At a speech before The World Affairs Council of Philadelphia this afternoon, Yellen had an opportunity to clarify her views on the economy. She chose to come off as neither extremely hawkish nor extremely dovish. But she did admit to being “cautiously optimistic” and said right off the bat that her “message will be largely favorable.”
And she added: “I continue to think that the federal funds rate will probably need to rise gradually over time to ensure price stability and maximum sustainable employment in the longer run.”
Drilling down to the specifics, Yellen said the “news from the labor market over the past year has been generally good” and that “we are now close to eliminating the slack that has weighed on the labor market since the recession.”
|Fed chief Janet Yellen: “Cautiously optimistic.”|
She did reference the weakness in the Friday jobs report and called it “disappointing.” But she also downplayed it somewhat by saying “one should never attach too much significant to any single monthly report.”
In Yellen’s view, the four main potential threats we face are
1) A possible weakening in domestic demand
2) Future turmoil emanating from China and Europe
3) A slowing in U.S. productivity growth and
4) Stubbornly low inflation.
But she said that the rebound in oil prices, stabilization in the dollar’s exchange rate, and the easing of Chinese tensions should win out. And she summarized her view by saying:
“I see good reasons to expect that the positive forces supporting employment growth and higher inflation will continue to outweigh the negative ones. As a result, I expect the economic expansion to continue, with the labor market improving further and GDP growing moderately.”
|“The Yellen Fed is much more than a day late and a buck short.”|
So is Yellen right? Should we all be “cautiously optimistic” about the outlook for the economy and the markets?
Or will this go down as Yellen’s equivalent of Ben Bernanke’s and Henry Paulson’s “Subprime is contained” talk? Or going back further, Alan Greenspan’s early-2000 speech about the “revolution in information technology” and all of its glorious wonders … within a few weeks of the start of the dot-com crash.
I’m very curious to hear what you think. But my take, based on my reading of the economic and cycle data, is that the Yellen Fed is much more than a day late and a buck short in addressing market risks and getting policy right.
They should have started normalizing policy a lot sooner than they did. They should have done a lot more, a lot sooner, to push back at the multiple bubbles that their policies (and policies of foreign central banks) helped create. But they didn’t. So I believe we could be facing some of the most troubling, volatile months ahead, a direct result of all the imbalances, malinvestment, and mispricing that wildly easy policy has caused.
As a result, my “long” recommendations are largely focused on “safe yielders” – companies that are less economically sensitive, less volatile, and that offer nice yields that are actually sustainable. My “short” positions are in companies with exposure to the large, unsustainable bubbles that built up over the last few years in sectors I have referenced repeatedly here in Money and Markets.
Agree? Disagree? Anything else you’d add here, now that Yellen has voiced her opinions? Then hit up the comment section below and let me hear your thoughts.
Last week offered up a huge serving of economic data, most of it showing an economy that’s fraying around the edges. So what did you have to say about it?
Reader Rick brought up the disconnect between the data and the markets, saying: “I am just befuddled. No matter how bad things are, with Kudlow and you reeling off stats about how bad business is, the market just goes up and up and up.”
Reader Monica responded by saying: “To a huge extent, psychology and emotion – rather than business fundamentals – drive the markets these days. How else would you explain all of the money poured into companies that aren’t profitable but are ‘popular’?
“People are gleefully investing because the market has been going up and the powers that be are telling them that everything is fine, as in: ‘Move along, nothing to see here.’ People don’t want to know the truth about the economy, and the government also doesn’t want them to know the real situation because there would be rioting in the streets.”
Reader Vinman added: “Maybe we have the Zimbabwe effect going on. Zimbabwe printed money so fast, and inflation was so furious, that everybody put their money into the stock market and drove their market into the zillions. But other factors may be at play, too. Many companies borrowed money in the first quarter to buy back shares and this is probably why the markets bounced back.”
As for what’s happening on the ground, Reader Larry offered this observation: “I’m in western N.C. where I own several businesses. Our primary business is construction and we have enjoyed steady growth for the past five years or so.
“However, I do see things pulling back a bit as you suggested. We do commercial and industrial construction and do a fair amount of development for ourselves. The development side has picked up a bit as the demand has been present. We are selective in what we do.”
What about autos? Reader Bob weighed in there by saying: “I am here in Detroit auto land. May 2016 car sales were not all bad as May 2015 had two fewer selling days. Yes, carmakers are turning to more leases and subprime loans with higher incentives to move iron.
“But the good news is the average age of the U.S. car fleet is still over 11 years and the car-driving population in the U.S. keeps increasing. So I see good car sales for another two years or so before the next big downturn.”
Finally, Reader Stu said: “I just don’t see this economy doing anything other than struggling. An overbearing government that engineers numbers … a Fed that prints trillions of worthless dollars … and millennials graduating with huge debt and degrees that don’t translate into good jobs. An improving economy and a government committed to making hard choices to get spending under control could let us start making headway against our unsustainable debt.”
Thanks for sharing your thoughts about where things stand – particularly your on-the-ground observations of business conditions. It should be pretty clear where I stand on the economic cycle, and I trust you’ve taken protective steps to help your portfolio thrive in this environment. If you have any other comments, though, please do share them online.
Chinese and U.S. policymakers continued their verbal sparring over a host of issues over the weekend, from territorial claims in the South China sea to overcapacity and subsidies for Chinese manufacturing firms. The bickering comes as U.S. Secretary of State John Kerry and Secretary of the Treasury Jack Lew meet with their government counterparts in China.
The march toward the investment gutter continues in global bond markets, with a benchmark sovereign bond yield index compiled by Bloomberg sinking to 0.62% in the wake of the jobs report. Australian 10-year yields hit an all-time low, while Japanese bond yields got within a basis point of them and the U.S. Plus, U.S. 10s are closing in on very important technical support just below 1.7%.
U.K. voters will soon decide whether to split from the European Union or remain in the economic bloc. The June 23 referendum could lead to significant economic and market turmoil, and the latest British polls suggest the “Leave” campaign is gaining momentum.
Private firms like Elon Musk’s SpaceX are increasingly looking to pick up where governments have left off – exploring moons, planets, and asteroids, according to the Wall Street Journal. The latest entrant is a Cape Canaveral, Florida-based firm called Moon Express. It’s seeking to land a suite of scientific instruments on the moon via a rocket launch from New Zealand.
Do you think the U.S.-China talks will lead to anything productive, or just more sparring over security and economics? What are your thoughts on the ongoing declines in global bond yields, or the upcoming “Brexit” vote? Should we be encouraged that private firms are increasingly looking to space exploration, or should that largely remain the job of U.S. and foreign governments? Let me know your thoughts in the comment section.
Until next time,