No sooner was the January jobs report released than the Wall Street Journal posted a succinct headline: “Hiring, Wages Pick Up as Job Market Nears Full Health”.
Whether the job market is actually as red hot as the BLS’ headline numbers is a debatable topic, but it is absolutely clear that the “emergency” the Fed cited 73 months ago when its pegged the money market rate a zero has long since vanished. Indeed, by the standards of all prior history, ZIRP was a death bed remedy. Prior to December 2008, the Fed had never, ever pegged the funds rate at zero—not even during the Great Depression.
So if the US economy did generate new jobs at the 4 million annual rate implicit in the November-January average, how is it that not only is the money market still pinned to the zero bound, but that the Fed continues to energetically waffle over how many more months it will remain there? Don’t these people know what the words “emergency” and “extraordinary measures” mean in plain English?
Not that it really matters. The truth is, the stubborn and unaccountable continuance of a crisis era monetary policy in the face of a purportedly booming labor market reflects something altogether different than economic common sense. Namely, it is the product of a pernicious partnership of convenience between the Keynesian money printers who dominate the Fed and the gamblers who inhabit the Wall Street casino. Together they virtually smoother any recognition that the current juxtaposition is just plain nuts.
As it happened, not more than 60 minutes after the WSJ headline appeared the usual suspects were at work explaining a condition that seemed anomalous even to the cheerleaders on CNBC.
First, the Fed’s PR man at the WSJ posted a “Hilsenramp”, reminding the gamblers that the “whopping increases in payroll employment in recent months” don’t necessarily mean that the party will end any time soon. You need to understand the code words, he explained:
Fed officials will decide at their March meeting whether to change or drop the language in their policy statement pledging to “be patient” in deciding when to raise their benchmark short-term interest rate from zero. That phrase means they won’t move for at least two more meetings. After the March gathering, the Fed has meetings scheduled for April and June. If the policy makers keep the “patient” language in the statement, that would indicate they don’t think they’ll raise rates at those meetings.
Having thus teed-up the basis for still another delay, Wall Street then got the word seconds latter from Goldman’s chief economists and stock peddler. Said Jan Hatzius to his skeptical bubble vision host,
“The case for ‘patience’ is still quite strong.”
So the worrisome anomaly embedded in the morning’s jobs report was quickly and cleanly dispatched. Goldman ordered no deletion of the “patience” word from the March statement, and, ipso facto, the casino was assured of free carry trade money until Labor Day, at least.
To be sure, Hatzius had his reason for his ZIRP for longer ukase, but it was a whopper. He noted with a straight face that Yellen would not be impressed with the 2.2% y/y growth in hourly wages, also reported this morning, and that her signal that the blessed hour of “full employment” was approaching and that interest rates need to get off the zero bound would be gains in the 3-4% range.
Really? There has not been one month of 3-4% y/y hourly wage gains for almost a decade. And the prospects that this will occur any time soon, say during the next decade, are remote to none.
And whether Yellen actually expects this or not is beside the point. Unlike in the 45-years ago time warp from the Yale economics department where our Fed head became indoctrinated in James Tobin’s bathtub theory of economics, the US labor market does not operate in a closed system internationally, and it is not remotely close to full employment of the potential labor hours available at home.
In fact, the next round of downward labor pressures is just getting started owing to the crack-up boom that has been engineered by the world’s central banks. Due to worldwide financial repression and the scramble for yield caused by ZIRP, there has been a massive over-investment in capacity to produce energy and raw materials, transportation, shipping and distribution services, industrial intermediates and finished consumer products, including luxury items and BMWs, among numerous others.
So this two-decade long spree of planetary malinvestment is already causing commodity prices to tumble, and manufactured products will not be far behind. Thus, iron ore is nearing $60 per ton compared to a peak of $200 in 2011, and according to one astute observer of the China scene, as we posted this morning, is heading for under $40 per ton soon.
And that is just the first leg. The reason for this collapse is not only the massive over-investment in iron ore mines in Australia and Brazil owing to cheap capital, but that as the China debt Ponzi has reached its limits, its steel production has stagnated. During 2014 it grew by less than 2% compared to double digit rates for the prior two decades—and that plain and simply means bone-busting “dumping” of steel products and fabrications into the export markets in the years ahead.
In fact, China’s steel product exports already doubled during 2014 to nearly 100 million tons, but China actually has excess capacity that is upwards of 500 million tons. Couple that massive overhang with the collapse of global demand for plate steel, owing to the shutdown of new shipping construction, and structural steel and rebar, due to the rapid cooling of the China and EM construction boom, and you have a global steel price war that will crush not only profits, but wages, too.
Needless to say, the iron ore/steel products food chain is only a leading but typical example. As we posted elsewhere this morning, the currency war and race to the bottom is now on among central banks all over the world. The People’s Bank of China is surely next in line as it desperately tries to cool down its internal construction binge and make up the resulting growth deficit with a revivals of export growth via cheaper RMB exchange rates.
In a word, virtually every central bank in Asia and Europe is involved in a deliberate policy of exchange rate depreciation and therefore export of deflation–including enormous downward wage pressures— into the world economy.
At the same time, the phony 5.7% domestic unemployment rate reported yesterday has nothing to do with full employment. The relevant number in the report is that there are still 101 million working age Americans who do not have jobs, and only 45 million of them are on OASI retirement benefits. And that says nothing about the tens of millions of job holders who are employed far less than a full 40 hour work week.
In short, there is a surfeit of available labor at home and abroad, meaning 3-4% wage gains are not coming down the pike any time soon or ever.
So if that’s what the Fed is waiting for - then the so-called “lift-off” may not be coming even this year. And in any event, the trivial 25 bps increases in the funds rate that may eventually come have nothing to do with interest rate “normalization” or the return of honest price discovery in the casino.
And that suits the needs of the Wall Street gamblers just fine.