US yield, however, stays in negative territory and helps XAU/USD limit its losses.
Bitcoin Weekly Forecast: BTC’s next breakout could propel it to $80,000 Premium
Bitcoin’s recent price consolidation could be nearing its end as technical indicators and on-chain metrics suggest a potential upward breakout. However, this move would not be straightforward and could punish impatient investors.
Week ahead – Hawkish risk as Fed and NFP on tap, Eurozone data eyed too
Fed meets on Wednesday as US inflation stays elevated. Will Friday’s jobs report bring relief or more angst for the markets? Eurozone flash GDP and CPI numbers in focus for the Euro.