While overall unemployment remains high in the US, here’s an amazing revelation few are talking about:
Change in Payrolls Since June 2009 (End of Recession)
Private Payrolls: +3,212,000
Government Payrolls: -618,000
Source: Thomson Reuters, US Bureau of Labor and Statistics
Effectively, the private sector is staging a comeback few appreciate, whereas the jobs contraction largely has been at the federal, state and municipal levels. For more information on the payroll numbers, check out this recent article on Fisher Investments MarketMinder: Donkeys, Elephants, and Employment
Have a great Thanksgiving weekend!
We can argue forever about how the Fed should do its job. And we can also argue forever about whether governments should control the money supply: If Not Ben, Who? If Not the Fed, What?
I find the latter most tedious because—debate it however much you like—that system ain’t changing anytime soon.
How about, instead, we stop thinking that the Fed has much or any ability to control the economy at all? Particularly in a globally interconnected system like now, why on earth do folks believe an institution like the Fed—ostensibly created to oversee and control commercial banking—would have the tools or ability to direct the larger economy? Because, if you do think that, then you have to ask yourself what kinds of tools the Fed actually has at its disposal to make the economy do what it wants. QE? Low short-term interest rates? Paying for deposits on reserve? These are great tools to control the fractional banking system, which admittedly plays a large role in the economy. But such things at best only obliquely address the wider economy.
We constantly read “is the Fed out of bullets?” It’s the wrong question—the Fed doesn’t even have the right kind of ammo in the first place and never has.
I’ve long argued in this space, on MarketMinder, and in my books, that markets and economies are CEAS (complex emergent adaptive systems). The recognition of this fact over and above the reductive mathematics of modern economics means also realizing the best way over time to create a stable, prosperous system is to allow it to form of its own volition. The Fed and its very small set of tools, and it’s very narrow mandate (stable prices and employment) are a poor place to look for savior or oracle. Certainly, metrics like the yield curve—its steepness and overall level—matter greatly to the economy. But I’ve always considered those things a function of whether the Fed was making a mistake in monetary policy rather than “making the economy grow”. The Fed can’t make the economy do anything, it can only set a few fairly narrow conditions (same is more or less true for the government). The rest is up to the economy itself (read: individuals acting of their own self interest).
But it’s also true that, though folks think of the Fed as an “institution”, and therefore generally unchanging and stodgy, it’s been one of the most dynamic and evolutionary financial entities of the last century. Particularly in the last 30 years, the Fed went from barely noted to holding press conferences on the economy and having its chairman show up on 60 Minutes (as noted here: Bernanke: Ready for His Close Up on 4/27.)
So, the public at large will keep looking to the Fed for messianic solutions, and the Fed will continue to evolve, particularly as a political entity. But don’t let that hype confuse you about what the Fed truly can and can’t do.
One of the things I’ve always found interesting is that, when folks attempt to describe investing history, they describe the “this time it’s different” investors as a priori, dyed in the wool optimists. That is, so much speculative folly resides in convincing oneself asset prices can’t go down for some newfangled reason.
That’s true! Investors do this in cycles pretty often. But few figure to ever contemplate the other side: pessimists constantly proclaim “this time is different” too—figuring out ways to convince themselves that valuations can’t go higher, it’s a new world of flat and falling prices, forever and ever, amen.
Right now, the pessimist “this timers” are prevalent: This Time, Our Economy Really Is Different
Well, you have to give The Economist some credit—at least they come right out and say it:
Nothing really speaks better to today’s sentiment, particularly across the pond, than this, does it? And, with all due respect to The Economist (which I read each and every week), this is precisely the kind of attitude that caused current global turbulence, not the other way around. It would be a fantastic thing to see the governments of the world simply get out of their own way and allow economies to wash out inefficiency and be prosperous.
For all the bluster in recent years about how “the era of deregulation” and free markets failed, this is in the end a breathtaking display about how attitudes of “government as messiah” toward private enterprise are prevalent and have been for some decades now.
Capitalism booms and busts—when you materially distort those cycles, it’s tougher to emerge from the bust and get back to booming, not easier.
The Fed’s plan to “twist” its balance sheet toward longer maturity bonds is, to be sure, ill advised. To effectively flatten the yield curve in the name of keeping (ostensibly) mortgage rates low is bizarre. That’s because it’s more important to have a steep yield curve for general economic growth featuring at least somewhat non-distorted interest rates than it is to artificially try and prop up mortgages, as if that were the end all of the economy (it’s not).
Fortunately though, the twist isn’t the kind of negative that should derail the economy or the stock market. Much like QE2, the twist probably won’t have much effect, isn’t necessary, and raises the risk of problems like inflation down the road. But outside that, it should also prove similarly ineffectual as a negative. Those who view the Fed as Messiah will be disappointed, as will those who want to see this as necessarily bearish. One thing the twist might signal, though, is that the Fed is no longer willing to take huge new measures to be more accommodative—its balance sheet won’t grow, just shift, this time around.
Liu Junning writes an important piece in yesterday’s WSJ on how to view China and its burgeoning economy.
- The Ancient Roots of Chinese Liberalism: Westerners who think that authoritarian rule is China’s natural state misunderstand its culture.
Indeed, this perspective is bolstered by Henry Kissinger’s (too long and often turgid) On China. The first few chapters of the book lay out a cultural/socio-historical framework for understanding China that downplays communism and holds Confucianism as the still primal underpinning.
Make no mistake: China’s still full of communists. But to say liberalism isn’t a part of “their culture” is both erroneous to the culture and a misunderstanding of its foundations. As Lao Tzu said: “The more prohibitions there are, the poorer the people.”
One of the foremost things no one can contemplate—even fathom—these days is that this recovery (stock market and economic) is actually quite normal. No one can contemplate it, and therefore it’s an idea with a ton of potential power. “But!” you say. “But what about…QE2! The financial crisis! High unemployment! PIIGS! Housing is still weak! Bank lending is anemic!” And yet…
…capital markets have recovered in much the way they do after basically any big bear market, and economies of the world have done the same after any big recession. Corporate earnings and the broader economy are back at new highs (US and globally, but not in places like the UK and some of Europe ). And, as always, unemployment has been the laggard.
Some keep saying this is different than every other cycle. But insofar as true outcomes are concerned (the thing investors care about most but less so for non-accountable economists), this has been downright normal stuff—straight through to mid-cycle slowdowns, fears of double-dips, and so on.
Of course there are features to now that are different—history never repeats exactly, only rhymes. But the notion that now is all too normal is the one thing bulls and bears alike have trouble with today. And thus is something worth contemplating.
|*The content contained in this article represents only the opinions and viewpoints of theFisher Investments editorial staff.|
This isn’t news:
Fed Weighs Growth Risks: Officials Keep Fresh Eye on Slowing Inflation, Europe Even as the U.S. Recovers
It’s a kind of anti-news, what-if news, not-really news, speculative news. There’s no story here. It’s what I call a “could” headline in my book, 20/20 Money. There’s the possibility of a story, but not really a story. Nothing about the Fed keeping an eye on global growth and weighing options for what it might do in the future is different than any other day of financial existence. Some will say, “But the stakes are higher today and the Fed’s moves are more important than ever.” I’ve been hearing that for as long as I’ve been in this business. What the Fed does is always important, as is what the economy, inflation, and unemployment are doing. That will never not be true.
Investors would do well to completely skip headlines like these, which waste time and offer nothing but obfuscation.