This Fed Could Not Be Any Less Transparent- By NEIL SISKIND

This Fed would have us believe it is operating in accordance with its dual mandate of price stability and maximum employment. It has said as much.

The Fed, though, has a third mandate ever since the financial crisis: Stability of the financial system.

Chairman Powell, in his December 19th testimony, clearly said that he is not concerned about inflation- in prices or in wages- but the Fed continues to raise interest rates.

The Fed would have us believe it feels compelled to get interest rates to a point of neutral, where it is neither accommodative or restrictive. Not true. The Fed wants credit and risk to tighten- to be restrictive on the economy. Former president of the Federal Reserve Bank of New York, William Dudley, made it plain in an interview with Bloomberg’s Kathleen Hays on December 20, 2018, that he believes that the Fed wants to slow the economy- period. Chairman Powell’s comments on the lack of inflation and intent to raise rates, confirms this.

Chairman Powell has failed to articulate one area of concern which makes the continuation of raising rates seem logical- not even any inflation concerns. But raising them as the stock market crashes so that he has cushion if he ever needs it, is not believable; prudent- but not believable.

Here are some comments Chairman Powell has made in the two most recent Fed meetings:

  • No asset class is too pricey
  • There’s little wage inflation and wage growth is not necessarily inflationary
  • Corporate debt is concerning, but not obscene
  • Price inflation is about 2%, at best, and has been stuck there
  • It’s not the Fed’s job to ensure financial stability
  • Labor markets are tight but wage growth doesn’t cause inflation
  • The U.S.-China conflict is not a big concern
  • No comments at all on home prices

The Fed would have us believe it is moving rates higher so that if and when there is an economic downturn, it will have bullets in its gun (or arrows in its quiver) to re-stimulate the economy by cutting interest rates. This is not true. No Fed would hike into slowing GDP growth and a sinking stock market just so it can cut if it needs to “someday”, while it purports to see little inflation or economic that it can articulate (aside from some concern about Italy’s problems).

Some might argue that this is exactly the time to hike rates- while the economy is strong and can withstand it- even if the stock market doesn’t like it. But, with no inflation, and expectations by everyone of lower GDP and heightening global stresses in the coming months, raising rates as cushion for a slowdown without the ability to point to any foreseeable risks, is a bit theoretical and intangible- and this Chairman was supposed to be avoiding theory to the detriment of pragmatism and data dependence. Moreover, it’s not so much that the economy is strong as much as it is that the Fed will not admit any weakness. Powell is trying to have it both ways- raise rates and have people accept it as prudent without acknowledging any troubles- and it’s not working.

This does not mean that the Fed is wrong for hiking interest rates, it just means that it is not being transparent about the growing and foreseeable risks as it does so. The Fed has elected to perplex people, over alarming us.

The Fed has had one agenda with regard to its rate hikes- to slow the economy by tightening credit and deflating asset prices built on debt and risk. No other story line it presents holds up to scrutiny.

This Fed is choosing jawboning and its third mandate over transparency in order to get credit to tighten itself without actual rate hikes, if possible, and get people to stop making and taking speculative loans and investments. This, along with the lack of transparency and a complete understanding of the Fed’s intentions, are causing significant volatility and declines in stocks and in homes. But, the Fed may be fine with that if it can do one thing that matters most- prevent another financial crises due to continued extensions of cheap credit, more bad loans, and more asset inflation.

The Fed has recently expressed some dovishness as asset prices have declined, having much to do with people’s concerns that asset price declines will affect the “real economy”. If this proves true, the Fed may be near done with its hiking cycle. If this does not prove to be the case, per the data, the Fed may either decide to continue with hikes until the economy slows- or it could remain dovish, since assets prices and credit may come under control. We’ll see.

 

 

Neil S. Siskind, Esq., President
The Siskind Law Firm
Tel: 646.530.0006

Neil Siskind is the Founder & Chairman of The Fatherhood Assignment
Neil-Siskind-photo
Learn more at:  http://www.neil-siskind-the-fatherhood-assignment.org/

Neil Siskind is the Conservator of the Neil S. Siskind Nature Preserve
Neil-Siskind-Picture

The Neil S. Siskind Nature Preserve is over 8 acres of environmentally-pristine waterfront land in a magnificent setting along New York’s majestic Hudson River. The Preserve includes a variety of species of animal and plant life, and is a precious example of the thoughtful maintenance of New York’s priceless open spaces. The land’s uses are limited to outdoor recreation such as hiking and climbing, and the study of ecology, nature and land use. The Neil S. Siskind Nature Preserve allows for the intelligent contemplation of our valuable natural resources and the most effective ways to maximize them and keep them protected.

Neil Siskind, Founder, “National Fatherhood Day” – March 29th

Neil-Siskind-pics
To encourage recognition of the needs of boys and girls who are living without fathers or father-figures in their lives.

Read about the non-profits and charities whose missions Neil Siskind supports and promotes: www.neilsiskindsupports.com
Caring is Free®

You can read what clients and associates say about Neil Siskind at: http://siskindlawfirm.com/neil-siskind-bio/.

Neil Siskind’s Volunteer Work:

– Memorial Sloan Kettering Cancer Center, Volunteer

– Memorial Sloan Kettering Cancer Center, My Fundraiser- Help Neil Siskindhelp children with cancer to be more comfortable: http://mskcc.convio.net/site/TR?px=3182108&fr_id=2632&pg=personal

– Make-A Wish Foundation- Help Neil Siskind make sick children’s wishes come true by creating your own fundraiser: Neil-Siskind/Help-Make-A-Child-Smile.htm

– DonorsChoose.org- Donate to one of my needy public classrooms: http://www.donorschoose.org/NeilSiskindGiving

– Champion Children– We seek to inspire people through stories of children who have overcome challenges: http://siskindlawfirm.com/neil-siskind-champion-children/


Neil Siskind’s Pro Bono
 Work:

– Saving Senior Citizens- Protecting New York’s senior citizens from fraud and financial abuse www.savingseniorcitizens.com

– Senior FreeStart Business– Pro Bono: We seek to help put senior citizens in the right direction so that they can face the challenges of the modern economy: http://siskindlawfirm.com/free-start-business/

– Veteran FreeStart Business– Pro Bono: We seek to help put Iraq and Afghanistan war veterans in the right direction so that they can face the challenges of the modern economy: http://siskindlawfirm.com/free-start-business/

– In development: The Neil S. Siskind School of Hope: A free school to teach inner-city youths the skills of entrepreneurship and importance of economic self-sufficiency.

Neil Siskind’s Government Work:

– Suffolk County District Attorney’s Office, Boston, MA, 1994, Intern
– Office of Senator Christopher J. Dodd, Newington, CT, 1992, Intern
– Hartford County Department of Probation, Hartford, CT, 1991, Intern

Neil Siskind’s Community Assistance:

Financed & operated a legal clinic providing low-cost legal services to struggling Long Islanders during the recession to help clients resolve debt, organize finances, and launch new businesses.

Neil Siskind’s Professional Curriculum Vitae: http://neilsiskind.com/

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The Fed: Americans Forget About Good Old-Fashioned Jawboning- By NEIL SISKIND

The more that Chairman Powell promises more rate hikes, the tighter credit becomes. This tighter credit, even without actual hikes, can help slow the economy and prevent the Fed from having to even act- or enable it to act to a lesser degree than projected. Let the Fed do its job.

 

Neil S. Siskind, Esq., President
The Siskind Law Firm
Tel: 646.530.0006

Neil Siskind is the Founder & Chairman of The Fatherhood Assignment
Neil-Siskind-photo
Learn more at:  http://www.neil-siskind-the-fatherhood-assignment.org/

Neil Siskind is the Conservator of the Neil S. Siskind Nature Preserve
Neil-Siskind-Picture

The Neil S. Siskind Nature Preserve is over 8 acres of environmentally-pristine waterfront land in a magnificent setting along New York’s majestic Hudson River. The Preserve includes a variety of species of animal and plant life, and is a precious example of the thoughtful maintenance of New York’s priceless open spaces. The land’s uses are limited to outdoor recreation such as hiking and climbing, and the study of ecology, nature and land use. The Neil S. Siskind Nature Preserve allows for the intelligent contemplation of our valuable natural resources and the most effective ways to maximize them and keep them protected.

Neil Siskind, Founder, “National Fatherhood Day” – March 29th

Neil-Siskind-pics
To encourage recognition of the needs of boys and girls who are living without fathers or father-figures in their lives.

Read about the non-profits and charities whose missions Neil Siskind supports and promotes: www.neilsiskindsupports.com
Caring is Free®

You can read what clients and associates say about Neil Siskind at: http://siskindlawfirm.com/neil-siskind-bio/.

Neil Siskind’s Volunteer Work:

– Memorial Sloan Kettering Cancer Center, Volunteer

– Memorial Sloan Kettering Cancer Center, My Fundraiser- Help Neil Siskindhelp children with cancer to be more comfortable: http://mskcc.convio.net/site/TR?px=3182108&fr_id=2632&pg=personal

– Make-A Wish Foundation- Help Neil Siskind make sick children’s wishes come true by creating your own fundraiser: Neil-Siskind/Help-Make-A-Child-Smile.htm

– DonorsChoose.org- Donate to one of my needy public classrooms: http://www.donorschoose.org/NeilSiskindGiving

– Champion Children– We seek to inspire people through stories of children who have overcome challenges: http://siskindlawfirm.com/neil-siskind-champion-children/


Neil Siskind’s Pro Bono
 Work:

– Saving Senior Citizens- Protecting New York’s senior citizens from fraud and financial abuse www.savingseniorcitizens.com

– Senior FreeStart Business– Pro Bono: We seek to help put senior citizens in the right direction so that they can face the challenges of the modern economy: http://siskindlawfirm.com/free-start-business/

– Veteran FreeStart Business– Pro Bono: We seek to help put Iraq and Afghanistan war veterans in the right direction so that they can face the challenges of the modern economy: http://siskindlawfirm.com/free-start-business/

– In development: The Neil S. Siskind School of Hope: A free school to teach inner-city youths the skills of entrepreneurship and importance of economic self-sufficiency.

Neil Siskind’s Government Work:

– Suffolk County District Attorney’s Office, Boston, MA, 1994, Intern
– Office of Senator Christopher J. Dodd, Newington, CT, 1992, Intern
– Hartford County Department of Probation, Hartford, CT, 1991, Intern

Neil Siskind’s Community Assistance:

Financed & operated a legal clinic providing low-cost legal services to struggling Long Islanders during the recession to help clients resolve debt, organize finances, and launch new businesses.

Neil Siskind’s Professional Curriculum Vitae: http://neilsiskind.com/

Sponsored Advertisements

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Learn How To Bring Products To Market And To Expand Your Distribution Channels
The Complete Guide To The Ways To Manufacture & Sell Your Products

 

 

The Yield Curve: Is It Quantitative Easing, Or Is It Quantitative Tightening?- by NEIL SISKIND

Quantitative easing, intentionally, caused bond yields to decline.

Now, the reversal of that policy, or quantitative tightening, may be causing bond yields to rise.

Economists and analysts use quantitative easing as the reason that the 10-yr. yield and the yield curve may not be signaling the same message as in the past.

Others, like myself, argue that the yield curve would be flatter sans quantitative tightening, which means that the yield curve would be flatter, or even inverted by now, were it not “butfor” quantitative tightening.

So, is quantitative easing to blame for a flatter curve- or is quantitative tightening to blame for a curve that appears steeper than it really is, or would be, based on investor expectations alone?

Further, are some investors avoiding bonds because of quantitative tightening- causing the yield curve to be even steeper and even less reflective of true investor sentiment?

You have to consider time frames. Let’s use an extreme example. What if quantitative easing took place 40 years ago? Could you blame a flatter curve on quantitative easing in that case? What about if it was 20 years ago? Now, what about 10?

It depends on how far back you go to set your starting line.

Using my 40 years ago quantitative easing purchases example, how long can you point to quantitative easing as a significant influence on the the 10-yr. and long bonds and the yield curve(s) more than you can blame the present and active quantitative tightening policy being implemented? Can it be said that quantitative easing affect the yield curve forever? At what point, and how much time has to pass after a quantitative easing before markets are determined to have re-taken control of prices and yield curves. Ten years? Twenty? Never?

Quantitative tightening is a present and on-going activity. It has an immediate and present effect that is measurable, rather than theoretical.

Quantitative easing was “then”- quantitative tightening is “now”.

 

 

Neil S. Siskind, Esq., President
The Siskind Law Firm
Tel: 646.530.0006

Neil Siskind is the Founder & Chairman of The Fatherhood Assignment
Neil-Siskind-photo
Learn more at:  http://www.neil-siskind-the-fatherhood-assignment.org/

Neil Siskind is the Conservator of the Neil S. Siskind Nature Preserve
Neil-Siskind-Picture

The Neil S. Siskind Nature Preserve is over 7 acres of environmentally-pristine waterfront land in a magnificent setting along New York’s majestic Hudson River. The Preserve includes a variety of species of animal and plant life, and is a precious example of the thoughtful maintenance of New York’s priceless open spaces. The land’s uses are limited to outdoor recreation such as hiking and climbing, and the study of ecology, nature and land use. The Neil S. Siskind Nature Preserve allows for the intelligent contemplation of our valuable natural resources and the most effective ways to maximize them and keep them protected.

Neil Siskind, Founder, “National Fatherhood Day” – March 29th

Neil-Siskind-pics
To encourage recognition of the needs of boys and girls who are living without fathers or father-figures in their lives.

Read about the non-profits and charities whose missions Neil Siskind supports and promotes: www.neilsiskindsupports.com
Caring is Free®

You can read what clients and associates say about Neil Siskind at: http://siskindlawfirm.com/neil-siskind-bio/.

Neil Siskind’s Volunteer Work:

– Memorial Sloan Kettering Cancer Center, Volunteer

– Memorial Sloan Kettering Cancer Center, My Fundraiser- Help Neil Siskindhelp children with cancer to be more comfortable: http://mskcc.convio.net/site/TR?px=3182108&fr_id=2632&pg=personal

– Make-A Wish Foundation- Help Neil Siskind make sick children’s wishes come true by creating your own fundraiser: Neil-Siskind/Help-Make-A-Child-Smile.htm

– DonorsChoose.org- Donate to one of my needy public classrooms: http://www.donorschoose.org/NeilSiskindGiving

– Champion Children– We seek to inspire people through stories of children who have overcome challenges: http://siskindlawfirm.com/neil-siskind-champion-children/


Neil Siskind’s Pro Bono
 Work:

– Saving Senior Citizens- Protecting New York’s senior citizens from fraud and financial abuse www.savingseniorcitizens.com

– Senior FreeStart Business– Pro Bono: We seek to help put senior citizens in the right direction so that they can face the challenges of the modern economy: http://siskindlawfirm.com/free-start-business/

– Veteran FreeStart Business– Pro Bono: We seek to help put Iraq and Afghanistan war veterans in the right direction so that they can face the challenges of the modern economy: http://siskindlawfirm.com/free-start-business/

– In development: The Neil S. Siskind School of Hope: A free school to teach inner-city youths the skills of entrepreneurship and importance of economic self-sufficiency.

Neil Siskind’s Government Work:

– Suffolk County District Attorney’s Office, Boston, MA, 1994, Intern
– Office of Senator Christopher J. Dodd, Newington, CT, 1992, Intern
– Hartford County Department of Probation, Hartford, CT, 1991, Intern

Neil Siskind’s Community Assistance:

Financed & operated a legal clinic providing low-cost legal services to struggling Long Islanders during the recession to help clients resolve debt, organize finances, and launch new businesses.

Neil Siskind’s Professional Curriculum Vitae: http://neilsiskind.com/

Sponsored Advertisements

Inventors, IP Owners, Manufacturers
Learn How To Bring Products To Market And To Expand Your Distribution Channels
The Complete Guide To The Ways To Manufacture & Sell Your Products

Fed Funds Rate Effect On The 10-Yr. Yield- By NEIL SISKIND

Going dovish:

Some say that as the Fed gets dovish, the 10 yr. yield goes lower, in kind. Others say that a lower Fed funds rate leads to a steeper curve.

If the Fed is dovish due to a lack of growth expectations, (and has a lack of inflation expectations) the yield curve should flatten, as investors seek the safety of bonds as the economy and stock market decline. Ultimately, this could invert the curve.

If the Fed’s dovishness is due to expectations of growth without inflation, the yield curve should steepen as investors go “risk on” to benefit from growth and low rates.

If the Fed sees inflation (in prices and/or wages and/or assets) with or without growth, it would not be dovish, unless it is dovish because of a political factor that pushes up inflation- such as tariffs. It could also be dovish if it sees any inflation risks as being less of a risk than are the risks to immediate economic growth (of course, as long as the inflation is not the cause of the expectation about the growth risk).

 

Whistling Past The Fed- By NEIL SISKIND

“The big miss” following the last Powell speech was by the public – not by the Fed. People spent so much time trying to decipher Chairman Powell (some getting him right, some getting him wrong) that they ignored his clear statement that, regardless of whether there are future hikes, the “hikes to date” have not yet fully hit the economy. So, while investors want to know if there will be future Fed hikes that would hit company margins, or compress stock multiples, or encourage investment alternatives (such as cash or Treasuries), they overlook that it will be growth and earnings that will be the primary catalysts for weaker stocks from what the Fed has already done! Earnings, ultimately, are the primary drivers of stock prices. Investors should worry less about if future hikes will happen than what existing hikes will cause. If they focus on the former, they may overlook the perils ahead from the latter. Even if you think the Fed turned dovish, it doesn’t mean that growth and earnings won’t be declining further- which would mean that stock prices are too high, regardless of what the Fed does next … because of what its already done.

If you want to see if and how Fed hikes will affect your stocks- best to look at the ones they’ve already done- and what those will do.

 

 

Neil S. Siskind, Esq., President
The Siskind Law Firm
Tel: 646.530.0006

Neil Siskind is the Founder & Chairman of The Fatherhood Assignment
Neil-Siskind-photo
Learn more at:  http://www.neil-siskind-the-fatherhood-assignment.org/

Neil Siskind is the Conservator of the Neil S. Siskind Nature Preserve
Neil-Siskind-Picture

The Neil S. Siskind Nature Preserve is over 7 acres of environmentally-pristine waterfront land in a magnificent setting along New York’s majestic Hudson River. The Preserve includes a variety of species of animal and plant life, and is a precious example of the thoughtful maintenance of New York’s priceless open spaces. The land’s uses are limited to outdoor recreation such as hiking and climbing, and the study of ecology, nature and land use. The Neil S. Siskind Nature Preserve allows for the intelligent contemplation of our valuable natural resources and the most effective ways to maximize them and keep them protected.

Neil Siskind, Founder, “National Fatherhood Day” – March 29th

Neil-Siskind-pics
To encourage recognition of the needs of boys and girls who are living without fathers or father-figures in their lives.

Read about the non-profits and charities whose missions Neil Siskind supports and promotes: www.neilsiskindsupports.com
Caring is Free®

You can read what clients and associates say about Neil Siskind at: http://siskindlawfirm.com/neil-siskind-bio/.

Neil Siskind’s Volunteer Work:

– Memorial Sloan Kettering Cancer Center, Volunteer

– Memorial Sloan Kettering Cancer Center, My Fundraiser- Help Neil Siskindhelp children with cancer to be more comfortable: http://mskcc.convio.net/site/TR?px=3182108&fr_id=2632&pg=personal

– Make-A Wish Foundation- Help Neil Siskind make sick children’s wishes come true by creating your own fundraiser: Neil-Siskind/Help-Make-A-Child-Smile.htm

– DonorsChoose.org- Donate to one of my needy public classrooms: http://www.donorschoose.org/NeilSiskindGiving

– Champion Children– We seek to inspire people through stories of children who have overcome challenges: http://siskindlawfirm.com/neil-siskind-champion-children/


Neil Siskind’s Pro Bono
 Work:

– Saving Senior Citizens- Protecting New York’s senior citizens from fraud and financial abuse www.savingseniorcitizens.com

– Senior FreeStart Business– Pro Bono: We seek to help put senior citizens in the right direction so that they can face the challenges of the modern economy: http://siskindlawfirm.com/free-start-business/

– Veteran FreeStart Business– Pro Bono: We seek to help put Iraq and Afghanistan war veterans in the right direction so that they can face the challenges of the modern economy: http://siskindlawfirm.com/free-start-business/

– In development: The Neil S. Siskind School of Hope: A free school to teach inner-city youths the skills of entrepreneurship and importance of economic self-sufficiency.

Neil Siskind’s Government Work:

– Suffolk County District Attorney’s Office, Boston, MA, 1994, Intern
– Office of Senator Christopher J. Dodd, Newington, CT, 1992, Intern
– Hartford County Department of Probation, Hartford, CT, 1991, Intern

Neil Siskind’s Community Assistance:

Financed & operated a legal clinic providing low-cost legal services to struggling Long Islanders during the recession to help clients resolve debt, organize finances, and launch new businesses.

Neil Siskind’s Professional Curriculum Vitae: http://neilsiskind.com/

Sponsored Advertisements

Inventors, IP Owners, Manufacturers
Learn How To Bring Products To Market And To Expand Your Distribution Channels
The Complete Guide To The Ways To Manufacture & Sell Your Products

Do Low Interest Rates And Excess Liquidity Actually Cause “De-flation”, Rather Than “In-flation”?- By NEIL SISKIND

Low interest rates and excess liquidity lead to excessive borrowing by real estate developers. More units- especially condominium units- are built. This leads to more supply, and, eventually, due to principle of supply and demand, lower values, lower sales prices, and lower rents. It may take some time and the withdrawal of liquidity until that occurs. One may argue that it is, therefore, the withdrawal of liquidity, and, thus, the lack of liquidity, and not liquidity itself, that causes the deflation. Perhaps- but it is the liquidity and fiscal stimulus, itself, that creates the environment and the supply that is necessary for the subsequent deflation upon a withdrawal of stimulus. Thus, liquidity is a primary component, and cause of, deflation. Excessive liquidity forces imbalances upward, which, sooner or later, result in imbalances to the downside when the buyers disappear, while the assets remaining in existence.

This process applies to all hard assets which experience growth in value as the result of the investment of capital derived from excess liquidity that causes supplies to rise beyond demand, and/or values to disconnect from fundamentals.

But … no … I’m not just talking about withdrawals of monetary stimulus as the cause of asset to crash and bubbles to pop. It’s not that low interest rates just, ultimately, “lead to” deflation (upon withdrawal of the stimulus)- low interest rates and monetary stimulus actually “causes” deflation.

Here is an even more direct and immediately occurring correlation between the addition of liquidity and monetary stimulus to an economy through low interest rates (or other monetary tools, such as quantitative easing), and deflation, where withdrawals of liquidity and ensuing corrections and popping of asset bubbles are not necessarily necessary to a deflationary result: When interest rates are low, companies borrow capital to grow; in this day and age, growth means gaining “scale”. Growth, in the modern economy, requires “scale”. “Scale” helps companies to reduce input costs, and, thus, consumer prices. Scale has become so vital to growth for two reasons: First, because of a combination of the diminished importance of locality and relationships to sales because of the ability to reach a single point of purchase for all items at all times (i.e. the lack of geographic limitations on e-commerce), which brings me to the second reason, the Internet and the need for retailers (and B2B companies) to get consumers and customers to their websites, instead of to competitors’- and then keep them there forever- and that requires heavy marketing and best prices. The companies that offers this online can destroy any competitors. So, the companies that reach the most scale the fastest, in any industry, win. Once “scale” is achieved, it is very hard for third and fourth place companies to compete. Just look at Amazon and Facebook and how they have destroyed competition in their respective spaces because they scaled the largest. “Scale” is achieved through aggressive and expansive marketing programs to attract customers, or through the use of loss leaders (without, or together with, aggressive marketing programs), to attract new customers, or through mergers and acquisitions. These actions can be funded with equity or with debt. “Scale” results in price deflation.

Companies’ sizes and large scale (along with globalized workforces) and the resulting lowest prices, allow companies in industries to depress competition, as only a select number of companies in industries obtain the scale that attracts consumers and customers- and attracts the consumers and customers that helps increase “scale”. It’s a self-fulfilling loop. Consequentially, a small number of very large companies come to control labor markets and are able to keep wages in check throughout the industries and the overall economy. Liquidity and scale cause wage inflation to get suppressed by two forces- a global workforce, and a rise in bargaining power. In the former case, pressures are dispersed, in the latter, they simply disappear with “take it or leave it” type propositions.

The Internet led to endless needs to “scale”- and scale, due to our desire for the lowest prices in exchange for a fair wage, destroyed capitalism.

These are the reasons why, despite all of the liquidity in the system for the past ten years, inflation keeps undershooting. The capital is flowing to non-traditional channels, ones not classically used to measure inflation pressures and economic risk to an economy from too much money chasing too few resources. The capital is flowing to assets, to funding loss leaders, and to marketing initiatives, resulting in bubbles, disconnects between incomes and home prices, and scale and monopoly-like companies. The Fed’s so-called “dual mandate” becomes a challenge for the Fed as it sniffs-out financial dislocations (which many feel is also part of its mandate to manage), but raising rates slowdown jobs and wage growth- which already, at least the latter, are too weak- especially in light of home prices. The Fed is hesitant to identify, or point a finger at, or provide an opinion on asset prices or “bubbles”- or target them, at least not officially. Thus, the situation does not mean that the economy is not at risk. 2007 and 2008 prove that, notwithstanding low inflation, the economy is at great risk, perhaps greater risk, from asset dislocations and bubbles than from other kinds of inflation, such as prices and wages.

In the modern economy, monetary stimulus does not flow from the Fed, to banks, to companies, to capex and investment, to employment, to wages, to higher consumer prices. It flows direct form the Fed, to banks, to real estate investors, and to businesses that invest in scale initiatives, to revenue-driven tech businesses, and to share buybacks. So, when the Fed withdraws liquidity, assets crash, yield curves invert because growth- which is from assets and low (or no) margin growth investments, rather than the way it was in days of yore, where liquidity led to inflation and to company pricing-power and the potential for prices, and, thus, stocks to rise- disappears.

This new paradigm is the cause of the so-called “conundrum”, where the Fed raises rates and people panic because assets can quickly crash, as opposed to the economy having a slow orderly decline in employment and wages while product prices remain elevated until the inflation dissipates. It’s simply a more boom and bust model, as opposed to balancing and re-balancing, where costs rise and fall to compensate and balance-out other rising and falling costs. Think of it like a see-saw. In the past, you had two equally-weighted children whose balances of power shift, as one grows and then the other grows, and one develops a strategy, and then the other a counter-strategy. But, now, the economy and liquidity has become more like a boulder being dropped on one side and then removed off by a crane, and then dropped again, and then removed again.

So, the outcome of monetary stimulus and excess liquidity is that there can be, and in the modern economy is, immediate producer and consumer price deflation, immediate wage suppression and deflation, and temporary asset inflation, followed by eventual asset deflation.

Historically, debt capital has been used for innovations, productivity, and paying for the best talent- and increased home values were a by-product of rising wages in a community (often mortgaged by local, rather than national and international, banks, or private “hard money” lenders). In the modern economy, debt capital is used for: Revenue growth at the expense of margins (temporarily, for profitable companies, and permanently, for modern-economy/technology companies that have the goal of being acquired) through marketing and loss-leaders; asset speculation; and excessive stock buybacks.

The more monetary stimulus we get, the more that asset supplies and scale grow, the lower that those asset values, product prices, and wages sink- later …

… or sooner.

 

 

Neil S. Siskind, Esq., President
The Siskind Law Firm
Tel: 646.530.0006

Neil Siskind is the Founder & Chairman of The Fatherhood Assignment
Neil-Siskind-photo
Learn more at:  http://www.neil-siskind-the-fatherhood-assignment.org/

Neil Siskind is the Conservator of the Neil S. Siskind Nature Preserve
Neil-Siskind-Picture

The Neil S. Siskind Nature Preserve is over 7 acres of environmentally-pristine waterfront land in a magnificent setting along New York’s majestic Hudson River. The Preserve includes a variety of species of animal and plant life, and is a precious example of the thoughtful maintenance of New York’s priceless open spaces. The land’s uses are limited to outdoor recreation such as hiking and climbing, and the study of ecology, nature and land use. The Neil S. Siskind Nature Preserve allows for the intelligent contemplation of our valuable natural resources and the most effective ways to maximize them and keep them protected.

Neil Siskind, Founder, “National Fatherhood Day” – March 29th

Neil-Siskind-pics
To encourage recognition of the needs of boys and girls who are living without fathers or father-figures in their lives.

Read about the non-profits and charities whose missions Neil Siskind supports and promotes: www.neilsiskindsupports.com
Caring is Free®

You can read what clients and associates say about Neil Siskind at: http://siskindlawfirm.com/neil-siskind-bio/.

Neil Siskind’s Volunteer Work:

– Memorial Sloan Kettering Cancer Center, Volunteer

– Memorial Sloan Kettering Cancer Center, My Fundraiser- Help Neil Siskindhelp children with cancer to be more comfortable: http://mskcc.convio.net/site/TR?px=3182108&fr_id=2632&pg=personal

– Make-A Wish Foundation- Help Neil Siskind make sick children’s wishes come true by creating your own fundraiser: Neil-Siskind/Help-Make-A-Child-Smile.htm

– DonorsChoose.org- Donate to one of my needy public classrooms: http://www.donorschoose.org/NeilSiskindGiving

– Champion Children– We seek to inspire people through stories of children who have overcome challenges: http://siskindlawfirm.com/neil-siskind-champion-children/


Neil Siskind’s Pro Bono
 Work:

– Saving Senior Citizens- Protecting New York’s senior citizens from fraud and financial abuse www.savingseniorcitizens.com

– Senior FreeStart Business– Pro Bono: We seek to help put senior citizens in the right direction so that they can face the challenges of the modern economy: http://siskindlawfirm.com/free-start-business/

– Veteran FreeStart Business– Pro Bono: We seek to help put Iraq and Afghanistan war veterans in the right direction so that they can face the challenges of the modern economy: http://siskindlawfirm.com/free-start-business/

– In development: The Neil S. Siskind School of Hope: A free school to teach inner-city youths the skills of entrepreneurship and importance of economic self-sufficiency.

Neil Siskind’s Government Work:

– Suffolk County District Attorney’s Office, Boston, MA, 1994, Intern
– Office of Senator Christopher J. Dodd, Newington, CT, 1992, Intern
– Hartford County Department of Probation, Hartford, CT, 1991, Intern

Neil Siskind’s Community Assistance:

Financed & operated a legal clinic providing low-cost legal services to struggling Long Islanders during the recession to help clients resolve debt, organize finances, and launch new businesses.

Neil Siskind’s Professional Curriculum Vitae: http://neilsiskind.com/

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What Analysts Are Missing About The Economy- By NEIL SISKIND

Analysts are used to a business cycle ending with growing demand chasing less resources (i.e. inflation) resulting in higher interest rates, and, thus, slower growth or even recession.

Some analysts fear this process is in place, but will take a year or so to play out, provided that the Fed does not go too far, too fast.

Other analysts see no recession coming soon, or any significant slowdown at all in the near future, because their training and experience leaves them with a void in thinking. Inflation is not persistent and wages and prices (tariffs aside) may not create upward pressures enough to push the Fed onward and upward.

What these latter analysts fail to realize is that, even though GDP and earnings outlooks are solid, and inflation is low, the Fed has already made a significant dent and doesn’t need to go much higher in order to induce a slowdown. But, this an opinion; this is my opinion versus theirs’. So, let’s talk facts. On a factual basis, these analysts fail to recognize that price and/or wage inflation, or even “significant” rate hikes, do not need to occur before a slowdown can occur. In modern economies, where liquidity drives asset growth, such as trading of houses as assets, and companies use profits and debt to buy back stock instead of raising wages and creating more consumer demand, and companies use debt for acquisitions and to fund loss-leaders to gain scale- instead of for capex, any notable withdrawal of liquidity- such as we have already seen- even if such withdrawal eventually ceases (if the Fed stops hiking), is enough to sink an economy built on debt- as opposed to one that is built upon demand from growing wages, stronger consumers, and resulting higher prices by businesses with pricing power, and then higher interest rates. It just does’t work this way anymore.

Where, in the past, the withdrawal of liquidity can slow wages and prices, in the modern economy, which is a structurally weak economy, rising interest rates and removals of liquidity have a faster and deeper affect on the economy than a mere slowing of prices and wages would. Asset values and risk capital can immediately disappear as cash and bonds offer less risk with near equal returns, and as corporate and consumer debt from previously low rates and high liquidity can’t be paid back as easily, and as risk capital fast disappears because investors are not willing to buy corporate loan and debt instruments.

This is exactly what happened in 2007 and 2008. Risk capital became more costly and everyone ran for the exits on assets- because that’s where the capital flowed to.

This is why the yield curve is flattening again as the Fed remains hawkish. The yield curve is flattening because many investors believe that we are about to slow down … significantly, because liquidity is being withdrawn

The Fed has been targeting asset prices and financial instability, not wage and price growth- because there isn’t any. The Fed is getting what it wants- but it may regret what it wished for.

So, let’s talk tariffs. Higher interest rates can’t get prices lower if those higher prices are based on tariffs, rather than on demand and higher wages. So, if new tariffs are implemented, companies will earn less, or consumers will pay more, and/or demand will decline (which means companies will earn less). The Fed can’t help maintain price stability if the tariffs take hold because it’s a policy issue, not a demand issue; so, if the Fed pushes rates higher due to price inflation on consumers from tariffs, it sure would do us a world of hurt.

 

Neil S. Siskind, Esq., President
The Siskind Law Firm
Tel: 646.530.0006

Neil Siskind is the Founder & Chairman of The Fatherhood Assignment
Neil-Siskind-photo
Learn more at:  http://www.neil-siskind-the-fatherhood-assignment.org/

Neil Siskind is the Conservator of the Neil S. Siskind Nature Preserve
Neil-Siskind-Picture

The Neil S. Siskind Nature Preserve is over 7 acres of environmentally-pristine waterfront land in a magnificent setting along New York’s majestic Hudson River. The Preserve includes a variety of species of animal and plant life, and is a precious example of the thoughtful maintenance of New York’s priceless open spaces. The land’s uses are limited to outdoor recreation such as hiking and climbing, and the study of ecology, nature and land use. The Neil S. Siskind Nature Preserve allows for the intelligent contemplation of our valuable natural resources and the most effective ways to maximize them and keep them protected.

Neil Siskind, Founder, “National Fatherhood Day” – March 29th

Neil-Siskind-pics
To encourage recognition of the needs of boys and girls who are living without fathers or father-figures in their lives.

Read about the non-profits and charities whose missions Neil Siskind supports and promotes: www.neilsiskindsupports.com
Caring is Free®

You can read what clients and associates say about Neil Siskind at: http://siskindlawfirm.com/neil-siskind-bio/.

Neil Siskind’s Volunteer Work:

– Memorial Sloan Kettering Cancer Center, Volunteer

– Memorial Sloan Kettering Cancer Center, My Fundraiser- Help Neil Siskindhelp children with cancer to be more comfortable: http://mskcc.convio.net/site/TR?px=3182108&fr_id=2632&pg=personal

– Make-A Wish Foundation- Help Neil Siskind make sick children’s wishes come true by creating your own fundraiser: Neil-Siskind/Help-Make-A-Child-Smile.htm

– DonorsChoose.org- Donate to one of my needy public classrooms: http://www.donorschoose.org/NeilSiskindGiving

– Champion Children– We seek to inspire people through stories of children who have overcome challenges: http://siskindlawfirm.com/neil-siskind-champion-children/


Neil Siskind’s Pro Bono
 Work:

– Saving Senior Citizens- Protecting New York’s senior citizens from fraud and financial abuse www.savingseniorcitizens.com

– Senior FreeStart Business– Pro Bono: We seek to help put senior citizens in the right direction so that they can face the challenges of the modern economy: http://siskindlawfirm.com/free-start-business/

– Veteran FreeStart Business– Pro Bono: We seek to help put Iraq and Afghanistan war veterans in the right direction so that they can face the challenges of the modern economy: http://siskindlawfirm.com/free-start-business/

– In development: The Neil S. Siskind School of Hope: A free school to teach inner-city youths the skills of entrepreneurship and importance of economic self-sufficiency.

Neil Siskind’s Government Work:

– Suffolk County District Attorney’s Office, Boston, MA, 1994, Intern
– Office of Senator Christopher J. Dodd, Newington, CT, 1992, Intern
– Hartford County Department of Probation, Hartford, CT, 1991, Intern

Neil Siskind’s Community Assistance:

Financed & operated a legal clinic providing low-cost legal services to struggling Long Islanders during the recession to help clients resolve debt, organize finances, and launch new businesses.

Neil Siskind’s Professional Curriculum Vitae: http://neilsiskind.com/

Sponsored Advertisements

Inventors, IP Owners, Manufacturers
Learn How To Bring Products To Market And To Expand Your Distribution Channels
The Complete Guide To The Ways To Manufacture & Sell Your Products

 

 

 

As We’re Waiting On Wage Growth, Here’s The Conversation No One Sees Coming- By NEIL SISKIND

As losses on the S&P 500 Index, the Dow Jones Industrial Average, and the Nasdaq mount, investors and the media continue to ask, “Why?”.

So … why are these declines happening?

The declines are due to concerns about slowdowns in the economy and in earnings due to the combination of rising interest rates, elevated oil prices, rising consumer product prices due to tariffs, excessive corporate and government leverage, slowing exports, the approach of the natural end of a long business cycle, and stagnant real wages. So- there is no one reason for the declines[1]. These concerns are leading to investors selling equities and moving capital to more defensive positions, including into cash.

It’s not the lack of animal spirits in the U.S., or a lack of liquidity that are of the causes of concern about the underling economy at this time, or even over the course of the next six months, even as interest rates “normalize” and as the Fed searches for a rate it deems to be “neutral”. It’s the geopolitical policies and constraints that are being laid atop the rising target Fed funds rate (and the related interest rates) that are pressuring markets and investors to face concerns that, otherwise, would, likely, because of the fiscal stimulus, need not be addressed until mid to late 2019. Geopolitical risks are unpredictable and difficult for businesses and consumers to plan around or quantify.

Growing costs from the combination of tariffs, interest rates, and energy prices, are not new costs only for businesses– consumers’ costs have also been rising due to the same factors- and all in the face of, largely, stagnant wages- and it could begin to affect revenue growth results in Q3 and/or Q4 of 2018, and in 2019. Investors are wondering where Q3 earnings and/or Q4 guidance will fall. Investors are concerned about revenues- and about margins.

When it comes to higher costs, investors and analysts have been asking whether businesses that are experiencing higher raw materials costs will take the margin hits, or pass the costs on to consumers. They forget to discuss the third option: businesses can cut other costs, to wit, labor, to avoid either eating the margin losses or raising their prices. Hiding behind the conversation that this nation has been having about wage growth is a completely contrary conversation waiting to reveal itself- one about layoffs.

Because of the growing and new expenses for businesses and consumers with which businesses must contend, revenues and profits are at risk. What can businesses do about lower profit margins[2]?

Can businesses reduce tariffs? Of course not.

Can businesses reduce the prices of oil and gasoline[3]? No.

Can businesses have the Fed reduce its target funds rate- or can businesses make the 10-yr. Treasury yield decline? Not likely.

Here’s what businesses can do. They can cut expenses and reduce overhead- by cutting jobs.

Not only will job openings decline if revenues continue to disappoint while expenses rise- so will existing jobs. (Paradoxically, even following layoffs, the number of job openings still may not decline in a significant way. This could occur if the jobs needed to be filled are those requiring rare and special skills. Such positions can remain open even upon layoffs, and may remain open and unfilled until the skills gap narrows, which could take years.)

Everyone has been wondering for months- actually, for years- where the wage growth is. Perhaps, it’s time to begin to wonder, instead, when the job cuts will come. People have been discussing how higher labor costs would affect businesses if wages start to rise in response to low unemployment, as the Phillips curve suggests; but no one goes on to the other potential conclusion- that companies don’t have to give raises if the unemployment rate declines. The Phillips curve- if it even lives- is a concept, or a “theory” (one that, in the age of globalized work forces, and in a time where larger and larger companies dominate, if not nearly monopolize their industries, takes longer and longer to take hold)- and not a law that demands raises. One common way that wage pressures are managed by businesses- like any other costs- is to cut them- with the remaining employees forced to pick up the slack. In times of slowing-growth, labor forces are strictly scrutinized to eliminate any of the slightest redundancies. Demand destruction takes place in labor markets as in any other markets where costs rise too high to be sustained by those paying them (especially as other costs also rise, or revenues slow). Even if wages rise temporarily due to labor supply pressures, they can also be the first thing to get cut as revenues and/or earnings decline.

I’ve written in the past that there is good inflation and bad inflation- and that the “timing” of the inflation makes it one or the other. Rising wages can be good, if they are accompanied by GDP and earnings growth, but not if they are running counter to such growth patterns- and certainly not if, in addition, other input costs are rising. This latter type of scenario does not lead to raises and bonuses- it leads to layoffs. While everyone has been waiting for wage pressures to materialize, all sorts of other cost pressures have appeared. Companies cannot pass them all through to consumers- or absorb them all.

We are in a jobs bubble, one fueled by monetary and fiscal stimuli; and like a stock, or housing, or any other bubble, it eventually pops when the financial underpinnings are exposed … and usually long before it’s expected or predicted. If businesses foresee growing costs in the pipeline, or the potential for lower revenues, they have to be pro-active, and not re-active, especially in public companies, where officers’ jobs depend on profitability, and even on stock growth. Layoffs should come as no surprise as the GDP declines- as everyone anticipates. As job losses mount and demand side stimulus contracts, the slowdown is exacerbated.

Could anyone really think that if interest rates rise, and stocks fall, and housing markets slow, and trade wars and related costs grow, and GDP declines, and export markets contract, and sanctions cause higher oil and gasoline prices for consumers and companies, and government and corporate debt levels inflate- people won’t lose their jobs? Unemployment is just one more liquidity-fueled bubble, like any other liquidity-fueled bubble, which gets resolved, among other ways, by the withdrawal of liquidity by the Fed. Except in this case- it’s not only the Fed, but also the White House that will help ensure that the bubble deflates- or pops- much sooner than later.

If earnings and/or guidance over the next couple of weeks disappoint, and companies, by and large, point to rising input costs from interest rates, oil, and/or tariffs as the causes- the conversation on your television and in the markets will soon be changing from one about “waiting for wage growth”- to one about “preparing for layoffs”. This would not take place until after the holiday season, including the January “gift return and exchange” season.

If, and as the economy slows, a military standoff or conflict might arise between the U.S. and China. Military conflicts often occur in slow economic times to distract people, to rally the citizenry through patriotism, and even to create jobs. Regardless of the potential for such ulterior motives, tensions with China are on the rise and could escalate in coming months. The trade war would be a secondary cause for any military conflict, with the primary impetus being the United States’ encroachment on Asia, as the U.S. and China continue to compete behind the scenes for the soul of Kim Jong-Un and North Korea, and as U.S.-Taiwan relations expand. Kim Jong-un’s effect on world politics and global instability will rise in 2019. Russia’s location, and, thus, interests in the region will draw it into the conflict. How this will affect the U.S. economy is, of course, an unknown- and something for which investors should prepare as best as possible by watching commodities and currencies as events begin to heat up. All the pieces are in place for tensions with China to escalate in the coming months- as the trade war is taking its toll on the Chinese economy, as Kim Jong-un continues to be used as a political pawn by the U.S. and China- and as he plays both ends against the middle, and as U.S. Navy warships are flaunting their strength in the Taiwan Strait. Does this sound like a blossoming friendship to you? In general, the present administration is determined to repress China’s rise as a (or as the largest) superpower, at any cost- as we have been witnessing on the trade front.

For now, the unemployment rate and jobless claims remain low; and job openings remain high and continue to go unfilled, while the CPI, the PCE, the household savings rate, consumer spending[4], and real wages are all, basically, stagnating. Personal wealth is declining as housing and stock prices are under pressure. Household debt is at an all-time high. Company revenues and margins are under pressure in many sectors. As the U.S.’s, China’s, Japan’s, and other nations’ consumers spend less on U.S. products, how can companies’ earnings grow?

All that can really be said about consumers in terms of purchasing power is that they have jobs. This is pretty much what any and all bullishness on the consumer comes down to at this stage. As company margins get squeezed by rising interest rates, tariffs, commodities prices, and other input costs, and as revenues disappoint because of a weakening or apprehensive consumer … let’s hope that this, at least, lasts.

 

______________________

Fn

1.    Many in the financial industry suggest that, in both the U.S. and China, it has been rising interest rates, financial regulations and crackdowns (in China), and withdrawals of liquidity, that have been the primary culprits for the recent slowdowns in economic and stock market growth, with tariffs being only a small part of each nation’s respective recent problems. While rising borrowing costs clearly affect companies’ earnings and cause multiple-contraction in equities, expectations on the other side of the scale, of revenues and earnings, must decline significantly in order to see the kind of volatility and declines we have been seeing of late on the indices of both nations. As time goes by, it’s becoming increasingly clear that tariffs (on top of rising interest rates and stagnant wages) are going to cause growing economic and financial stresses for businesses and consumers, and investors are responding to these realities.

2.    There are many ways for businesses to handle rising costs, including: Finding new places to source products; re-examining and making changes to product mixes; commodities price hedging; renegotiating vendor and/or customer contracts; limiting discretionary spending; renegotiating or cancelling leases, etc.- but, all of these options can take significant time, have significant costs, and have unknown results and ramifications. Layoffs are a more immediate and predictable cost-cutting measure, and can be, relatively, easily reversed if necessary to resume growth or to repair miscalculations. Moreover, cutting labor overhead may give an employer the exact result it needs- as opposed to other cost-cutting measures.

3.    Oil prices have been heading lower, lately.

4.    Consumer spending, while up 2.3% over last year, has been up and down in recent months. Even in the “up” months, healthcare and energy prices- necessities- as opposed to luxuries and discretionary spending- have been responsible for the higher numbers. Hurricanes have also been the cause of much of the spending, such as on replacement vehicles that were damaged in storms.

________________

endnotes

1.    Remember that the monthly employment rate includes government jobs. Just as I’ve written about how the GDP includes government spending, the employment rate includes government jobs that result from government spending. So, again, the GDP can grow and the unemployment rate can decline, but there are ramifications for the national debt and the budget deficit for these positive economic results when government spending helps to feed GDP and labor force expansions. We pay for this growth.

2.    Millennials will be in for a big surprise when their idealistic views about job and career selection, demands and expectations from employers, and idealism about work environments no longer are addressed by employers, as job options diminish. Millennials’ expectations of work, such as their dreamy ideas of things like the so-called “gig economy” and quitting jobs and dropping-out of the workforce to chase passions, will be realigned in a slowdown or a recession with the reality of how difficult it is to make money, and support a family, and buy a home, and take vacations, and plan for retirement- things with which responsible adults have to deal.

3.    As economic growth slows, and unemployment rises, I’d pay attention to any “modern economy” type of industries. Crowdfunding will be decimated, as the amateur “investors” who “tinker” in highly speculative investments through these services, reign-in their excess or discretionary spending. Contrarily, the cannabis industry will likely see explosive growth, either despite, or perhaps because of a slowdown, as people seek an escape, become cynical about our economic and political systems and their own opportunities, and as states seek to grow their tax revenues.

4.    One might want to consider the implications of significant defaults on student loans should unemployment rise.

5.    In my two most recent articles, I advised- or warned- that the economy and your stocks would decline long before Wall Street says. Just look at the major stock indices, and reported revenues, and earnings guidance since the publications of those articles. Even the 10-yr. Treasury yield is off its highs.

________________________

Neil Siskind is: President of The Siskind Law Firm, focused on product investments, trademark licensing, product distribution, and real estate; Founder & Chairman of The Fatherhood Assignment™, a think tank and advocate for children with absentee fathers; Founder of the global charity marketing initiative, Caring is Free®; Founder of National Fatherhood Day™; Owner & Conservator of The Neil S. Siskind Nature Preserve, over 8 acres of conserved waterfront land along New York’s majestic Hudson River; and author of The Complete Guide To The Ways To Manufacture & Sell Your Products. On December 11, 2017, in his article The Yield Curve Speaketh: Why Stocks Might Crash in Early 2018, Neil Siskind accurately predicted the February, 2018 stock crash, the largest single-day point drop in the Dow Jones Industrial Average’s history. In his September 26, 2018 article, Lots of “Bull” In The Bull Market: Let’s Look At What’s “Really” Growing, Neil Siskind explained how, despite Wall Street’s bullishness, the economic data and stock market underpinnings were in decline, and that the economy and stocks were at imminent risk. By the closing of markets on October 23, 2018, the S&P 500 had fallen approximately 7%, with October being the S&P’s worst month since August 2015, the Nasdaq continues to have its worst month since 2016, and is down approximately 8% from article publication, and the DJIA is having its worst monthly performance since 2008. If you are in need of office space in South Florida, contact Neil Siskind about space availability at The Siskind Executive Office Complex in Boca Raton, FL.

Other Recent Articles by Neil S. Siskind:

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The Flattening Yield Curve: It’s “Not” Different This Time- By NEIL SISKIND

Here is a link to a 2006 Ben Bernanke speech suggesting that a flat or inverted yield curve may “be different this time” Bernanke Yield Curve Speech. This speech could have been delivered yesterday. We’re in the exact same scenario- solid GDP growth, low inflation, and a flattening yield curve. Then-Chairman Bernanke makes the argument that a lower term premium due to strong demand for longer term obligations (accompanied by the government’s and lenders’/investors’ expectations of low inflation and low interest rates in the future), caused by factors besides lenders’/investors’ expectations of slowing growth or recession[1], may be the cause of the yield curve’s flattening (the 10-yr. Treasury bond rate falling, as the 2-yr. Treasury rate rises)- as opposed to strong demand for the 10-yr. bond due to lenders’ expectations of both low inflation and a slowdown or recession. He also suggested that a global savings glut may be putting downward pressure on yields and was an additional reason to not fear a flattening or inversion as indicators of a forthcoming recession.

Any “it’s different this time” line of commentary about the yield curve is concerning[2], and, at least with regard to inversion, has usually (or always) proved to be wrong. How did 2007 turn-out, subsequent to this Bernanke speech? This economy is shaping up to be much like the 2005-2007 economy.

A business (and inflation) cycle is supposed to be: Demand growth from low interest rates, then job growth, then wage growth, then more demand growth, then prices rise, then interest rates rise and things cool down; and “not”: Liquidity rises, asset speculation rises, big companies use cheap money to get larger and larger and steal all the market share in their respective categories and put small businesses out of business- and kill the Phillips curve by controlling labor markets, wages stay stagnant (for consumers, who make up about 70% of GDP), gas prices rise because of the sheer volume of people working (with stagnant wages), houses become unaffordable due to excessive liquidity (including due to investors buying homes to rent out), debt grows because wages are stagnant, interest rates rise, even with little or no wage inflation (largely, to control asset bubbles), to exacerbate the problem, layoffs begin, due to oil and interest rates hitting businesses’s margins (with no ability by businesses to pass-through the costs to consumers, because of their stagnant wages), asset values drop, due to consumer debt overload, and the economy enters a deep recession or a near-depression requiring a government bailout. This latter scenario was what led-up to 2007 and 2008- results that could be repeated in 2019[3] (significant capex could push this out- though capex will most likely be used for buying and developing software programs and technologies that create and increase automation of internal business processes and the delivery of consumer services, and reduce needs for human labor).[4]

We actually have had significant inflation for quite some time. Home prices are out of joint in relation to incomes and affordability- just as in 2005-2007. This is exactly the danger of inflation to a society- basic necessities, like shelter, becoming too costly. The yield curve may be speaking to this[5]. Investors may believe that “it is exactly the same” this time.

Fed governors recently saying that U.S. bonds are now safe havens for foreign (and domestic) capital as emerging market (EM) volatility runs its course, and, therefore, the flattening curve is “different this time” is perplexing[3]. Of course U.S. bonds are safe havens- that’s the point of bonds. The fleeing to them reflects investor sentiment about growth and inflation, and affects the curve. How is that any different than any other reason to buy bonds (beyond portfolio diversification)? The whole world is concerned about the whole world- so they buy U.S. bonds. It’s a signal. Otherwise foreign (and domestic) capital would go into U.S. stocks, rather than bonds and the dollar. Despite quantitative tightening and ever-increasing Treasury auctions- the curve is still flattening. Think about that. That is a lot of risk-off investment. That is a lot of fear. Fed governors should be cautious about dismissing this situation as merely transitory- or as irrelevant to the domestic economy. It’s a reflection of commercial and non-commercial investors’ sentiments about their own respective economies- which may be U.S. export customers. It also, of course, reflects investors’ expectations and fears about the U.S. economy, itself, and confidence that yields likely won’t significantly rise. Moreover, if the yield curve (or yield curves) inverts, for any reason, credit markets can seize-up. Finally, if international capital flows are, primarily, into shorter term Treasuries, then concerns by overseas investors about EM volatility would not be the cause of curve-flattening.

Keep the following facts and data points in mind when assessing the shape of today’s curve:

  • The unemployment rate in October, 2006, was 4.4%- so, not much higher than today. Interest rates were rising, debt was accumulating, gas prices were elevated, housing prices were high, most inflation indicators were tame, wages were stagnant, the yield curve was flat, and analysts saw no end to growth in sight. Sound familiar? (And there was no trade war, as we have today.)
  • Some days, the S&P is up only because oil and gas prices (i.e. energy stocks) are higher. Good for investors- bad for consumers.
  • Real wage growth is lower when you factor in other inflation.
  • Company earnings we see are for public companies. What about private businesses? What about their earnings? Home Depot and Amazon grow- while independent (and even chain) hardware stores and book stores across America close.
  • Emerging markets are experiencing economic weakness and growing currency crises.
  • Tariffs may lead to higher prices for consumers, while wages are stagnant and interest rates are rising.
  • Global trade is slowing.
  • Housing affordability in America is at its worst in nearly a decade.
  • As housing slows, or crashes, from rising rates meeting stagnant wages, it, necessarily, means that construction jobs will decline.
  • The worse single day point drop in Dow Jones Industrial Average history was this year- February 5, 2018. (It’s noteworthy, I think, that I published my article “The Yield Curve Speaketh: Why Stocks Might Crash In Early 2018” less than 60 days earlier.)
  • 2018 second quarter GDP grew by 4.2%- but U.S. consumer debt rose in May, 2018, by the most in six months. Of course, the national debt keeps growing, too. Spending is easy- paying the bill is harder.

______________________

fn

  1. In Bernanke’s 2006 speech, he discussed that more stable inflation, better-anchored inflation expectations, lower economic volatility, and a variety of other potential culprits that do not include investors’ expectations of slowing or negative economic growth, may be responsible for demand for longer term securities and the lower term premium that could be the reason for the flattening curve- an argument that is being reiterated- or recycled- by Fed Chairman Powell, some Federal Reserve governors, Goldman Sachs, and some analysts and portfolio managers, today.
  2. To suggest that curve flattening or inversion is an effect of a term premium that is reduced due to strong investor demand based on anything other than expectations of slow or negative growth (such as only being based on the government’s and investors’ better-anchored-inflation expectations, reduction in economic volatility, or pension fund needs) and, therefore, not predictive of recession, may be risky. In any event, studies show that if certain curves invert (the 10-yr.-3-month or the 10-yr.-2yr.), it is predictive of recession no matter what the cause of the lower term premium (most likely because an inversion, for any reason, impedes banks extending credit). Likewise goes for any dismissal of an inversion as being due to a global savings glut or a decline in the natural interest rate; such alternative explanations are fraught with perils if investors are, in fact, buying bonds with the expectations or fears of slowing growth, and policy fails to acknowledge and address such.
  3. A flattening or flat yield curve (as opposed to an inverted curve) does not, necessarily, portend recession. But, it is the overall and totality of circumstances (high corporate debt levels, a rising target Fed funds rate, rising consumer debt, elevated asset and gas prices, stagnant wages, lower than expected CPI, PPI, and consumer spending, and a growing national debt, etc.), and the similarities of today’s economy to the 2005-2007 period, that make a flattening curve feel like a precursor to an inversion, and, ultimately, recession (of equal magnitude to the one that began in 2007 and 2008). But, without an actual inversion, the historical value of inversions foreboding or causing recessions would, obviously, not apply. Mere flattening of an applicable curve, or an actually flat curve, is not enough for the predictive or causative nature of inversions to apply. In such a scenario, any steepening of the 10-yr.-3-month or the 10-yr.-2-yr. yield curves from here without ever having inverted, and any future economic growth, would not be haunted by a recession having been previously signaled (at least as far as the yield curves go).
  4. A flattening or flat curve is hardly a guaranty of recession in a year. An inverted curve may not even indicate a recession in anything less than 12 months. But, a recession need not be presaged by an inverted yield curve (though it most always is). Many problematic cyclical and/or structural problems, or a significant political or financial crisis, or exponentially growing Treasury sales on the longer ends of the curve to fund the growing national debt and deficit (which could affect the term premium) in the face of a slowing economy and declining GDP, could lead to recession without a preceding curve inversion.
  5. Commercial and non-commercial investors have no dearth of reasons to be moving capital into the U.S. bond market, especially where U.S. inflation is tame, including excessive housing prices in the U.S. as interest rates rise and wages stagnate, EM weakness and challenges to growth due to Fed tightening and tariffs, risks to EM lenders and to EM investors from such conditions, and the risk of contagion to the U.S. economy.

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endnote

To determine (or speculate on) the reason for the shape of a yield curve (or for the change of the shape of a yield curve), one must first determine the cause of the shape (or the cause for the change of the shape) of that curve. For example, in the case of an inversion, in order to determine the reason for the inversion, one would need to know if the inversion is caused by Fed rate hikes or, rather, due to excessive buying of the 10-yr. bond- or by both.

________________

 

Here’s a little poem I wrote:

If the the 10-yr.-3-month curve inverts,
or if the 10-yr.-2yr. curve inverts,
patient shorts will prove the warts-
and longs will lose their shirts.

 

About the Writer

Neil Siskind is: President of The Siskind Law Firm, focused on product investments, trademark licensing, product distribution, and real estate; Founder & Chairman of The Fatherhood Assignment™, a think tank and advocate for children with absentee fathers; Founder of the global charity marketing initiative, Caring is Free®; Founder of National Fatherhood Day™; Owner & Conservator of The Neil S. Siskind Nature Preserve, over 8 acres of conserved waterfront land along New York’s majestic Hudson River; and author of The Complete Guide To The Ways To Manufacture & Sell Your Products.On December 11, 2017, in his article The Yield Curve Speaketh: Why Stocks Might Crash in Early 2018, Neil Siskind successfully predicted the February, 2018 stock market crash, the largest single-day point drop in the Dow Jones Industrial Average’s history. If you are in need of office space in South Florida, contact Neil Siskind about space availability at The Siskind Executive Office Complex in Boca Raton, FL.

Other Recent Articles by Neil S. Siskind:

Analysts Just Don’t Understand- By NEIL SISKIND

Wall Street analysts always say that low interest rates will be good for stocks.

Low interest rates may be good for stocks for a period– but low interest rates create asset bubbles that rub up against the low wages allowing for low interest rates. This is ultimately bad for the economy, bad for interest rates, bad for real estate … and bad for stocks.

When will Wall Street learn?