Alternative Thinking
The Daily Alpha - 09.18.15

Alternative Thinking
The Daily Alpha - 09.18.15

Garrett Baldwin

You're busy...

Well, no you're not.

It's Friday. So here's today's Alternative Thinking on the Fed's Interest Rate decision... and four other things that might keep you up at night...

1. “To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that the current 0 to 1/4 percent target range for the federal funds rate remains appropriate.” Fed Open Market Committee, Sept. 17, 2015

When the Federal Reserve didn’t raise interest rates on Thursday, investors should have thought of two people.

First, they should have felt terrible for the maintenance man who -- one-by-one – has to yank down all of the green celebratory balloons from the CNBC studio rafters that were supposed to symbolically drop when the central bank would raise interest rates. 

Nine hours of pre-Fed Chair conference coverage featured what felt like dozens of single-question interviews that all asked a variation of one phrase: “Should the Fed raise interest rates?”

Yes, CNBC was ready to party like it was 2006.

They even bought the glasses.

Looking goodBut when the central bank didn’t raise rates, that poor guy had to call home and tell his wife he was on “balloon duty” for the sixth time this year.

Then, after the Fed-Chair Press conference, investors should have worried about the very real Janet Yellen.

This was an odd conference. Her answers were confounding.

The problem isn’t that the Fed didn’t raise interest rates. For that they should be applauded. The Fed got something right.

But this central bank now seems – if it wasn’t already – oddly detached from reality, and both rate fatigue and academic mental gymnastics were on full display.

First, the statement.

Every major news outlet has this sentence in its first three paragraphs of coverage, which says something about how this has been interpreted: In a policy statement, the Fed revealed that “recent global economic and financial developments may restrain economic activity somewhat and are likely to put further downward pressure on inflation in the near term.”

The press translated this as: Blame China. (Though there’s room for Mexico and Canada too).

Rick Santelli raised hell again on Friday, followed by traders on the Chicago floor. Their argument: the Fed violated its duel mandate on full employment and domestic inflation by citing global weakness as its reason to delay the hike. Santelli said the Fed is now the world’s central bank. It’s not entirely fair criticism. This isn’t 1977. The interlinking of global economies is worth consideration for a reason to be mentioned in a moment.

Instead, focus on two other issues related to this China blame: First, not long ago, the Fed implied that outside influences wouldn’t affect the rate’s decision, and then yesterday, this reversal. But the second, and more important matter, is that the global economy has gone from a tiny influence to the central argument in her conference.

Yellen checked the boxes on employment and inflation… why?


Why didn’t the Fed just tell the truth?

It’d be easy to theorize that admitting this obvious fact would damage the legacy of this so-called economic recovery, particularly ahead of the 2016 election. But every centralized bank has always clung to faulty math and laboratory academics that operate in a fishbowl.

The truth is this: The jobs data and the inflation numbers still stink – and both will remain underwhelming for some time despite the headlines.

She could have stood up and left the room, and we could have gone back to discussing what we already knew: The employment numbers are cooked, and the U.S has been importing deflation from abroad – which is why China does matter.

Instead, we ended up with China as the focus, when we’re missing the bigger picture about the Fed’s detachment from the data and the impact of its policy decisions on income levels across America.

They’re making it all up as they go along…

Someone Explain This Please

The inflation and jobs data are very underwhelming. The Chair is too stubborn to admit it.

During a conference in Chicago last month, Bill Strauss, a senior advisor to Charles Evans, said that inflation has been hovering at 0.2% for the last 12 months. That’s nowhere near the 2% target, and it has been Evans’ key argument for delaying a rate hike, and, more important, for employing patience in this process.

But the jobs number is what should be in focus right now, because the argument that we’re close to full employment seems way off given the part-time-ization of the U.S. employment market, and falling participation levels. Jobs… jobs… jobs…

Now, everyone loves to bring up this chart. It’s the labor participation rate.


In 2002, 66.6% of Americans – 2 out of 3 – who were 16 or older and eligible to work were participating in the labor force.

Today, that number sits at 62.6%, the lowest level in 38 years. More than 94 million Americans are out of the work force.

Here’s the thing: This participation number isn’t going up any time soon.

The Bureau of Labor statistics projects it will fall to 61.6% in 2022.

First, today’s figure is highly skewed by teenagers (participation has declined by 43% since the employment peak in July 2006 – which opens debate over the impact of recent minimum wage hikes).

Second, you can blame the baby boomers for the 2022 decline.

The reason, as Strauss explained at the IDEAS conference last month, is that this rate includes everyone who is retired or retiring.

Not a lot of people recognize this. So, it’s been a political football with a bit of a deflated argument. Instead, everyone should be looking at individual age groups within the participation data.

For example, the 25 to 54 year old age group is still a full two percentage points off from its 2008 level of participation. Those are official numbers. In the age group of 25 to 34 year olds, Strauss’ figures put it closer to about a 4.4% decline from 2008 levels. Other estimates are within a 2.5% to 4.5% range.

Tack on that in March, at least 22 million people were unemployed or part-time and wanted a full-time job. (Here’s a good analysis of why this should matter to the Full Employment discussion.) Meanwhile, wage growth was going nowhere, and inflation was stuck in neutral.

How are we nearing “full employment?” (Take it away, Inigo Montoya)

The reality is this official 5.1% figure is cooked.

Is this factored in, or does dropping out of the workforce (whatever that actually means these days) give the Fed and the government an all-clear sign because bad economic policies allow statisticians to pretend that tens of millions of Americans would probably like to work, but have just given up hope?

We’re told the job market is healthy. Sorry, that’s like calling a bronzed horse’s behind a thoroughbred…


Several things confused traders on Thursday. First, the statement that she can’t rule out that the U.S. is stuck in a zero-interest rate world, despite her forecast. Or – this statement that the central bank is saying it could get by without any inflation for a few years.

It seems like they are making it up as they go along.

Finally, there was this nugget:  When asked if zero-interest rate policy was leading to inequality, a professorial statement followed a No answer:

“The main thing that an accommodative monetary policy does is put people back to work,” she said. “Income inequality is surely exacerbated by high unemployment and a weak job market.”

Sure, that might be true, but income inequality is also surely exacerbated by the fact that more than half the jobs created after the recession have been low-paying positions.

Meanwhile, in June, the Philadelphia Fed economist Makoto Nakajima pretty much admitted what we already knew: “Monetary policy currently implemented by the Federal Reserve and other major central banks is not intended to benefit one segment of the population at the expense of another by redistributing income and wealth,” Nakajima wrote. “However, it is probably impossible to avoid the redistributive consequences of monetary policy.”

It’s there in plain sight, but Yellen doesn’t admit it.

Since 2009, the S&P has more than doubled, the top 1% owns half of the stocks in the U.S.  So, nearly all of the wage gains since the recession have gone to the wealthiest, who are stock owners...

Thursday, the Fed made the right decision not to raise rates. Downplaying China’s economic influence before justifying the rate hike on its back didn’t help the cause.

Nor does the fact that the Fed seems completely detached from reality.

The job numbers still stink. Inflation isn’t going anywhere for a while. And the lower and middle class in the country haven’t seen the  same results of an “accommodative” system as much as the wealthiest in America.

What on earth do they actually discuss at these Fed meetings?

2. “Almost Anyone Can Open One of These”

As if China doesn’t have enough problems…

Fan Yu of the Epoch Times explains that China’s next bubble might come from an unexpected source…

Peer-to-peer lending.

3. "So another "glitch" today, eh? Here is what traders & investors should know about cyber threats to public companies, exchanges, banks & brokerages...”

Modern Trader is pleased to share ASSUME BREACH--Instruction to Traders (and Investors) in the Event of a Cyber Attack Upon an Exchange. It is the feature story from the latest issue of MODERN TRADER magazine.

In this controversial article, Modern Trader assembled four "ethical hackers" in a Chicago pub near the exchange and challenged them to reveal the hacking thought process toward identifying system vulnerabilities. How to hack a financial exchange… And the results were shocking.

After reading this, you might never purchase a cell phone again… you might never sent a work email to certain people… you might trust no one.


4. “Funds that women own or run have beaten the industry average on a one-year, three-year and five-year view/

Factoring a full market cycle dating back to 2007, HFR reports that funds run by women have returned 59% against average returns of 37 per cent. The Financial Times reports…

5. “Thankfully, closing the carried interest loophole has gathered more bipartisan support in recent months.”

The political football is back: carried interest. According to Congressional Joint Committee on Taxation, ending the so-called loophole would raise an estimated $1.4 billion in fiscal 2016, and $15.6 billion over the next 10 years.

See you on Monday. Follow @garrettbaldwin if you're bored...


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