I’m looking forward to this long weekend, because we’re celebrating my wife’s birthday with our kids and her family in Chicago. We have the opportunity to do so thanks to the U.S. labor movement. It pushed President Grover Cleveland to declare this national holiday honoring American workers in the late 1880s.
But now, almost 130 years later, the American worker’s plight is the subject of intense focus all over again. That’s true for policymakers at the Federal Reserve, and by investors the world over!
Just look at this past Friday’s comments from Fed Chairman Janet Yellen. Her speech was titled “Labor Market Dynamics and Monetary Policy,” and it was almost entirely devoted to trying to determine just how strong (or weak) the jobs market is.
Frankly, she sounded just as confused as many Wall Street pundits. She admitted openly that: “a number of developments related to the functioning of the labor market have made it more difficult to judge the remaining degree of slack. Differing interpretations of these developments affect judgments concerning the appropriate path of monetary policy.”
For instance, she noted that the unemployment rate has been falling much faster than the Fed expected. It knifed right through the 7 percent and 6.5 percent targets the Fed had laid out well in advance of the Fed’s original timeline. That arguably would require earlier interest rate hikes.
|In her speech last Friday, Fed Chairman Janet Yellen sounded as confused as many Wall Street pundits.|
But then she cited the plunge in the labor force participation rate — a fancy way of saying too few Americans are working relative to the size of the population. That arguably would postpone interest rate hikes … except for still another fact she cited: The decline may stem from the aging of the population, employees taking early retirement, and the increase in the number of workers going back to school to boost their skills.
I’ve had to read or listen to a lot of Fed speeches over the more than a decade and a half I’ve spent analyzing the economy and interest rates. The whole “on the one hand, on the other hand” analysis Yellen provided gets a little tiresome after a while. I think that’s because she’s just like many other Fed bureaucrats and Ivory Tower wonks — afraid to stake out firm ground because doing so exposes you to criticism and rebuke.
But I found one passage particularly important. She noted that the Fed has cooked up a labor market conditions index that takes 19 different indicators into consideration. Its bottom-line conclusion? That “the labor market has improved significantly over the past year.”
And that brings me to MY bottom-line conclusions on the labor market this Labor Day Weekend …
I believe the Yellen Fed is finally realizing it’s running out of excuses to keep money overly easy …
I believe the amount of labor market slack is shrinking fast, and that wage growth is going to show up sooner than many on Wall Street think …
I believe the sum total of the data out there suggests the U.S. economy is far from its “crisis era” days, and that a significant policy shift is looming.
All of that will have dramatic implications for everything from currencies to interest rates, and ultimately, to the economic expansion (down the road). So I strongly advise doing the following:
- Invest in strong, domestic sectors that are experiencing strong, SECULAR growth — energy, aerospace, health care, and so on.
- Favor U.S.-focused companies over those exposed to weaker regions like Europe and Japan — and that goes for the U.S. dollar over the euro and yen!
- Continue to “play” the economic revival here now … but recognize that the dramatic interest rate regime change I’m forecasting will cause major headaches down the road. Vulnerable stocks and sectors could be in for rough sledding in 2015 and beyond.
Oh and fourth, have a fantastic long weekend with your family and friends! And if you have time, share your thoughts about the labor market here. What you are seeing in your own backyards helps show whether Yellen and the rest of the Fed is on target or off track!
Until next time,
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