Here’s Yellen’s Challenge: Staying Cautious With Good News – The biggest unknown for Yellen and her policy committee is how financial conditions respond to the first rate increase. How will that affect business investment, the housing market and the cost of credit for everyday consumers? Overcoming an over-sized reaction in credit markets depends a lot on communicating what recent economic reports mean for the timing and pace of rate increases. Yellen could deliver that this week, or avoid it and risk more volatility later.
Yellen Heading to the Senate – That said, I am wary of expecting much in the way of insight on “patient.” The Fed has trapped itself with that language, and I am thinking that it will take the collective power of the FOMC to devise a way out. And they have little choice but to deal with that issue at the March FOMC meeting. The basic problem is this: The hawks would be happy with pulling the trigger on 25bp at the March meeting. The center isn’t ready to go along with that, but they want the option of being able to pull the trigger in June. But Yellen, in trying to signal in December that a rate hike was not imminent, linked the term “patient” to two meetings.
Stephen Hawking: Aggression could destroy us – “The human failing I would most like to correct is aggression,” the astrophysicist said. “It may have had survival advantage in caveman days, to get more food, territory or a partner with whom to reproduce, but now it threatens to destroy us all.”
Fracking Bust Deepens, Sets Records – But drillers have to service their mountain of debt with which the fracking boom was funded. They can’t afford to cut production. To stay alive, they cut operating cost and capital expenditures, and they’re laying people off. But they focus their remaining resources on the most productive plays, using the most efficient technologies, with a single-minded focus on raising production while spending less.
Knowledge Isn’t Power – So what is really going on? Corporate profits have soared as a share of national income, but there is no sign of a rise in the rate of return on investment. How is that possible? Well, it’s what you would expect if rising profits reflect monopoly power rather than returns to capital.
The case for inaction on interest rates – Earlier this month, Equitable Growth’s Ben Zipperer looked at that very relationship. If we assume long-run productivity growth is about 1.5 percent and inflation is 2 percent, in line with the Fed’s target, then average wage growth should be at least 3.5 percent a year.
A New Exercise in Industry Rotation – The first two are well-known for individual stocks, so it isn’t surprising that it happens at the industry level. The third one has been written about ad nauseam, with many conflicting opinions, so that there is little effect is no big surprise. The last one resembles research I saw in the mid-90s, where the effect of changes in real interest rates has about that impact on stocks. Again, nothing new — which is as it should be.