Yellen - "Who are you calling chicken?"

Yellen - "Who are you calling chicken?  cluck, cluck, cluck"

LoL - Yellen chickens out of hike interest rate as expected. Indeed, one FOMC member appears to be expecting negative rates.  Just confirms that the Fed has no idea how to get the patient off the hopium. This party is going to have to carry on until we finally get a currency collapse. With the Yen a prospective basket case, the Euro sumberged in under a migrant invasion and the Renminbi with a credibility problem however, the US dollar remains the only game in town, at least for the moment. Good news for gold and silver for those wanting to avoid the impending train wreck.
http://wyt-i.com/wp/wp-admin/post.php?post=904&action=edit

Expect Yellen to chicken out again on any meaningful rate rise for September

Will she or won’t she? It seems with Fed interest rate policy remaining the only game in town, strategists are stuck with trying to second guess Yellen’s next move at the forthcoming FOMC on 16-17 September. Of course we’ve been here before and we can look at all the evidence and data under the sun showing that rates should have gone up years ago and that the current ZIRP regime is counter-productive. Once again, we don’t think Yellen will raise rates, or at least not materially. Not because of the data, because most of that from the upward revision in Q2 US GDP (from +4.4% to +5.9% YoY – at nominal prices) to the fairly steady progress in employment and incomes would be supportive of an increase. Nor do we think because of slowdown scare stories out of China. Official China GDP data has been looking increasingly suspect for years and the blow-off in domestic equity prices was in large part a correction to credit fuelled speculative bubble which the Fed ought to be attempting to unwind itself. No, we don’t think she’ll raise because she doesn’t need to. Barring a brief wobble on one recent bond auction, the Fed doesn’t need to offer higher coupons to get its debt away, at least not yet. With ECB NIRP and a suitable level of political chaos being maintained globally, the US dollar remains well bid as do Treasuries, with yields easier across the maturity range. With sign that manufacturing competitiveness is already under pressure from the stronger dollar, why would Yellen want to compound the pain with an even stronger dollar while also risking snuffing out the credit fuelled consumption that is still keeping the US party going. Like Carney, she’ll talk the talk on rates, but push out the point when these are likely to impact into the year-end or beyond, if currency markets permit.

US private sector jobs +2.5%, average income +1.4% therefore total US private sector income +3.8%

So what of August’s NFP numbers? At +173k MoM overall and +140k for private sector jobs, the numbers were a little less than the >+200k estimates preceding them, although the August holidays can sometimes make the numbers a bit lumpy. On a YoY basis this represented an increase of +2.2% overall and +2.5% for private sector jobs, which after a +1.4% rise in average wages implies an approx. +3.8% YoY overall increase in US private sector gross incomes. Not a particularly rampant performance, but nor was it something out of line with what was being delivered over the previous cycle and certainly not something that would suggest the need for endless Fed life-support.

Average hours -0.5% vs Av hourly wage +1.9%

In terms of the components of this +1.4% YoY average wage increase, this included a +1.9% increase in average hourly wage which was slightly down from the approx. +2.5% being achieved earlier in the year, but a -0.5% contraction in average hours being worked. As reductions in overtime and hours worked can sometimes precede a more general contraction this will no doubt be kept under review by the Fed, although as one can see from the below chart this can also produce a number of false negatives.

Interest sensitive industries of Auto & Construction still hiring

By industry segment, the collapse in commodity prices has had an immediate and heavy impact on the associated ‘mining and logging’ employment segment (including oil) which should come as no surprise. A high US dollar has been slow to impact manufacturing employment, which is only just starting to tail off, while continued credit availability seems to continue to underpin construction and Auto related areas; notwithstanding the increasing erosion in share at the latter from international competitors. With both these areas sensitive to credit availability and rates, we would expect Yellen to be reticent in adversely impacting these.

So what does this mean for Wall Street? - More of the same, albeit perhaps with more emphasis on acquisitions and mergers than just share buybacks. For example, for the 5 year period 2010-15, the US quoted groups under our coverage converted approx. 71% of net income into FCF (vs 89% equivalent for 2002-07) and spent approx. 17% on acquisitions while returning 75% back to shareholders, with the remaining c.8% used to reduce debt.

71% of US FCF returned to shareholders in last 5 years

FCF generation and capital allocation 2002-07

“Trust us, we know what we’re doing”

Am I missing something here? No sooner than central bankers on both sides of the pond had impressed upon us the importance of managing expectations and newsflow for fickle markets, than Bernanke throws us a very curved ball. Was this the same person that has for months been sending out signals of tapering QE, that announced that the taps remain turned to maximum yesterday? Excuse me, but I’m confused as to what might have changed in the meantime. Indeed, looking at the predicable market reaction to the news (with asset classes rebounding across the board), I was not alone. The economic data has hardly changed (including the continued absurdity of the Fed’s +3-3.5% real GDP growth forecasts for 2013), although the ‘surprise’ emergence of Dr Yellen again as a possible replacement for Bernanke, following Summers bailing out, may have provided the catalyst. An uber dove like Yellen would not want to inherit an existing tapering policy.


Unfortunately our natural cynicism that politicians (including central bankers it seems) will continue to follow the line of least resistance until this is no longer possible, appears to be confirmed. We all know QE doesn’t work, so claiming the need to keep pumping must therefore assume the last 4 years of QE hasn’t worked and therefore smacks of insanity if this were the real reason. The real reason of course is two-fold. First, the need to keep the asset bubble of toxic bad loans inflated, at least, long enough for banks to foist them on the rest of us and secondly to keep funding a structural deficit that politicians and consumers do not have the stomach to honestly tackle before the demographic time-bomb explodes. Running these twin deficits has only been facilitated by the US dollars status as reserve currency. With over half of all US dollars offshore, this has also meant that the subsequent dollar depreciation has forced those overseas dollar holders to effectively fund the majority of this excessive expenditure. Thank you Johnny foreigner!

This strategy however is not a sustainable state of affairs. It is clear there is no political will to balance budgets even before the baby boomers retire. Congress is stymied by pork while the President seems to be on another planet. In his recent business roundtable speech came the simply jaw-dropping assertion that raising the debt ceiling does not increase US federal debt. And this after castigating his audience that “ I just want to remind people in case you haven’t been keeping up”. Ha, the audacity. It reminds me of the line in Josey Wales “Don’t piss down my back and tell me it’s raining”. Obama claims a 3% deficit is OK, while his key policy suggestion is to increase immigration (a bit like Labour in the UK). Although I presume that this would only work if only young and productive immigrants were let in rather than benefit scroungers plus their retired relatives.

http://www.whitehouse.gov/the-press-office/2013/09/18/remarks-president-business-roundtable

http://cnsnews.com/mrctv-blog/craig-bannister/obama-raising-debt-ceilingdoes-not-increase-our-debt-though-it-has-over

So where does this leave us all. A political class that remains in denial and will not act until forced to, but by then it may be too late and a cabal of central bankers and their bank paymasters who have lost control of events. They have been able to get bailed out while making vast carry-trade profits from easy money, but lack the self-restraint to get their snouts out of the trough before the abattoir doors slam shut. In case you “haven’t been listening” the world is increasingly polarising around two camps. The newly wealthy cold war losers of China and Russia bearing a grudge, but also owning substantial US debt and a US that has been blundering around in its foreign policy while alienating its allies (as well as many Americans). It may not happen this month or even this year, but at some point and with the right catalyst there will an assault on that bastion of US power, the US dollar and its role as the world’s reserve currency. Without it, the US is bust on its current military and social commitments and everyone knows it. Should this happen, and it inevitably will on its current trajectory, then expect a run on the dollar which would rapidly increase its funding costs. Bernanke’s signal since May that tapering will happen sooner rather than later may not have been welcome by the QE addicts at the trough, but it suggested that responsible individuals were still at the helm of monetary policy and would force some much needed fiscal discipline to those who had been relying on central banks to monetise their deficits for too long. Yesterday’s apparent volte face on this therefore is a very sad day. Perhaps it may be temporary, but it has sent out all the wrong signals and that there is no monetary or fiscal discipline to rely on. As such it will have to be for markets to eventually provide this discipline, but painfully. Despite its best attempts, 10 year interest rates have already doubled in a year and mortgage rates are also up around 100bts. When the Govt and the Fed lose control of markets, then caveat emptor.