First Impressions

Priming the Wage Pump?
by Doug Ashburn

I have long held that the Federal Reserve’s ability to stoke inflation (or prevent deflation) would be bound by its inability to pump up wages through monetary policy. Price inflation is one thing – a central bank has can certainly make goods more expensive relative to currency by diminishing the value of currency a la Ben Bernanke’s famous “helicopter speech.”

Wage inflation, however, is quite a separate animal, especially if a nation is suffering from excessive unemployment. If the pool of available workers is plentiful, higher consumer prices will be good for profit margins, but not necessarily translate into upward wage pressures. In fact, the five-year rally in equity prices we have been experiencing is certainly proof of that phenomenon.

Maybe, however, wage pressures are right around the corner, or so say three Princeton professors in a new study (see quote below). They argue that we may not need to work through the entire unemployment overhang before wages start creeping upward. Specifically, the “long-term unemployed” whose skill sets may not be adequate for redeployment in the current environment, should not be counted in unemployment statistics. When such employees are removed from the equation, they say, we are nearing full employment, and employers may soon be required to entice workers with higher wages.

Does this mean rates are headed upward sooner than the Fed is indicating and, more importantly, sooner than the market is predicting?

Quote of the Day

We tentatively conclude that the long-term unemployed exert relatively little pressure on the economy.
Princeton University professors Alan Krueger, Judd Kramer and David Cho, whose recent paper, “Are the Long-Term Unemployed on the Margins of the Labor Market?” was quoted in the FT article “Wage inflation threatens Fed interest rate plans, say economists.”

Lead Stories

Wall Street Bond Dealers Whipsawed on Bearish Treasuries Bet
Lisa Abramowicz and Daniel Kruger – Bloomberg
Betting against U.S. government debt this year is turning out to be a fool’s errand. Just ask Wall Street’s biggest bond dealers.
While the losses that their economists predicted have yet to materialize, JPMorgan Chase & Co., Citigroup) and the 20 other firms that trade with the Federal Reserve began wagering on a Treasuries selloff last month for the first time since 2011. The strategy was upended as Fed Chair Janet Yellen signaled she wasn’t in a rush to lift interest rates, two weeks after suggesting the opposite at the bank’s March 19 meeting.

***DA: Man, this trading stuff is risky.

Sweden Turns Japanese
Paul Krugman – The New York Times
Three years ago Sweden was widely regarded as a role model in how to deal with a global crisis. The nation’s exports were hit hard by slumping world trade but snapped back; its well-regulated banks rode out the financial storm; its strong social insurance programs supported consumer demand; and unlike much of Europe, it still had its own currency, giving it much-needed flexibility. By mid-2010 output was surging, and unemployment was falling fast. Sweden, declared The Washington Post, was “the rock star of the recovery.”
Then the sadomonetarists moved in.

***DA: The real story here is that central banks are expected to be market timers as well – a tall order especially in this time of unprecedented action. Krugman does a nice job of reminding us that tightening too early has a downside. Waiting too long, however, has a downside as well.

Wage inflation threatens Fed interest rate plans, say economists
Robin Harding – Financial Times
High long-term unemployment in the US may fail to hold down inflation, creating a challenge for Federal Reserve plans to keep interest rates low well into 2015, according to economic analysis.
A growing body of research from high-profile economists, including Alan Krueger, who chaired President Barack Obama’s council of economic advisers until August, suggests that wage inflation could soon rise because short-term unemployment is almost back at normal levels.

***DA: Wage inflation is the Holy Grail for which the Fed has been seeking. Without wage inflation, consumer inflation will always be muted. I’ll believe it when I see it.

European Bonds Rise on ECB Stimulus Speculation, Ukraine Crisis
Lukanyo Mnyanda and Liz Capo McCormick – Bloomberg
European government bonds advanced this week, with Italian and Irish yields falling to the lowest levels on record, as prospects of further European Central Bank stimulus fueled demand for the region’s debt securities.
Portugal’s 10-year yield dropped to the least since 2006 and Spain’s to a level not seen since 2005 as reports showing euro-area inflation at a four-year low and a decline in German investor confidence added to signs the region’s recovery is stalling.

China Swap Touches Nine-Month Low on Bets Policy to Stay Loose
The cost of locking in China’s interest rates touched the lowest level since June on speculation the central bank will ensure an adequate cash supply to counter a slowdown in economic growth.

Bond ‘most expensive in history’
Richard Evans – The Telegraph
Bond fund managers are complacent about the risks they face and investors can expect losses if these rosy assumptions are shattered.
This is the view of one investment expert who interviews fund managers all the time. Adrian Lowcock of Hargreaves Lansdown said some bonds were currently “priced for perfection” – in other words, were certain to fall in value if the economy or other factors produced any surprises in the coming months.

***DA: Be on the lookout for black swans.

Fund answer to bond investors’ dilemma
David Oakley – Financial Times
Bond investors face double trouble. Bond yields are at historical lows, making it hard to gather strong returns, while looming interest rate rises in the US and UK hang over the market, threatening to destroy the value of portfolios.

Why Putin Isn’t Scared by $115 Billion of Debt: Russia Credit
Vladimir Kuznetsov – Bloomberg
Russian companies, facing $115 billion of debt due over the next 12 months, will have the funds even as bond markets shut because of the Ukraine crisis, according to Moody’s Investors Service and Fitch Ratings.
Firms will have about $100 billion in cash and earnings at their disposal during the next 18 months, Moody’s said in an analysis of 47 businesses April 11.

***DA: If it is a waiting game, the wait just got longer.

Eurozone peripheral nations see interest bill climb
Robin Wigglesworth – Financial Times
The eurozone periphery countries will have to pay more than EUR130bn this year just to meet the interest payments of their mounting debts, a servicing burden almost three times as high as the rest of the single currency area.

Bank Defaults Seen as Dark Side of Deposit Vows: China Credit
Chinese Premier Li Keqiang’s plan to introduce deposit insurance is meant to comfort the nation’s savers as bad loans mount. In the bond market, it’s fueling speculation he’s preparing to let some banks collapse.
Authorities may tolerate failures of smaller banks once depositor safeguards are in place, Kwong Li, chief executive officer of China Lianhe Credit Rating Co. said.

***DA: The next step toward a modern banking system.

Central Banks

The Potential Bubble the Federal Reserve Cares Most About
Andrew Flowers – FiveThirtyEight
In the aftermath of the 2008 financial crisis, economists debated whether the Federal Reserve should be involved — at all — in pricking bubbles. The housing bubble, and subsequent financial crisis, had led to a disastrous result: Hundreds of banks had failed and millions of Americans had lost their jobs. At the time, many still believed the emergence of future bubbles could only be prevented through financial regulation, and not through interest rate hikes.

***DA: Hence the glacial pace of rate normalization and the need to control the message. A rate shock would be most unpleasant.

BOJ Recovery Picture at Odds With Cabinet Data: Chart of the Day
James Mayger and Toru Fujioka – Bloomberg
Central bank Governor Haruhiko Kuroda says one sign of Japan’s recovery under Abenomics is that a gap between the nation’s actual and potential growth rates has come close to “zero.” A government gauge gives a less optimistic picture.
The CHART OF THE DAY compares indexes of how much the economy is picking up, one from the Bank of Japan and the other from the Cabinet Office.

Kuroda Inflation Focus Risking Money-Market Health
Masaki Kondo, Mariko Ishikawa and Shigeki Nozawa – Bloomberg
Money market watchers say Bank of Japan Governor Haruhiko Kuroda risks crippling the foundation of the nation’s financial system to achieve his inflation target.
The outstanding balance of interbank lending in the so-called call market tumbled 17 percent this year to 14.1 trillion yen ($137 billion) on April 11, the least since January 2003 when the central bank was conducting its first round of easing through bond purchases.

No Zero Hedge, The Fed Is Not Making Up Data
Jeffrey Rosen – Seeking Alpha
– Zero Hedge wrongly claims that the Fed is fabricating loan and lease data.
– Zero Hedge’s conclusions are based on statistically and mathematically unsound methods.
– Zero Hedge cherry-picked the loss leaders, compared those data points with an incorrect aggregate, and then had the audacity to claim the Fed fabricated its data.

***JB: Them’s fightin’ words! (Zero Hedge always has had a bit of a “sky is falling” mentality.)

Cognitive Dissonance In Equity Markets? Economy Growing, Not Accelerating — Higher Prices Negative for Spending
Steve Blitz – Forbes
Cognitive dissonance is holding opposing views in your head and trying to make sense of it while maintaining your sanity. The equity market appears to be having its moment of cognitive dissonance. The market seems to be rallying because, after Yellen’s lunchtime speech, most seem convinced the Fed keeps pumping.

Central bankers roam the globe making deals
Steven Butler – USA Today
Fire the boss and bring in an outsider. Football teams do it. So do manufacturing companies and tech giants. Now central bankers are the latest class of internationally itinerant technocrats roaming the globe, shaking up the staid world of central banking, carrying bold ideas across borders and shining light in dark corners.

Al’s Emporium: Hedging Away Our Future
Al Lewis – The Wall Street Journal
It’s ridiculous to expect the Federal Reserve to understand what caused a financial collapse that it didn’t see coming, but nearly six years later our central bank is finally getting a clue.
“More important than commercial banks or investment banks, hedge funds may be the most important transmitters of shocks during crises,” according to the latest Economic Letter from the Federal Reserve Bank of San Francisco.


Currency futures volumes key to RBI plan on FIIs’ forex hedging
Saikat Das – Economic Times
The Reserve Bank of India’s plan to allow foreign institutional investors (FIIs) to hedge their foreign exchange positions may not gain steam unless the market for currency futures returns encouraging volumes. The RBI is expected to come out with the final modalities shortly.

Intervention Cease-Fire Making Victors of Asia Bulls: Currencies
Lilian Karunungan and Jiyeun Lee – Bloomberg
South Korea and Taiwan have declared a cease-fire in Asia’s currency wars.
The Korean won and Taiwanese dollar posted the biggest gains among 11 Asian currencies tracked by Bloomberg this month through April 18 on speculation their central banks have stepped back from intervening to weaken the exchange rates. The won touched a 5 1/2-year high of 1,031.55 per U.S. dollar on April 10, which allowed Taiwanese policy makers to let their currency reach a three-month high of NT$29.91 the same day.

Indexes & Index Products

WisdomTree: Looking Under the Hood of Smart Beta
Jeremy Schwartz – ETF Trends
The recent months have seen a wide proliferation of the term “smart beta,” which in its simplest terms indicates an index construction that does not weight constituents by market capitalization but incorporates some type of rules-based rebalancing process. A wide array of strategies are starting to have live performance histories greater than five years, and we evaluated the WisdomTree Indexes focused on U.S. equity markets with at least that much history. What are these various smart beta index strategies really doing when one looks under the hood?


Hedge Funds Cut Gold Bets in Longest Slide of 2014: Commodities
Debarati Roy – Bloomberg
Hedge funds lowered bullish bets on gold for a fourth week, the longest streak this year.
The net-long position contracted to the lowest since mid-February as speculators sold bullion on signs of accelerating U.S. economic growth. The investors more than doubled bets on lower prices in the past month while reducing wagers on a rally in six of the past seven weeks.

Van Eck’s Foster: Output Costs, Chinese Demand To Help Gold Build Base
Kitco News (via Forbes)
The potential for increased Chinese demand and production cutbacks on any further price drops is likely to help gold build a base, says Joe Foster, portfolio manager with Van Eck International Investors Gold Fund (INIVX).
Meanwhile, he remains bullish on the precious metal for the longer term due to the potential for further monetary and financial-market risk.

China allows gold imports via Beijing, sources say, amid reserves buying talk
A. Ananthalakshmi – Reuters
China has begun allowing gold imports through its capital Beijing, sources familiar with the matter said, in a move that would help keep purchases by the world’s top bullion buyer discreet at a time when it might be boosting official reserves.

Canadian gold mining’s bidding war shows appeal of buy over build
Nicole Mordant – Reuters
A takeover battle for Canada’s Osisko Mining Corp, involving three of the world’s top gold producers, is more than just a testament to the quality of the company’s low-cost mine, it also spotlights a shortage of top-class gold assets in politically stable areas of the world.

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