GDP - Major Miss, Our Side

Well, that was not pretty.  We had looked for something just through 2% at the very best, Q2 GDP and a negative H1. Instead, we had Q2 at +4% and Q1 R up to -2.1%.

We’re heading out to the corn patch in a few minutes to salvage what’s left as we find the raccoons have been making off with our crop.


Robert Craven

 

Overreach

Yellen told Congress recently that valuations of high-yield bonds “appear stretched.”  The UK Telegraph: “It is quite unusual for the chair of the Federal Reserve to express a view on market valuations, so it is hardly surprising that investors have sat up and noticed.”

It is “quite unusual” simply because most know when to keep it zipped, when they are out of their arena and away from their mandate. 

The respected columnist George Will recalled how the Economist noted last year that, “…Yellen is now poised to take the tiller of the US economy.” From Will: “Oh? The economy has a tiller? And with it, the Fed chair can steer the US economy? Who knew? A touch of the tiller here, a nimble reversal there - these express the fatal conceit of an institution that considers itself capable of, and responsible for, fine-tuning the nation’s $15.7 trillion economy.”

Many fear the next bubble, a yet-to-be indentified excess-gone-to-the-dogs manufactured by Fed largesse. This is not a likely outcome. Instead, our next crisis will be tied to the combination of Fed activism – fooling with the tiller - and the world market crowd’s demand for a god. Thus, if Yellen judges that high-yield bond valuations are inflated, the market crowd takes that as gospel (which is exactly what happened, this incident, as high-yield investors quailed). 

We noted in past sketches that we will have hell to pay. This Fed chair will continue to overreach; the market crowd will continue to react in the extreme (as do all crowds) and the resulting market violence/distortions will help to put this so-called recovery to rest.


Robert Craven
 

The Best May Be Behind Us

For those who may have missed our blog, past weeks, just a friendly reminder – the US economy didn’t going anywhere, H1. 

We will see advanced Q2 GDP this week, with GDP revisions back to 1999; if Q2 breaks much through 2% it will be a miracle. Amazingly, there are still many out there who believe that weather was the main culprit, Q1 (-2.9%) and that we are in for a major bounce, Q2.  Poor little darlings.

We find from last Friday’s June Durables print that non-defense capital goods shipments, ex-aircraft - the measure used for calculating equipment spending - fell 1% in June, fell 0.1% in May (R from +0.4%) and fell 0.3% in April. Capital goods shipments were supposed to be part of the “big bounce” in Q2 GDP. Nope.

We suffer under a “progressive” administration and now we have a “progressive” as Fed chair. There is no sanity in that.

As a direct result, corporate risk takers are simply not “taking” any. That means non-residential fixed investment will increase about half of what most expect, H1.

We will witness the June Payroll release this Friday.  May headline figures looked to be buoyant, misleading many observers.  Come on now.  About 70% of new jobs created year-to-date have been voluntary part time jobs. These don’t carry much horsepower for goodness sake.

Our problem is that for the time being at least, we cannot translate macro insight to the bottom line. This is because in the fixed income markets, central banks are now seen as governors (of the lawn mower variety).

The distortions triggered by an activist Fed chair will continue to act as a retardant.  We may have seen the best from this recovery.


Robert Craven

Eye on the Ball

The recent NFP print appeared to contradict our long-held view on US growth. That is, many, perhaps most observers believe jobs lead GDP; these same observers, most of whom had their predictions flattened by the Q1 GDP print of -2.9%, were cheered by recent jobs figures and claimant counts.  These folk predict a major acceleration in growth (which would save their necks).  We did and still do predict little to nothing by the way of growth.

Where in the world do they get this stuff?  Jobs have never been a leader, at least not during our time in the arena.  We never use charts but if the reader insists, take the correlation of NFP to GDP, past 20 years or so and report back.  Jobs may be a coincident indicator, at best, which is why we could never explain the near-orgasmic response tied to buoyant payroll reads.

And jobs and claims are especially poor indicators now given the change in payroll practices.  Employers hire temps more than ever.  They do it to manage production; they don’t want to get hung out to dry.  Now if a temp goes back to the agency, it is not a layoff; it does not raise unemployment insurance – they can’t collect it.  So of course this makes the weekly claims reads look rosier than reality would justify.

But this is not the only reason to discount jobs figures. Another is that productivity (aggregate hours / output) has tanked. That is, it takes a heck of a lot more workers now to produce a given quantity of goods than it did, Q4 ’13; about 1,500,000 more by some estimates. Productivity is down maybe 5%, Q1, because – you guessed it – the fall in business investment. It was incessant meddling by the Fed and administration that led to this; risk takers don’t trust either one. They fear the risk that high corporate taxes will go higher, the risk that the bloat in regulations will bloat further, and finally, they fear the results of what they understand to be the fatal conceit of a Fed chair who thinks she is capable of fine-tuning the US economy.


Robert Craven

HR 5018

Many of us celebrate the first step to a return to sanity at the Fed – the introduction of the Federal Reserve Accountability and Transparency Act of 2014 (HR 5018). 

We have a Rule of Law in this country - its origin to be traced to the Scottish enlightenment, especially the work of founder James Wilson. This Rule of Law is sacrosanct. We have also had from time to time a Rule of Monetary Policy Making in this country; however, this rule has been repeatedly ravished, violated. HR 5018 seeks to prevent such a repeat outrage.

All but the willfully blind now acknowledge that more predictable rules-based policy leads to better economic performance. See the recent works of Belongia, Ireland, Carlozzi, Taylor and so many others.  John Taylor: “In one of his last research papers Milton Friedman argues that the Taylor rule ….worked well because it was a way to keep the growth rate of the money supply constant, another way to make the connection between money growth rules and interest rate rules.”

Naturally all do not agree because planners and activists - the self-anointed among us - have yet to be cleansed from the system.  Fed chair Yellen is one of the anointed. That is why this week she went on record opposing HR 5018.

Instead, we expect the hearings on HR 5018 to expose the dangers of relying on Friedman’s “accidents of personality” and to ignite at least the pilot light, if not the main burners on the return voyage to sanity in central banking.


Robert Craven