Morning Report – The Fed thinks the labor force participation rate isn’t going to increase meaningfully9/12/14

Markets are flat as we close out a dull week. Bonds and MBS are down amidst a global bond sell-off.

Retail Sales increased .6% in August. Ex autos and gas, they increased .4%. July’s numbers were revised upwards.

Import prices fell .9% in August, driven by a drop in oil prices. Ex food and fuels, import prices were flat.

The preliminary September reading for the University of Michigan Consumer Sentiment indicator showed an increase and hit the high for the past year.

The jumbo securitization market is pretty much dormant, except for the occasional Redwood Trust deal. Only 2.3% of all jumbos originated in the first half of 2014 have been securitized. At the peak of the housing bubble, almost half of all jumbos were securitized. Banks are instead choosing to hold them on their balance sheet. Banks are subsidizing the jumbo mortgage rate in order to bring in the wealthy client and then offer all other sorts of banking services, including the lucrative wealth management business.

Another article about the lowering of the speed limit for the economy. Federal Reserve economists do not expect the labor force participation rate to increased meaningfully as the labor market improves. They argue that the number of people who aren’t working, but would work if conditions were better are relatively small. The upshot is that this paper bolsters the hawk case at the Fed and is ammo for those who want to start raising rates. Not sure dove Yellen will play along, and the voting members will take a dovish turn next year as hawks like Plosser lose their vote.

3 Responses

  1. Brent, the other day you were suggesting moving out of equities because the Fed might raise rates, but today you think the Fed is moving like a snail. I require more certainty, and I deserve it.



  2. Mark, I am not sure I buy the case the staff economists are making, that there is less slack in the labor market than appears. I think a lot of those that are currently out of the labor force would return if the opportunity presented itself.

    I don’t think the Fed raises interest rates by more than a symbolic amount until you start seeing wage inflation, and we are nowhere near seeing that. If I was Janet Yellen, I would end QE now and probably try and carefully sell some of the paper on the balance sheet, keeping in mind that selling paper will reduce the money supply. I would raise rates by a symbolic amount just to get off the zero bound and not increase them any more until we start seeing 5% annual wage inflation.

    I don’t really have a view whether the Fed is moving too fast or too slow – my point though is that the stock market is assigning a 100% probability that no one will blow up once the rates start going up. The last 3 times the Fed started hiking rates (1994, 2000, 2005), we popped the stock market bubble, the real estate bubble and blew up Orange County.


    • Brent, thanx. I am now personally in a guaranteed annuity from Pru that looks like a great investment – it guaranteed doubling in 12 years when I bought it in 2011. I am also drawing on my SEP-IRA, working part time, and now drawing SS. Meanwhile, Rosanne is still earning six figures but as a CPA she has always been so conservative that she is heavily in bonds that are now maturing. So now we are looking at putting her maturing bonds in rental property, but the liquidity preference is also real for her – she would not put more than $300K in rental properties, at least, not now.

      Her earnings are going to decline as she winds down toward semi-retirement. Like me, she probably will not hang it up completely, but she will make her work life easier – and our remaining healthy years worth having more spare time.

      This summer, with two actual vacations, albeit that they were each short, was terrific for us. We want more of that. I wouldn’t hesitate to have twice as much in rental properties as Rosanne and I would leverage, at least to 50% down. She is going to be a cash buyer, period. Limit risk is her approach. BTW, in 2009 she looked like a genius and I looked like everybody else my age, whose horizon for total retirement receded.


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