The Price is Wrong

The Price is Wrong

If you feel like things are more expensive, you are right. Despite a slightly weaker than expected inflation report in April, this year, prices have accelerated faster than Fed officials anticipated just a few months ago. Last week we learned that headline inflation increased to a 14-month high of 2.5 percent from a year ago in April, due in large part to rising gas prices. Excluding food and energy the core rate increased by 2.1 percent.

Fed to Raise Rates for Janet’s Swan Song

Fed to Raise Rates for Janet’s Swan Song

The Fed likes to act in December…and this December will be no different. When the central bankers convene their two-day policy meeting this week, they are widely expected to increase short-term interest rates by a quarter of a percent to a new range of 1.25 to 1.5 percent. It would be the third increase of the year, the fourth in the past year and the fifth of the rate increase cycle.

Why the Fed Matters

Why the Fed Matters

Now that President Trump has named Jerome (“Jay”) Powell as the next Federal Reserve Chairman, to succeed Janet Yellen, you may experience one of those, “Why do I care about this?” moments.

Trump to Unveil Tax Plan and Fed Chair

Trump to Unveil Tax Plan and Fed Chair

President Trump and Congressional Republicans are about to unveil two, potentially market-moving measures: a tax overhaul plan and a new Federal Reserve Chair. As if those were not enough, those events will occur amid a Federal Reserve Open Market Committee meeting, a monthly jobs report and stock markets soaring to new highs.

Economic Growing Pains 2017

Economic Growing Pains 2017

"The simple message is the economy is doing well," Federal Reserve Board Chair Janet Yellen said in the press conference that followed the central bank’s third quarter-point rate hike in 15 months. She went on to say "We have confidence in the robustness of the economy and its resilience to shocks." You might be wondering what exactly “well” means. Let’s start with the long-term economic growth rate, which has averaged about three percent annually for the 50 years from 1966 through 2016.

Federal Reserve Rate Hike #2


The Federal Reserve will likely raise short-term interest rates this week, when it convenes the last policy meeting of 2016. The second rate hike of the cycle comes one full year after the first, nine years after the last time it had previously raised rates. The central bank is probably more confident about this action than it was a year ago, because it will occur after the President-elect indicated that there would likely be a new boost to the economy, in the form infrastructure spending, tax cuts and deregulation. While GDP averaged a fairly subdued 2 to 2.25 percent during the recovery thus far, the potential Trump actions have prompted economists to increase their estimates for 2017 to 2.5 to 3 percent. Economists and investors will be paying close attention to any mention of how the FOMC may change its outlook in response to the major fiscal stimulus that will likely be enacted. A faster growing economy could mean that the Federal Reserve will finally see its much-desired pick up prices and as a result, the central bank should be gearing up for a series of rate hikes in 2017.

Here’s the rub: for all of candidate Trump’s complaining about Janet Yellen’s Fed keeping rates too low for too long, the biggest risk to the current expansion would be if the Fed were to move more quickly than anticipated, putting the current stock market rally at risk and potentially sparking a recession.

Fear not…current Fed officials appear to on track to under-deliver on their inflation target, as they have done consistently over the past twenty years. That’s why Yellen has been so willing to be patient on raising rates. Although Trump took aim at Yellen for not raising rates faster, she may in fact be the ideal Fed Chair to keep the economic expansion/stock market rally alive in 2017.


Savings: Any increase in the Fed Funds rate could help nudge up rates on savings accounts, but after the first increase, banks passed very little of the increase on to their customers. Bottom line: savers’ suffering is not likely to end any time soon.

Mortgages: While rates for fixed rate mortgages key off the 10-year government bond, not short term rates that the Fed controls, yields have already started to rise since the election. The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($417,000 or less) increased to 4.27 percent, the highest level since October 2014 and up from 3.5 percent before the election. Adjustable rate mortgages (ARMs) are linked to shorter-term rates, which means that consumers should be careful about assuming these loans and also should consider locking in a fixed rate now. Those who have ARMs could see payment increases down the road.

Auto Loans: For those planning on purchasing a new car with a loan, don’t worry too much. An extra quarter-point increase on a $25,000 loan amounts to a few dollars a month in higher payments.

Credit Cards: Most credit cards have variable rates and unlike the savers, the card companies are quick to pass along the increase to the borrowers within a few billing cycles. You may want to consider locking in a zero balance transfer offer, because it won’t be around as the Fed keeps increasing rates in 2017.

Student Loans: Federal loans are fixed, so there will be no impact from a rate increase, but some private loans are variable. Double check your paperwork to determine what benchmark rate (Libor, prime, T-bill) your loan is tied to.


Stocks: If the Fed goes slowly and the economy improves, the stock market should be fine. But, as noted above, if the central bank ends up raising rates faster than expected, it could hurt prices. In the past, shares of banks, energy, industrials and technology do well amid rising rates.

Bonds: When interest rates rise, bond prices fall and in this particular cycle, it could be even more painful, because the slow growth recovery lulled many bond investors into complacency. That said, there is no reason to abandon the asset class. For most investors who own individual bonds, they will hold on until the bonds mature and then purchase new issues at cheaper prices/higher rates. For those who own bond mutual funds, they will reinvest dividends at lower prices and as the bonds in the portfolio mature, the managers will reinvest in new, cheaper issues with higher interest rates. In other words, being a long term investor should help you weather rising interest rates, though you may want to consider lowering your duration, using corporate bonds and keeping extra cash on hand. (For more on bonds, check out this post.)

MARKETS: There were new records all around, providing more post-election gains. Since November 8th, the Dow is up 8 percent, the S&P 500 has gained 11 percent and the NASDAQ is up 9 percent.

  • DJIA: 19,756, up 3.1% on week, up 13.4% YTD (23rd record close of 2016)
  • S&P 500: 2259, up 3% on week, up 10.6% YTD
  • NASDAQ: 5444, up 3.6% on week, up 8.7% YTD
  • Russell 2000: 1388, up 5.6% on week, up 22.2% YTD
  • 10-Year Treasury yield: 2.47% (from 2.39% week ago)
  • January Crude: $51.48
  • February Gold: $1,161.40, 5th straight weekly decline
  • AAA Nat'l avg. for gallon of reg. gas: $2.20 (from $2.17 wk ago, $2.01 a year ago)


Mon 12/12:

Tues 12/13:

6:00 Small Business Optimism

Weds 12/14:

8:30 Retail Sales

8:30 PPI

9:15 Industrial Production

2:00 FOMC Meeting Announcement/Economic Forecasts

2:30 PM: Fed Chair Janet Yellen press conference

Thurs 12/15

8:30 CPI

8:30 Empire State manufacturing survey

8:30 Philly Fed manufacturing survey

10:00 NAHB homebuilder survey

Friday 12/6

8:30 Housing Starts

Federal Reserve: See you in December!


Nothing is certain, but it’s fair to say that it is highly unlikely that the Federal Reserve will raise interest rates when it meets this week. While various Fed officials have tried to keep the prospect of an increase on the table, a so-so August jobs report, weaker than expected retail sales and still soft manufacturing data combined to push the odds of a hike at below 20 percent, according to the futures market. That means the focus will turn to the Fed’s economic projections, which have been off the mark for most of the past year, and the accompanying statement. When Chair Janet Yellen spoke from Jackson, she noted that the case for a second interest rate increase was “strengthening”. That may be true, but it is clearly not strengthening enough to warrant a move now. Most analysts expect that the central bankers will send smoke signals that the December meeting is not just possible, but likely.

Of course, because this is the Fed, there will be nothing like this: “We can’t raise rates yet and certainly will not do anything in November, just days before the election, but clear your schedules for December 14th, because we plan to celebrate the one-year anniversary of the first rate hike in a decade with another quarter point!” At this pace you might earn one percent on your savings account by the time the NEXT Olympics rolls around in 2018! To put into perspective just how slow this rate tightening cycle is, compare it to the most recent campaign in 2004-2006, when the central bank increased the fed funds rate by a quarter-point five times in 2004, eight times in 2005 and then four times in 2006.

Meanwhile now that Americans finally got a raise after eight years of stagnating incomes, maybe they will start spending with a little more gusto. In its 2015 Poverty and Income Report the Census Bureau said median (the point where half of households fall below and half are above) household income rose by 5.2 percent to $56,516. The good news is that the gains were seen in all regions, across all age groups, and for most ethnic and racial groups. BUT (you know there would be a catch!) even with the bounce, inflation adjusted income remains below the $57,423 in 2007, just before the Great Recession began and is still 2.4 percent less than the peak of $57,909, reached in 1999.

On a more positive note, with the gains in income, the split between workers and companies appears to be narrowing. According to Capital Economics, “At its peak in 2001, labor compensation accounted for 57.7 percent of GDP, but it subsequently fell sharply, hitting a 60-year low of 52.5 percent in the first quarter of 2012.” While labor’s share has been falling due to longer-term trends like structural factors such as globalization and the decline in the power of and membership in unions, the drop accelerated due to the weakness of the post-recession labor market. As the labor market has improved, especially over the past few years, labor’s share of income has started to rebound, “rising to 54.3 percent in the second quarter of this year” and those gains correspond to a drop in the corporate profit share.


  • DJIA: 18,123, up 0.2% on week, up 4% YTD
  • S&P 500: 2139, up 0.5% on week, up 4.7% YTD
  • NASDAQ: 5244, up 2.3% on week, up 4.7% YTD
  • Russell 2000: 1224, up 0.5% on week, up 7.8% YTD
  • 10-Year Treasury yield: 1.69% (from 1.68% week ago)
  • British Pound/USD: 1.3002
  • October Crude: $43.03
  • December Gold:  at $1,310.20
  • AAA Nat'l avg. for gallon of reg. gas: $2.19 (from $2.18 wk ago, $2.30 a year ago)


Mon 9/19:

10:00 Housing Market Index

Tues 9/20:

FOMC Meeting Begins

8:30 Housing Starts

Wells Fargo CEO John Stumpf testifies before the Senate Banking Committee about the 2M unauthorized accounts the bank had opened.

Weds 9/21:

2:00 FOMC Meeting Announcement/Economic Forecasts

2:30 Fed Chair Press Conference

Thursday 9/22:

8:30 Chicago Fed National Activity Index

9:00 FHFA House Price Index

10:00 Existing Home Sales

10:00 Leading Indicators

Friday 9/23:

Yellen's Jackson Hole Speech May Move Markets


The first eight months of the year have been dominated by one question: When will the Fed raise rates next? The answer may come from a surprising place: Jackson Hole, WY. Since 1982, the Federal Reserve Bank of Kansas City has hosted a late summer economic policy symposium in Jackson Hole. The event brings together central bankers, private market participants, academics, policymakers and others to discuss the issues and challenges in a public but informal setting. While this may sound like a bunch of boring people in a beautiful location, in recent years, some central bankers have made big news from Jackson. In 2010, Fed Chair Ben Bernanke discussed the pros and cons of several policy options, including buying “longer-term securities,” which was the premise of the second round of quantitative easing or QE2. Two years later, Bernanke used his Jackson Hole remarks to introduce the possibility of a third round of asset purchases known as QE3, when he said: “The Federal Reserve will provide additional policy accommodation as needed to promote a stronger economic recovery and sustained improvement in labor market conditions in a context of price stability.”

Four years later, the central bank is no longer buying assets to prompt economic growth, but so far, it has only increased its benchmark interest rate one time-last December. While some Fed officials have recently been leaning towards an interest rate increase sooner rather than later, others are concerned that the economy remains too fragile to risk higher rates. Further evidence of the division between the two camps was evident in minutes from the last policy meeting.

That’s why at this year’s Jackson Hole confab, traders and economists will listen closely to current Fed Chair Janet Yellen’s speech, “The Federal Reserve’s Monetary Policy Toolkit” to see if there is either an implicit or explicit clue about when the next rate hike will occur. While she is not likely to say, “September is baked in the cake,” she may discuss the factors that would lead to an increase in September, like another strong employment report along with firming inflation. Right now, the market is predicting just a 20 percent chance of a September move and 50 percent likelihood at the December meeting. A September surprise could knock stocks down from their peaks and usher in what could be a bumpy autumn.

MARKETS: Summertime and the living is easy….in what was a typical August week, stocks bounced around all-time highs, but closed mostly unchanged amid light volume.

  • DJIA: 18,552, down 0.1% on week, up 6.5% YTD
  • S&P 500: 2183, down 0.01% on week, up 6.8% YTD
  • NASDAQ: 5238, up 0.1% on week, up 4.6% YTD
  • Russell 2000: 1236, up 0.5% on week, up 8.9% YTD
  • 10-Year Treasury yield: 1.58%
  • British Pound/USD: $1.3078
  • September Crude: $48.52, up more than 20% since falling below $40 in early Aug
  • August Gold:  at $1,340.40
  • AAA Nat'l avg. for gallon of reg. gas: $2.16 (from $2.13 wk ago, $2.63 a year ago)


Mon 8/22:

8:30 Chicago Fed National Activity Index

Tues 8/23:

10:00 New Home Sales

10:00 Richmond Fed Manufacturing Index

Weds 8/24:

9:00 AM FHFA House Price Index

9:45 PMI Manufacturing Index Flash

10:00 Existing Home Sales

Thursday 8/25:

First day of Kansas City Fed Econ Symposium in Jackson Hole, WY

8:30 Durable Goods Orders

11:00 Kansas City Fed Manufacturing Index

Friday 8/26:

8:30 GDP

8:30 International Trade in Goods

8:30 Corporate Profits

10:00 Janet Yellen’s speech from Jackson Hole

10:00 Consumer Sentiment

Greece, Jeb! and Stock Corrections


European leaders will convene yet another emergency meeting in Brussels on Monday to discuss how and whether to restructure Greece’s debt. This may all sound like déjà vu all over again, but contrary to five years ago when the Greek drama started to unfold, today investors are less concerned that a default would take down the euro zone or the interconnected global economy. It could however, create a bout of panic in the markets. If officials do not come to an agreement, they will have no choice but to come up with a Plan B, which would likely include capital controls to limit withdrawals from Greek banks and prevent a classic run on the banks (see “It’s a Wonderful Life” for the best explanation of a bank run). In fact, about €5 billion of deposits reportedly left Greek banks last week alone. Instead of a well-orchestrated Grexit, there could be what the FT’s John Authers calls a “Graccident”, where a default would lead to a messy and de facto Grexit. Plan B would also likely include the European Central Bank’s extension of emergency loans to Greek financial institutions and Greece’s preparation of a new currency or IOU system.

As the tragedy that is Greece continues, investors seem more interested in the Federal Reserve. Last week, Chair Janet Yellen elegantly threaded the needle: Yes, the central bank would most likely raise short-term interest rates this year (probably two quarter of a percent increments), but the pace of increases will be gradual. Complicating matters for the central bankers was the first quarter, when the economy contracted by 0.7 percent. Sure, most of the slowdown was due to transitory factors, like weather, the West Coast port shutdown and $40 crude oil, but far be it for this Fed to err on the side of snuffing out potential growth.

The government will provide a third update to Q1 GDP this week, which may show marginal improvement, but most have already set their sights on the rest of the year, which should improve steadily. Because Q1 was such a stinker, growth for the total year is likely to be 2.5 percent, matching the pace of the past few years.

I usually quote the post World War II rate of growth, which is about 3.3 percent, as a benchmark, but according to the New York Times that longer term average may overstate the expected growth rate today. The reason is that “Over the last 40 years, the American economy has grown at an average of 2.8 percent per year,” which is considerably slower than the 3.7 percent average from 1948 to 1975. Additionally, the higher rate includes “two favorable trends that are now over: women entering the work force, and baby boomers reaching their prime earning years.”

The downshift in growth expectations might come as a surprise to newly minted presidential candidate Jeb Bush, who in a speech last week said that his goal for economic growth was 4 percent. The Financial Times called this figure “Fantasyland” and the NYT chimed in, saying Mr. Bush’s 4 percent goal has “close to 0 Percent Chance” at success.

MARKETS: While the NASDAQ and Russell 2000 indexes were making new highs last week, two other indexes weren’t so fortunate. The Dow Jones Transportation Average entered correction territory (a drop of more than 10 percent) for the first time in nearly four years and the Shanghai Composite lost 13.3 percent for the week, the worst week since the financial crisis and the second time this year it has fallen into correction territory. Additionally, last week brought the biggest outflows from bond funds in two years, triggered by the possibility of not one, but two, interest rate hikes later this year. These events were just more fodder for those worried investors who are convinced that the next leg for the broad U.S. market is down.

  • DJIA: 18,015, up 0.7% on week, up 1.1% YTD
  • S&P 500: 2110, up 0.8% on week, up 2.5% YTD
  • NASDAQ: 5,117 up 1.3% on week, up 8% YTD
  • Russell 2000: 1284, up 1.6% on week, up 6.6% YTD
  • 10-Year Treasury yield: 2.27% (from 2.39% a week ago)
  • August Crude: $59.61, down 0.6% on week
  • August Gold: $1201.90, up 1.9% on week
  • AAA Nat'l avg. for gallon of reg. gas: $2.80 (from $2.80 wk ago, $3.68 a year ago)


Mon 6/22:

8:30 Chicago Fed

10:00 Existing Home Sales

Tues 6/23:

8:30 Durable Goods Orders

9:00 FHFA Home Price Index

10:00 New Home Sales

Weds 6/24:

8:30 Q1 GDP – final reading (prev = -0.7%)

Thurs 6/25:

8:30 Personal Income & Spending

Fri 6/26:

10:00 Consumer Sentiment

Stocks: Up, Incomes: Down


You can forgive the vast majority of Americans for not celebrating last week’s 28th record high of the year for the S&P 500 index. Oh sure, people like to see retirement accounts rise in value, but there is a pervasive sense among workers that they are not getting ahead. In fact, just as the stock market completed its strongest week in four months, a new report from Sentier Research on income revealed that many continue to struggle. As of June, median income for all households, adjusted for inflation, was $53,891. Here's the good news: in the past three years, incomes are up 3.8 percent. The bad news is that in the five years since the recession ended, median income has fallen by 3.1 percent. That’s just one of the reasons that when Federal Reserve Chair Janet Yellen delivered her much-anticipated speech from Jackson Hole, WY, she said that “the unemployment rate has fallen considerably, and at a surprisingly rapid pace,” but “the labor market has yet to fully recover.”

How has it not recovered? Well, as of July, there were 3.2 million workers who have been unemployed for more than 26 weeks and still want a job. Although this is well below the peak of 6.7 million and the lowest level February 2009, it is still very high. Additionally, while the unemployment rate has dropped nearly 4 percentage points from its late 2009 peak to 6.2 percent in July, the broad unemployment rate (defined as the official rate, plus marginally attached workers; those who are neither working nor looking for work, but want a job and have looked for work recently; and people who are employed part time for economic reasons), stands at a lofty 12.2 percent.

And then of course there’s the problem of Americans’ eroding earning potential, highlighted by the Sentier report. But as Yellen noted, part of the problem is structural, meaning that some global economic changes that have put pressure on incomes are here to stay. Sentier found that median income, adjusted for inflation, is 5.9 percent below where it stood in the year 2000. The stunning fact that the average American is WORSE OFF than he or she was fourteen years ago seems to get short shrift in reporting on the recovery.

There are a few factors that have contributed to the longer term slide in incomes: (1) Globalization allowed companies to move operations overseas, where wages were cheaper than in the US; (2) Technological advancements eliminated the need for as many workers overall; and (3) Most public companies have been more concerned with boosting share prices than in paying workers.

In an effort not to end on such a downbeat note, it’s worth noting that economists believe that as the economy continues to improve, incomes will slowly rise. Unfortunately, that may be cold comfort to millions who are having a hard time meeting their daily obligations. As one radio listener recently said, “I like when my 401K goes up, but it doesn’t help me pay the utility bill!”

MARKETS: Just in time for the busy Labor Day weekend, oil and gas prices have dropped to near 6-month lows.

  • DJIA: 17,001, up 2% on week, up 2.6% YTD
  • S&P 500: 1988, up 1.7% on week, up 7.6% YTD
  • NASDAQ: 4464, up 1.7% on week, up 8.7% YTD
  • 10-Year Treasury yield: 2.41% (from 2.34% a week ago)
  • October Crude Oil: $93.65, down 1.2% on week
  • December Gold: $1280.20, down 1.9% on week
  • AAA Nat'l average price for gallon of regular Gas: $3.44 (from $3.54 a year ago)


Mon 8/25:

10:00 New Home Sales

10:30 Dallas Fed Survey

Tues 8/26:

8:30 Durable Goods Orders

9:00 Case-Schiller Home Price Index

10:00 Consumer Confidence

Weds 8/27

Thurs 8/28:

8:30 Weekly Jobless Claims

8:30 Q2 GDP – 2nd estimate (Preliminary: 4%)

8:30 Corporate Profits

10:00 Pending Home Sales

Fri 8/29:

8:30 Personal Income and Spending

9:45 Chicago PMI

9:55 Consumer Sentiment