Last week’s look-ahead column closed with passing mention of surprises. Today we’ll explore the potential for one domestic surprise, and three foreign oops-a-daisies. The more the four tilt toward oops, interest rates will fall; the more they improve, rates up.
The world will not truly reopen until Friday, Jan. 9, with release of December job data. My domestic opinion has survived the week: Headwinds are lighter than any time in a decade.
That said, tailwinds are also lighter, especially the good ol’ cyclical recovery. In the aftermath of the Great Recession neither jobs nor housing has behaved as they “should,” and the stock market rally may be more QE artifact than GDP anticipation.
Disparate observers (Tim Duy, University of Oregon; Rick Rieder, Blackrock) have noted recent changes in the Fed’s estimation of the job market. A four-year puzzle: a steady decline in unemployment, but a nearly equal decline in participation in the workforce. If unemployment really is falling, competition for workers will cause wages to rise and ultimately turn inflation upward.
Bernanke in December: “Inflation can be quite inertial. It can take quite a time to move. I think a lot of the declines in the participation rate are demographic or structural … a lot of the unemployment decline that we’ve seen, contrary to sometimes what you hear, I think a lot of it really does come from jobs.”
Tha-dump. That’s the most optimistic forward by the chairman since the show stopped.
Bilateral surprise potential: 1) cyclical growth pressure has been low, but is now stronger than we’ve thought, or 2) job growth looks like cyclical pressure but isn’t.
Down the first road, the Fed is eager to end QE for fear it may have to tighten sooner than anyone thinks. Down the second, global forces have made obsolete the cycles of the last 65 years, and the Fed may not have done enough. Or be able to.
Three potential international oops-a-daisies
Japan is everyone’s “bug in search of a windshield.”
Its national debt is at least double its GDP, and it has entered last-ditch emergency policy. The Bank of Japan is buying Japanese bonds at about 2.5 times the rate of the Fed’s QE, trying desperately to ignite the economy. In April, Japan will attempt the simultaneous feat of austerity, raising the national sales tax from 5 percent to 8 percent.
Yesterday the Health Ministry (often less than frank) announced a 244,000-person decline in Japan’s population, an annual affair since the crest before 2010 at about 128 million. It’s not just that the population is shrinking by about 2 percent a year. Most of us get a lot older before we die, and become a drain on tax revenue. The Japanese have the longest life expectancy in the world.
All of that notwithstanding, 95 percent of Japan’s debt is held inside Japan. So long as Japan’s people are willing to accept the yen printed by the Bank of Japan, no big surprises. Internationally, the yen fell 25 percent last year, undercutting the exports of its competitors (everybody).
Europe’s thin pulse is getting great press, presumably because treading water is so much better than drowning.
Newly re-elected Angela Merkel’s first demand of the others: Surrender control and tighten austerity (Nicht Schwimmen!).
The European Central Bank advises that if anyone bets on drowning by shorting Club Med bonds, it will throw a life preserver. But not until they are drowning.
Nothing has changed: Germany’s surplus, peripheral unemployment and debt growth; economic, fiscal and banking disunion. Europe’s people are second-oldest only to Japan, adding to the impossible fiscal situation (Europe does allow immigration, which is helping stabilize the population. Japan is 98.5 percent Japanese).
As big as Europe’s debts are, they’re only about half of Japan’s as a percentage of GDP, and most is owed in-country.
China is attempting to rebalance from fast-expansion overinvestment to a normal economy, and nobody there or anywhere knows how it will go.
China’s politics are so different from any other economy that no one outside even knows how to keep score. The U.S. Army is not in business for itself. Our political parties do not run our judiciary. We do not plan quickly to move 400 million farmers without other skills to new cities. We spy on civilians, but you can write or speak as you wish.
Bet on one thing: A China consensus values stability. Xi Jinping will not be China’s Mikhail Gorbachev.
Overseas surprises are not imminent, but if they were, they wouldn’t be surprises.
Lou Barnes is a mortgage broker based in Boulder, Colo. He can be reached at lbarnes@pmglending.com.
