Wage gains

6 Biggest Money Stories of 2016


With two weeks to go, it’s time to look back and reflect on what stories shaped the year. In chronological order, here are my “6 Biggest Money Stories of 2016”. 1. US Stock Market Correction: Investors were plunged into reality in February, as fears of a global growth slowdown pushed US stock indexes into a correction, which is defined as a more than 10 percent drop from the previous high mark. While stocks grabbed the headlines, it was the action in crude oil that freaked out insiders. On February 11th, US crude closed at $26.21 per barrel, the lowest point since 2003 and a 75 percent plunge from the June 2014 peak. The combination of weakening demand and fears of a global oil glut, prompted the International Energy Agency to say, "With the market already awash in oil, it is very hard to see how oil prices can rise significantly in the short term."

2. Fed Inaction/Action: A year ago, the Federal Reserve did something it had not done in nine years: it raised short-term interest rates by a quarter of a percentage point. The action ended a near seven-year period of zero interest rate policy or “ZIRP”. At that same December 2015 policy meeting, officials also released their “dot plot,” which is where each Fed meeting participant anonymously provides a prediction of where the fed funds rate should be at the end of the year for the next few years and in the longer run. The median forecast was for rates to rise by full percentage point in 2016, which we now know, was way off. Whether it was worries about slowing growth, the UK vote on whether or not to leave the European Union or the US Presidential election, it was the Fed’s inaction in 2016, which shaped most of the year. Now with the Fed’s one rate hike of 2016 behind us, the big question is whether the central bankers’ new dot plot, which anticipates a 0.75 percent in additional rate increases in 2017, comes to fruition or not.

3. Brexit: It may now seem quaint to remember what a big surprise it was that UK voters decided to leave the European Union on June 23rd. “Brexit” was a seismic and unexpected result, which caught global investors off guard. Markets tumbled in the days after the vote, but recovered fairly quickly. The vote forced Prime Minister David Cameron to step down and propelled Theresa May, who half-heartedly supported the Remain camp, to succeed him. May has vowed to begin the process of leaving the EU by the end of Q1 2017.

4. Wells Fargo Sales Debacle: When news emerged that Wells Fargo employees’ fraudulently opened as many as two million deposit and credit-card accounts without customers’ knowledge, in order to hit internal sales targets, it was a scandal that seemed impossibly old school. As Time’s Rana Foroohar noted, “the fraud in this case was just so easy for average people to understand.” What was harder to figure out was the bank’s response to the fraud. Instead of admitting that management had created a culture, which encouraged cross-selling at any cost, it cut 5,300 bad apples, paid a $185 million fine to regulators and hoped to sweep the whole issue under the rug.

Not so fast...the public outrage, combined with a Congressional hearing where Senator Elizabeth Warren took the unusual step of telling then-CEO John Stumpf to resign (“Have you fired any senior management, the people who actually oversaw this fraud... Your definition of accountability is to push this on your low-level employees. This is gutless leadership.”) Weeks later, Stumpf stepped down.

5. Wage Gains: If 2014 and 2015 were the strongest years of job gains of the recovery (+260K/mo and +221/mo, respectively), 2016 was the year when wages finally accelerated. Wage growth had remained stubbornly at 2 percent during the past few years, but in 2016, the improving economy and labor market helped wage growth start to outpace inflation. In November, wages were up 2.5 percent from a year ago. With the unemployment rate at nine-year lows, there is hope that the trend will continue -- and accelerate -- in 2017.

6. Post-Election Stock Rally/Bond Plunge: The much-feared market collapse that was associated with a Trump victory occurred…for about three hours on election night. But ever since president-elect Trump’s speech in the wee hours after the results were in, stock markets have gone parabolic on the upside. Worries about trade wars were replaced with delight over potential infrastructure spending, tax cuts and a reduction of regulations across a wide swath of industries.

While stocks were flying, bonds were plunging, as investors viewed those same policies as increasing growth rates and potentially spurring inflation. As a result, they believe the Fed will have to raise rates more quickly next year. Because higher interest rates erode the value of outstanding bonds, the price of 10-year treasuries have fallen and yields have jumped from a low of just under 1.4 percent during the summer to 2.6 percent, the highest level since September 2014.


  • DJIA: 19,843, up 0.4% on week, up 13.9% YTD
  • S&P 500: 2258, down 0.1% on week, up 10.5% YTD
  • NASDAQ: 5437, down 0.1% on week, up 8.6% YTD
  • Russell 2000: 1364, down 1.7% on week, up 20.1% YTD
  • 10-Year Treasury yield: 2.59% (from 2.47% week ago)
  • January Crude: $52.03, up 0.3% on week
  • February Gold: $1,136.80, 6th straight weekly decline
  • AAA Nat'l avg. for gallon of reg. gas: $2.23 (from $2.20 wk ago, $2.00 a year ago)


Mon 12/19:

Fed Chair Janet Yellen gives a speech on the state of the job market

Tues 12/20:

Weds 12/21:

10:00 Existing Home Sales

Thurs 12/22:

8:30 Durable Goods Orders

8:30 GDP (3rd estimate, previous=3.2%)

8:30 Chicago Fed Activity Index

8:30 Corporate Profits

9:00 FHFA House Price Index

10:00 Personal Income and Spending

Friday 12/23:

10:00 New Home Sales

10:00 Consumer Sentiment

2:00 The U.S. bond market closes early ahead of Christmas

Holiday Shopping 2015


With Halloween in the rear-view mirror, it’s time to talk HOLIDAY SHOPPING 2015 -- now that’s scary! The always-dubious National Retail Federation (NRF), the industry cheerleader, is predicting a 3.7 percent increase in holiday spending. As Barry Ritholtz has noted, “the methodology employed by the NRF survey is defective, because it relies on asking consumers how much they spent last year, and how much they plan on spending this year.” Of course, people have “no idea what they spent last year. No clue whatsoever,” which is why “the track records of these surveys are awful.” So what’s really going on for consumers, as we head into the final two months of the year? Although wage gains have been paltry, low prices overall (health care costs not withstanding) have amounted to extra money in the wallets of most Americans. They are spending some of that money on long lasting goods, like cars, as well as services; and also saving at a decent 4.8 percent rate.

The dual trends of pokey wage increases amid low inflation encouraged the Fed to maintain 0 - 0.25 percent interest rates at its meeting last week, but the central bankers also left the door open to a possible rate hike at the final policy meeting of the year. Before that confab, there will be two more employment reports: one this week and then another on the first Friday in December. What might get the Fed to act in December is a pick up in job creation and wages. The prior three months has seen an average monthly gain of just 167,000, down from the nearly 200,000 this year and annual wage gains have been stuck at 2 - 2.2 percent.

Economists expect that 175,000 – 185,000 jobs were created last month at that the unemployment rate will remain at 5.1 percent. The Fed may also keep an eye on the participation rate (the number of Americans working or actively seeking employment), which dropped to a 40-year of low of 62.4 percent in September.

According to Capital Economics, most of the 4.5 percent decline in the rate from the peak of 67.3 percent in 2000 is due to the aging of the population (1.8%), rising disability (1.2%) and an increase in post-secondary education enrolment (0.9%), there will continue to be a chorus of commentators, who will cite participation rate as a rationale for the nation’s woeful job market. It may be helpful to know that just 0.6 percent of the decrease should be attributed to the recession. “It is notable that, even with the job openings rate at a record high and the unemployment rate within touching distance of the long-run natural rate, the participation rate continues to trend relentlessly lower.”


  • DJIA: 17,663 up 0.1% on week, up 8.6% on month, down 0.9 YTD
  • S&P 500: 2,079 up .2% on week, up 8.3% on month, up 1% YTD (best month in 4 yrs)
  • NASDAQ: 5,053 up 0.4% on week, up 9.2% on month, up 6.7% YTD
  • Russell 2000: 1161, down 0.4% on week, up 5.9% on month, down 3.6% YTD
  • 10-Year Treasury yield: 2.09% (from 2.03%)
  • December Crude: $46.59
  • December Gold: $1,141.40
  • AAA Nat'l avg. for gallon of reg. gas: $2.18 (from $2.21 wk ago, $3.00 a year ago)


Mon 11/2:

9:45 PMI Manufacturing Index

10:00 New Home Sales

10:00 Construction Spending

Tues 11/3:

Motor Vehicle Sales

10:00 Factory Orders

Weds 11/4:

8:15 ADP Private Jobs Report

8:30 International Trade

10:00 ISM Non-Manufacturing Index

Thurs 11/5:

8:30 Productivity

Fri 11/5:

8:30 October Employment Report

3:00 Consumer Credit

El-Erian: “Income Inequality is Horrific”


There is nothing better than an hour spent talking to Mohamed El-Erian at the annual LinkedIn Finance Connect event. El-Erian has a unique ability to break down hardcore economic concepts into digestible, easy-to-understand analogies. For example, when I asked him about his prediction about worldwide growth this year, he said, “imagine if you were a elementary schoolteacher and I told you that overall, your classroom would be better this year than it was last year. Unfortunately, that slightly better classroom that still has troublemakers." Those rambunctious troublemakers include: Russia/Ukraine, Greece, Brazil, Venezuela, Nigeria – any one of them could disrupt global economy and threaten the progress of the “limping along” economies of Japan and Europe, as well as the improving U.S. economy. One bright spot for El-Erian is China, which is clearly downshifting from 10 percent growth over the past three decades, to a more sustainable 6-7 percent rate. Although many have predicted looming disaster for the world’s second largest economy, El-Erian believes that China will be able to make a soft landing.

He’s less sanguine about Greece, where the probability of three possible outcomes is:

  • 45% Greece and Eurozone officials muddle along
  • 50% Greece leaves Eurozone (“Grexit”) and a massive dislocation in financial markets ensues
  • 5% Greece wades through and comes out better

As Greece teeters on the edge of disaster, other European countries (Germany, Switzerland, Sweden, Denmark) are seen as bastions of safety. In fact, some investors are actually paying countries to hold their money. Mohamed says that there are two types of investors, who buy bonds with negative interest rates: (1) Those who are willing to pay up to ensure that their money is safe and (2) those who are betting that negative returns get more negative. Although negative interest rates have persisted longer than El-Erian though they would, he does not believe that the situation will last.

The US economy should continue to expand this year at a 2.5 percent annualized rate and El-Erian is hopeful that monthly job creation will average over 200,000. The combination will prompt the Fed to increase interest rates at its September policy meeting, but El-Erian noted that this is likely to be “the loosest tightening in history,” so it will take a considerable period of time before conditions look normal again.

As far as the labor market is concerned, while job creation should pick up, stagnant wages are limiting growth. “Income inequality is horrific,” and while this is a decades long trend, in the six years since the official end of the recession, only a small percentage of Americans seem to be back or better off than they were before the recession. El-Erian said, “100 percent of the total income growth during this recovery has gone to the top 5 percent of earners.”

While some companies are actually doing more to help narrow the income gap, El-Erian would like to see an overhaul of the corporate and personal tax systems. On the individual side, lawmakers should consider raising the minimum wage and eliminating some of the benefits, which wealthy taxpayers enjoy, like not paying tax on carried interest and the mortgage interest deduction.

[The April jobs report did not show much progress on the wage front. While the job market recovered in April after getting roughed up in March, the Bureau of Labor Statistics said 223,000 new jobs were added last month and the unemployment rate ticked down to 5.4 percent, the lowest level since May 2008. This time around, the unemployment rate slid for the right reason: 166,000 additional workers entered the labor force and snagged jobs. Average earnings were up 2.2 percent from a year ago, up from 2.1 percent in March - a tiny improvement, but a far cry from 3 percent annualized rate seen during the last expansion.]

Last year, when I interviewed El-Erian, he said that the US economy was approaching a “T-Junction”, where it could veer in one of two directions: (1) growth accelerates, justifying current stock prices; or (2), growth remains sub-par, central bank policy loses effectiveness and stocks tank. This year, he said that the US is moving up the neck of this critical junction and continues to believe that the odds are 50-50 for either outcome. With even chances, the disconnect between markets and economic reality is the biggest risk facing investors and according to El-Erian, you may want to hold a little more cash in your portfolio, just in case the more negative scenario plays out.

MARKETS: In a volatile week, the bulls won out and pushed indexes within striking distance of all-time highs.

  • DJIA: 18,191, up 0.9% on week, up 2% YTD
  • S&P 500: 2116, up 0.4% on week, up 2.8% YTD
  • NASDAQ: 5,003 down 0.04% on week, up 5.6% YTD
  • Russell 2000: 1234, up 0.5% on week, up 2.5% YTD
  • 10-Year Treasury yield: 2.15% (from 2.1% a week ago)
  • June Crude: $59.39, up 0.4% on week
  • June Gold: $1188.90, up 1.2% on week
  • AAA Nat'l avg for gallon of regular Gas: $2.66 (from $2.61 week ago, $3.66 a year ago)

THE WEEK AHEAD: With earnings season mostly winding down, investors are turn their attention oversees, where once again, problems in Greece and Russia/Ukraine pose risks.

Mon 5/11:

Tues 5/2:

Greece is due to make a 750M euro payment to IMF/Euro Finance Ministers meet

9:00 NFIB Small Business Optimism

10:00 Job Openings and Labor Turnover Survey

11:00 Household Saving and Debt Report

Weds 5/13:


8:30 Retail Sales

Thurs 5/14:

Kohl’s, Nordstrom

8:30 Producer Prices

Fri 5/15:

8:30 Empire State Manufacturing

9:15 Industrial Production

10:00 Consumer Sentiment