The Street should applaud the Fed's conservative wait 'n' see stance on when to taper off its $85 billion monthly bond purchase initiative. Nobody knows better than the Federal Open Market Committee and its platoon of economists that their record of forecasting GDP, inflation and unemployment numbers is dismal.
The Fed waxed too bullish on GDP recovery and personal consumption expenditures, but, its cautious POV on unemployment stats is on the money, pointing out that the quality of new hires is low-quality, namely part timers and healthcare jobs, low paying, unskilled labor categories.
Maybe, we're on the eve of a recovery in manufacturing employment and capital goods spending, but what a long wait. The country operates at a capacity utilization rate of 78%, historically where it hangs out during recessionary cycles.
Industrial production on my charts just recovered to its previous cyclical peak in 2007. Meantime, industrial capacity is unchanged from a decade ago. All this suggests the recovery story in manufacturing operating profit margins is still not yesterday's news.
The low rate of capacity utilization in the country suggests wages rest contained for now. I see this metric as the leading indicator for when employment costs escalate for corporations.
Even Detroit, back to previous peak North American sales approximating 16 million, is reluctant to build new plants, preferring to operate 80-hour-a-week production lines.
I do sniff a domestic renaissance coming in capex and manufacturing employment. Wage scales in emerging markets are escalating rapidly. The power of unions in South Korea is notable. Japanese car manufacturers continue to locate new plants in the U.S., benefiting from low tax rates here and negotiated favorable work practice rules.
I find the Fed's focus on 2% as the ideal inflation rate in the country absolutely ridiculous. Yes, I know, some economists think 4% is a better rate, stimulative of capex, consumer spending, real estate development et al.
No question, labor in this cycle stands short changed. Wage rates hardly escalate and corporations are major beneficiaries of flattish employment expense as well as minimal rates of interest on new debt.
The history of the country is dotted with long cycles of excessive wage escalation which made us uncompetitive, egregiously in the seventies. The UAW and Teamsters now sit as toothless tigers. Car makers are competitive and forklift jockeys earn no more than $10 an hour, even at Amazon.
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The dual mandate of the FRB, low inflation and full employment, doesn't specify whether inflation should be zero, 2% or 4%. I'd like to see it stick closer to zero till the end of time.
Commercial real estate overbuilding precipitated the horrendous recessions and stock market collapses in 1969 – '70 and 1973 – '74. The only cycle more infectious was Detroit's seventies sweetheart pact with the UAW which afforded annual wage increases between 7% and 8%. This cancerous construct lasted until the early eighties when Paul Volcker purged the country, inducing 15% interest rates on Treasuries.
The market's focus today on the impact of FRB withdrawal of monetary stimulus is overdone but nevertheless a potent variable for financial markets near-term. Investors need to sensitize themselves that yield resetting comes rapidly, in a matter of months. Nobody knows how vulnerable bond market funds and ETF pools may be to investor withdrawals. But, any mini-panic would be a buying opportunity.
Major pension funds could choose to reset debt-equity portfolio ratios favoring equities by 10 percentage points. This counts up to more than a $1 trillion exodus. Not an overnight reset, normally ranging over a year or two.
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