In her Jackson Hole speech today, Janet Yellen released a technical note detailing the construction of the Fed's new labor market conditions index (LMCI), which she cited as among the reasons to maintain an exceptionally accommodative monetary policy.
She failed to cite the fact that the index has enjoyed its longest uninterrupted string of quarterly gains in the nearly 40-year history of the indicator, a period which includes a labour market downdraft every bit as vicious as that of the Great Recession.
source: http://www.federalreserve.gov/econresdata/notes/feds-notes/2014/assessing-the-change-in-labor-market-conditions-20140522.html
Moreover, she also fails to note that the cumulative improvement in the index has taken it to levels at which virtually every prior tightening cycle during the history of the indicator had already taken place. Macro Man took the liberty of constructing such a cumulative index, using the data that the Fed very helpfully provided.
It's true that the index has yet to reach the apex of prior labour market cycles, but good Goddam, that's hardly a useful threshold to contemplate the start of a tightening campaign. For those readers with short memories, the last two proper tightening cycles (starting Feb '94 and June '04) concluded with eye-watering bubbles caused by overly-easy monetary policy.
Small wonder, then, that Macro Man and other punters sometimes feel like we're caught in a Stealer's Wheel song....
She failed to cite the fact that the index has enjoyed its longest uninterrupted string of quarterly gains in the nearly 40-year history of the indicator, a period which includes a labour market downdraft every bit as vicious as that of the Great Recession.
Moreover, she also fails to note that the cumulative improvement in the index has taken it to levels at which virtually every prior tightening cycle during the history of the indicator had already taken place. Macro Man took the liberty of constructing such a cumulative index, using the data that the Fed very helpfully provided.
It's true that the index has yet to reach the apex of prior labour market cycles, but good Goddam, that's hardly a useful threshold to contemplate the start of a tightening campaign. For those readers with short memories, the last two proper tightening cycles (starting Feb '94 and June '04) concluded with eye-watering bubbles caused by overly-easy monetary policy.
Small wonder, then, that Macro Man and other punters sometimes feel like we're caught in a Stealer's Wheel song....
56 comments
Click here for commentsWhy would the Fed tighten when they are clearly trying to inflate away $50 trillion of debt? Expect QE to be resumed in 2015...
ReplyMM, check this out
Replyhttp://www.frbkc.org/publicat/research/macrobulletins/mb13Hakkio-Willis0718.pdf
Fed still sees overall level (not change) way below average ;-)
Thank goodness the captcha now apparently turned into an ad vs an impossible image to read!
Question: Beyond manipulating long term lending rates, is there a consensus here on the full effects of QE?
ReplyAre the popular charts mapping QE[1,2,twist,3] to the S&P showing correlation or causation?
Will the S&P necessarily fall after QE3 stops?
C Says
ReplyIFeels,
I think trying to find any consensus on QE is simply an exercise in futility ,because it is seeking to answer the wrong question. I would rather people stopped the pretence that the Central Bank and government are independent structure when in fact they are very closely interdependent. Looking at the arrangement from that position one might then take the view that the cost of financing in the economy reflects the scale of correcting previous policy where monetary policy was asked to do the job that should rightly have been done by fiscal policy in establishing the competitive position of the economy within the global market.
I might add this brings to mind for me that peculiarity of the UK and language. That is ,because the English Language is so globally well received the British tend not to learn foreign languages. Likewise when a country enjoys reserve currency status is it more likely to use monetary policy than fiscal policy
to communicate it's relative position of competitiveness?
Great post.
ReplyStealers Wheel... You get bonus points for good taste, MM ! Or are you a big Tarantino fan ?
ReplyUnfortunately, whoever wrote this blog over at Macro Man doesn’t quite know what they are talking about. So while I may agree with their conclusion that Yellen probably didn’t make her point very well by citing this indicator, their argument is not sound. The way this indicator is constructed is such that relatively short-run changes in the index are informative about the condition of the labor market. Cummulative changes in the index that occur over a number of years or decades have no meaningful interpretation. This is one of those times where the graph that is presented in this article looks like it has a meaningful pattern, but it does not.
ReplyUnfortunately whoever wrote that comment at D Murray probably cut and pasted it from a different forum as the language does not appear to tally with -
Reply1) Someone writing a comment directly addressed to this blog
2) Anyone who knows Macro Man
3) Anyone who wanted to raise a question about the validity of the cumulative index, supported by a good case other than 'it doesn't', instead of wanting to use the maximum number of words in a vaguely patronising tone which smelled somewhat of self-aggrandisement
Perhaps whoever wrote that comment at D Murray would like to shed some light on its origins?
Beyond Polemic's objections, I would note the following:
Reply1) Mr./Ms. Murray is not listed amongst the authors of the original Fed note, so presumably did not conduct the research himself.
2) There is often utility in looking at indicators in ways differently from those that a creator intended to glean fresh insights
3) In this case, the Fed paper in question included a table showing the cumulative change in the indicator per expansion and recession. Unfortunately, therefore, it would appear that whoever wrote the D Murray comment doesn't know what they are talking about.
4) In any event, even if the Fed had not used the cumulative reading of the indicator itself, given that the output gap is a cumulative measure of output relative to trend, the approach would still have merit. But, y'know, the Fed did, so I guess the approach gets a gold star as well.
I see the NY desk is doing its job , not..over the weekend.
ReplyBack to bed.
The Fed does look at cumulative returns, but not at the level of cumulative returns over the life on the index. This would have no meaningful interpretation for the same reason that the level of the index itself has no meaningful interpretation.
ReplyI think the graph in abee crombie's comment illustrates this in an intuitive way. http://www.frbkc.org/publicat/research/macrobulletins/mb13Hakkio-Willis0718.pdf
It's a stationary, mean-reverting series. It's OK to look at cumulative readings over an eight year expansion, but no longer? Sorry mate, you haven't got a scooby.
ReplyMacro Man, looking at that chart 8 years out the RoC is as vicious as I've seen. But concur with sentiments that some people reading the chart may think b/c of the independent data series the chi-square data can be over optimized and isolated through xcel solver to suit the outcome they want. Been a witness to this type of data churning from a similar analyst team some years back in the back office, never ends well due to the over-optimization of household goods and data which always leads to
ReplyGarbage in - Garbage out
Baa1 rated Irish 10yr now 1.8%;60bps lower in yield than risk free UST 10yr
ReplyTalking of Ireland, Does any one else think that the boon of super low euro rates + boom of UK linked economy is a repeat recipe of its last leverage blow up? And if so then there is room yet in Irish Reits..
ReplyIf there is a leverage shock in the system it won't be isolated , the data is showing an enormous amount of connectivity at the moment.
ReplyIt's as if the data has taken on a parallel life force, you really have to see it from where I am to grasp the uniqueness of the situation , it truly is a wonderful experience having spent a lifetime of moving sets of data around such chaos.
Polemic said "I would rather people stopped the pretence that the Central Bank and government are independent structure when in fact they are very closely interdependent."
ReplyHear, hear. I second the remarks that the Hon Gentleman made a few moments ago.
Anon said: "Why would the Fed tighten when they are clearly trying to inflate away $50 trillion of debt? Expect QE to be resumed in 2015..."
In a nutshell, squire. See the above remarks!
Speaking of clown shows, Spanish 10s 17 bps safer than USTs and 18 bps tighter than gilts? Really, señor? Perhaps you'd be interested in some recently (not quite) constructed apartment complexes in Extremadura? Sorry, the A/C isn't working yet....
Until that piece of mispricing is corrected, there will be jokers to the left (Spain) and the right (Italy).
Not me LB .. that was mr C ( for Clever)
ReplyAgain, looking at cumulative returns is okay (although there are serious problems with doing that over long periods of time). Looking at the LEVEL of cumulative returns is misleading. Do you look at the index's level as well?
ReplyHow is it misleading other than that you claim it to be so? You do understand the difference between a stationary and trending time series, don't you?
ReplyThe chart of the cumulative changes captures the cyclicality of the labour market quite well, and also provides a quick way to assess the timing and magnitude of labour market improvement over different cycles. In the Fed paper, they cite that the index improved by a cumulative 319 points between 1982 and 1990, but if you don't look at the cumulative chart you don't see that the bulk of those gains occurred during the first couple of years.
You keep claiming there are problems with looking at cumulative returns, but fail to cite a single one. Must try harder, I'm afraid.
I do so hope that D Murray is the nom de plume of a J Yellen. 3
ReplyParty hats on, S&P 2000!
ReplyLB, I think Spanish 10 and US 10 are gonna keep going in different directions. The convergence trade has been the best way to play Europe, certainly risk adjusted better than long equities.
Can EEM breakout at the same time DXY does. That would have been a nice correlation trade to have put on a few months ago!
As I said already, you can't look at the "level" of cumulative returns over the life of the series for the same reason that you can't look at the level of the index itself. The model's trends are not designed to be informative about the full level of employment, and the index captures common movements among the cyclical changes from each indicators trend and neglects any common movements in those trends.
ReplyAgain, if this is too difficult to understand (which would be understandable BTW), just look at the following link. It compares changes in employment with the overall employment level, and makes it obvious that the level of employment has still not recovered from the Great Recession.
Lastly, did you really think that Yellen would get it that wrong with her comments? As far as I'm concerned, she actually knows how to interpret this index :)
http://www.frbkc.org/publicat/research/macrobulletins/mb13Hakkio-Willis0718.pdf
ReplyC Says
ReplyIn essence we have a global collapse in yield that reflects the situation that two major parts of the world economy are not in a position to inflate anything regardless of the FED ,or BOE. I refer of course to Europe still on it's knees and China tremulously trying to do a rebalancing act. This is the connectivity that counts and as such I don't think the issue is can the Fed ,or BOE raise rates. Perhaps they can ,but can they do it by more than 50bps without tanking this wobbly ship? If this is the real question then with yields sinking and the spreads increasing then the beauty lineup makes for some otherwise unlikely bed companions in the portfolio. At least for the immediate future.
Good points C. Personally i think rates are the bluntest instrument in the box with regards to economic control. Perhaps we are busy discussing the use of Agent Orange when we should be researching and applying much more selective weedkillers.
ReplyThe fiscal side for example can be much more selective and instead of this rates problem of wiping out the innocent indebted along with the the weeds of inflation and asset bubbles, they can target the areas of concern directly
We are hearing everyday of companies shifting brass plaques or operations for tax reasons ( Burger king/ Hortons the latest) and it would be interesting to see data on tax regimes vs growth and lead lag functions in general, but equally, in reverse, targeted punitive fiscal measures can be just as effective.
Perhaps the amount of genius and analysis that currently goes into rate curve analysis and prediction should in future be applied to fiscal policy expectations.
Can you tax price rises??!
China does'nt have to rebalance, it does'nt have to find winners either
Reply..Ps i'm hearing the jockeys on that desk are'nt on the job old boy:)
Apart from that last trade, in would be really nice if someone could get that last fuckwit trade off my case..ahem books!
ReplyBetter still, fuck it, if this fuckwit trade don't drop off consider me retired from trading.
ReplyCome and spend 5 minutes in the real world fuckwit!
ReplyThank you D. Murray very valid thoughts. Thanks for bringing a inflamatory post down to earth.
ReplyIn regards to why this labor market improvement doesnt indeed really matter to Yellen, I refer everyone to the recent BCA analysis showing that an increase in wage inflation might in fact be welcomed for socio economic policy reasons and also because there may not be pass through to broader inflation
You sold me out Son!
ReplyI promise you , you'll never collect!
ReplyRiddled me with bullets , you'll never collect!
ReplyDon't come back fuckwit, I don't want your money.
ReplyHey Amps..
ReplyDon't you worry old son.. you ll be fine.. just lie down on Dr. Polemics couch and tell me all about it.. Seems like you've been having a couple of tough days .. Now just relaaaaaaax and look at the hands of this watch .. you feel sleepy ..
Well Doc,the only thing those hands
Replyspinning around that clock are telling me is how sneaky that motherfucker of a Spooz is.
I just wish that that big shadow was still watching over me , these players would know all about.
UBS CIO on Bloomberg last night stated he was present at a meeting with other CIOs last week (all total they manage 4 trillion). Each person present was asked if they were buying bonds with negative rates. All stated no.
ReplySo who is buyings bonds with negative rates? Why?
@Anon - what neg rates you are talking about? People have different inflation expectations. German sub-zero bonds have a nice bit of post-euro-breakup optionality built into them - you pay 2bp for some serious upside versus holding euros. I'm long some very low yielding foreign bonds that over the long run may have neg yield but the trade is working now.
ReplyI still think there is a high-beta rally into EOY. I put on a long RTY short SPX trade, but couldn't resist a slug of Nov. index puts as a hedge. IV's are insanely low still.
So who is buyings bonds with negative rates? Why?
ReplyConvexity hedging....
EURUSD going down daily, but closing in on support in the 1,3100-1,3150 area. The Buck stops here?
ReplyAnother remarkably lucid explanation of low rates, liquidity traps and the role of debt and demographics, from Lacy Hunt. Just so LB doesn't have to tell you all over again.....
ReplyDebt Sclerosis
Look, I know this isn't fun. Optimism about the economy is very American. But these are the facts, and it's not a domestic issue, it's global.
Sorry bond bears, back into the forest with you, or you are going to be a spit roast very soon.
Mt T, I'll take the other side of the SPX vs RTY...all the dogs in S&P are rallying. I dont rule out a beta chase into ye, but i wouldnt bet on it either. This is a crappy value investors dream market (one who bought and is holding)
ReplyI'm not sure we are gonna hold 2000 in Spoos
Re; Convexity, apparently it comes in below 2.25%...look out below
http://guggenheiminvestments.com/perspectives/market-perspectives/dont-fight-the-u-s-treasury-rally
LB,
ReplyAppreciate the link. Surprisingly reasonable. Thank you.
@LB, within that Lacy Hunt interview is a crucial item about "productive debt". The fact that we're not repairing bridges and roads and water infrastructure and all kinds of other stuff is just criminal.
ReplyI'm not sure I buy his post-WW2 explanation for the economy growing, but that's probably a quibble for the purposes of this discussion.
- Whammer
C Says,
ReplyMy primary concern about monetary policy is I suspect that over multiple cycles it allows cyclical issues to transform into structural issues. Perhaps this may explain why indeed when we look it appears that monetary policy appears to get less bang for it's buck with each iteration. In essence ,because it fails to address the underlying issues of competition ,but simply defers them to a future date. I have to say it always reminds me of the old company scam which I am sure many of you are familiar with. Towards the end of the period if one appears to be falling short on sales targets one simply 'pulls forward' from the next period anything in the order book that can be treated that way. In other words you increase sales now, but do so from future demand.
Unfortunately, I see no easy answer ,because the psychology of the issue is a cliff not easily climbed. By that I mean I have often noted that people will favour the line of least resistance when it comes to taking a course of action. If monetary policy appears to 'hurt' less than fiscal policy and it appears to do so then will they really do anything differently?
Yellen, Draghi, Carney, Kuroda, et al, will eventually roll craps in their no-limit game. When they do, the collapse will be epic and 2008 will seem like a walk in the park.
Replythis quote from Ayn Rand:
“Do you wish to know when that day is coming? Watch money. Money is the barometer of a society’s virtue. When you see that trading is done, not by consent, but by compulsion – when you see that in order to produce, you need to obtain permission from men who produce nothing – when you see that money is flowing to those who deal, not in goods, but in favors – when you see that men get richer by graft and by pull than by work, and your laws don’t protect you against them, but protect them against you – when you see corruption being rewarded and honesty becoming self-sacrifice – you may know that your society is doomed. Money is so noble a medium that it does not compete with guns and it does not make terms with brutality. It will not permit a country to survive as half-property, half-loot.”
–Ayn Rand Atlas Shrugged, p. 385 (1957)
Another fantastic day for those Bond Bears....
ReplyBond bear flank steak, anyone? Bond bear ribeye? Smoked bond bear ham? Slowly roasted bear?
I could go on, but you get my point....
My hat is off to whoever saw Portugal 10yr @ 3% a couple years ago. What a fantastic run. Nuts.
Replygood god rand is just so tedious
ReplySo how low do German 10yr Bunds go? Probably Mr Putin has played a little role as well.
ReplyI mean what are they going to converge with Japanese yields at 50bps or so. 30 year bund had the low in 2011 @ 1.63 or so, about 10bps from where we are now.
I'm thinking about getting the kevlar out. I've got the feeling too many CTA's are on that trade
Yes, clearly this is not the time to be getting long dodgy European peripherals but the US has a long way to go in terms of lower yields, as we see the latest version of the blockbuster movie "Escape Velocity: The Sequel" start to crash at the box office this winter.
ReplyBunds are feeling this first due to the twin effects of slow recovery in periphery and the chill in its trade with its Eastern partners, for sure.
Bucky is now in the latter stages of his current rally. The critical support levels for EURUSD are going to be tested in the next week or two, then we'll see whether the run is over.
The first tranche of the ECB's four-year funding plan for banks (TLTROs) will go on offer on September 18.
ReplyThis is ancient news, but the full transcript of the fed's Sep-16 2008 meeting (when it was getting pretty nutty) were recently released. It's a pretty interesting read.
Replylink
Anon @ 9:34
ReplyTLTRO is probably the most overestimated thing since the invention of the robot lwan mower.
Most banks have sufficient liquidity (yes, even in Southern Europe). The good clients issue bonds or generate enough cash from operations, the crappy ones are not creditworthy, no matter whether you charge them E+200 or E+175. The potential benefit got much lower over the last couple of weeks because rates came down a lot. 4y money @ 25bps fixed equals roughly 3M E+0bps right now with Euro swaps hovering around current levels. There is not much left that banks can distribute.
Draghi does NOT want you to say that
Reply