Econintersect: Every day our editors collect the most interesting things they find from around the internet and present a summary "reading list" which will include very brief summaries (and sometimes longer ones) of why each item has gotten our attention. Suggestions from readers for "reading list" items are gratefully reviewed, although sometimes space limits the number included.
The Week That Shook the Fed (Gretchen Morgenstern, The New York Times) Morgenstern highlights two events from last week that have been very troubling for the Federal Reserve: Congressional hearings on quashing dissent within the Fed and an academic paper that accuses the Fed of partiality. The first of these saw a very uncomfortable New York Fed president, William Dudley answering questions about the ties between Goldman Sachs and its supposed regulator (the New York Fed) revealed by whistleblower Carmen Segarra. See GEI News today for the latest on this. The second is a paper by University of Texas Austin professor Henry Hu which details how the Federal Reserve operates to preserve the well-being of member banks and not the goals of "investor protection and market efficiency". Prof. Hu says a "a conflict is emerging". Hu is referring to disclosure conflicts between the SEC and the Fed, as well as Fed internal conflicts of interest between carrying out congressional mandates on employment and inflation vs. protecting the member banks. (Econintersect: Well, duh!!!) See Disclosure Universes and Modes of Information: Banks, Innovation, and Divergent Regulatory Quests (Henry Hu, Yale Journal on Regulation).
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7 charts that explain the undocumented immigrant population (Nia-Malika Henderson, The Washington Post) One interesting aspect of the data is that the number of illegal immigrants has declined by about 200,000 between 2010 and 2012 (first graphic) but the number from Mexico has declined by about 1 million between 2007 and 2012 (second graphic). About 2/3 of the Mexican decline occurred during the Great recession (2007-2010).
Yellen Gets That Sinking Feeling Greenspan Once Knew (Matthew Boesler, Bloomberg) Boesler suggests that Janet Yellen may have no better luck raising interest rates that did Alan Greenspan a decade ago. When Greenspan raised benchmark overnight rates 2004-2006 he was trying to drive long-term interest rates higher to slow down the growth of excesses in credit markets. But the initial response was not forthcoming. See Explore Analytics article, third below. In 2007 the yield curve inverted (long-term rates fell below short-term rates, a condition that is usually followed by recession) and then all rates fell to historic lows over the next couple of years as a reaction to the credit crisis, The Great Recession and the debt deleveraging period that followed. Econintersect: The Fed has a tool for forcing long-term interest rates higher. With over a $1 trillion in Treasury securities on the balance sheet they could sell long-term treasuries through FOMC (Fed Open Market Committee) actions. This would likely drive bond prices down and interest rates higher. However, this tool is more like a sledgehammer than a scalpel and implementing such a strategy in a relatively weak economy could quickly precipitate a recession (it would be taking money directly out of the real economy, reducing aggregate demand). See next three articles for factors on the Fed radar screen regarding interest rates.
Wages to Rise on Signs of Improving U.S. Job Market (Richard Clough, Victoria Stilwell and Jennifer Kaplan, Bloomberg) This article discusses the prospects for wage-driven inflation to finally arrive more generally as it has already in the energy sector and the states of North Dakota and Texas. But the component of wage growth related to energy may relax with lower oil prices and there still may be lagging wage pressures as a result. See next article.
Fed's Two Jobs Collide as Drop in Unemployment Vies With Inflation (Michelle Jamrisko and Catarina Saraiva, Bloomberg) By June of next year projections have the unemployment rate at levels the Fed has said they consider to represent full employment (low 5% area). But will this be enough to push wages higher and give inflation to boost sought by the Fed of 2% (core rate)? That question is difficult because of the lowered labor force participation rate. If slack does disappear from the labor market, how many of the millions of working age no longer in the labor force would return? Aggregate demand could well see significant increase without much wage inflation - and that would be what is called a "sweet spot".
US Treasury Historical Yield Curve 1990 – 2013 (Gadi Yedwab, Explore Analytics) Here is a particularly clever way to display the entire yield curve on a timeline. Yedweb displays yields for all Treasury maturities on the same timeline. (Note: The version of this graphic at the source is interactive, displaying all interest rates for any date selected by cursor.) Here is a summary of how to read his graphic:
The larger the vertical displacement, the steeper the yield curve. (Steepest: 1993-1994, 2003-2004, 2009-2011, 2013 and (not shown) 2014)
The smaller the vertical displacement the flatter the yield curve. (Flattest: 1996, 1999, 2000-2001, 2006-2007)
When long-term rates are lower than short-term rates, the curve is inverted. This easily seen by following the bright red 30-year rate line, but there are also times when only part of the curve is inverted (such as 1998 when the 5-year rate was lower than any other).
(Inversion vs. 30-years: 2000-2001, 2007;
Inversion vs. 10-year: 2006-2007;
Inversion vs. 7-year: 1996-1998;
Inversion vs. 5-year: 1998; and
Inverson vs. 3-year: 1996.
Why Larry Summers sees danger ahead for the economy (Lori Montgomery, The Washington Post) Hat tip to Rob Carter. The short summary is that Summers sees the global economy sliding back into (or, in some cases, towards) recession and his recommendation is that the U.S. should increase expenditures on infrastructure to avoid the 'rip tide' (Econintersect term, not Summers). Summers calls the U.S. 'the healthiest patient in the global economic sick ward'.
Finance and the jelly bean problem (Tim Harford, The Undercover Economist) Hat tip to Rob Carter. Harford reports on the work of three mainstream economists who have studied the factors involved in portfolio performance. Their conclusion is not that it is impossible to 'beat the market' (the common summary of Modern Portfolio Theory) but that the complexity of the problem is beyond the tools that have been applied. They find research has identified 316 variables with a demonstrated impact on stock market pricing. To be tractable, a Portfolio optimization effort would have to dismiss most of these (the authors suggest 296 would be thrown out). Then what is the reliability of the result obtained from the remaining 20 variables? That is the question the authors leave us with. Econintersect: This is another of the certeris paribus issues in finance and economics. To go even further what if the factors determining portfolio performance are dominated by 'cross terms' rather than linear combinations of the variables included in the model? This discussion explains why successful traders are, in general, those who are reactive to market changes as they happen rather than those with a set-it-and-leave-it model. Of course, many who are reactive also fail so the message may be: "Don't trade". (Unless you are that 1-in-a-thousand brilliant trader.)
A Major Long-Term Change In The Labor Market Is Bad News For The US Economy (Shane Ferro, Business Insider) Hat tip to Marvin Clark, GEI Discussion Group, LinkedIn. Churn (rate of changing jobs) is considered a healthy factor in the economy (up to a point, of course). It leads to improved productivity and better wages in many cases. Churn rates for men with less than high school education are 1/3 lower than at the turn of the century; churn rates decline with increasing education. College graduate men had a churn rate around 21% in 1999 and about 15% in 2012, nearly the same percentage drop as other educational cohorts. College graduate women have a higher churn rate than men but other educational levels have less or the same. Women have experienced a noticeably bigger decline in churn rates in this century compared to men.
IRS Clarifies Key Rollover Question (Ed Slott, Financial Planning) Retirement accounts with both before-tax and after-tax contributions have always created headaches for owners and planners. Now the IRS has clarified one aspect that was in conclusion: As far as the IRS is concerned portions of an IRA may be transferred to more than one new account and, in addition, the after-tax allocation may be transferred to a Roth IRA while the before-tax portion goes to a traditional IRA. The 401(k) plan itself may complicate this. If the plan allows only one direct rollover per year then the process can be to do the rollover to the new traditional IRA, followed by a distribution (60-day) to the owner who can then transfer the money to the Roth IRA. Slott cautions: the direct rollover must be done first.
From Value Creation To Value Extraction (Shareholders Unite, Seeking Alpha) Hat tip to Bob Millman. The author argues that corporate stocks have become vehicles for "massive extraction" rather than a means of funding of corporate development. He cites stock buyback programs as the penultimate vehicle for the extraction operation. He refers to a Harvard Business review article which we have discussed previously: Profits without Prosperity by William Lazonick. The financial engineers have found a way to extract most of (and in 2007 more than) the total net income of U.S. corporations. Any wonder little investment is taking place?
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