Equities were “broadly neutral” with the rally “on hold,” one headline read early Thursday.
Implicit is the notion that stocks will probably keep rising. They’ve just paused for a break, their legs dangling off a high beam like construction workers from those black and white images of yesteryear, when skyscrapers were built by men immune to vertigo and unafraid of gravity. Soon enough, we’re assured, the scaffolding will extend further up through the clouds.
The Lunar New Year has kicked off in China. In the west, we can’t fathom such a thing as a week-long holiday. Maybe that’s part of our collective psychological distress. Then again, these days it’s a job people want, not a vacation. The figure (below) is an updated version of a visual I use frequently to illustrate the ongoing malaise in the US labor market. It’s not “healed.” And Larry Summers is probably wrong.
I suppose nobody needs a reminder, but the stock market isn’t the economy. And that’s been part and parcel of the Fed’s problem for a dozen years. The vaunted “wealth effect” assumes stock ownership.
But when stock ownership is heavily concentrated among those with the lowest marginal propensity to consume, you end up with visuals like the one shown below (admittedly a “chart crime” but one that plays well with the proverbial “crowd”).
“It should be an embarrassment that meaningful questions are not asked,” JonesTrading’s Mike O’Rourke said, of Jerome Powell’s speech on Wednesday. “The reason they are not asked is because we all know the answers and the answers are a combination of disturbing and dangerous,” O’Rourke added, noting that,
Powell continues to assert the narrative that the FOMC’s policy approach seeks to aid the weakest and most vulnerable. He reminds us that this population was the last group to experience meaningful gains after 10 years of economic expansion. But it is left unspoken that the pursuit of this policy is driving wealth disparity to record levels. In essence, he is saying that his way of helping the poor is to make the ultra-wealthy much wealthier. It should be embarrassing that he is not called out on this. The Fed can keep monetary policy very accommodative without perpetual asset purchases.
O’Rourke discussed fiscal stimulus too, but regular readers know my position. The Fed is aware of their role in creating inequality. But until everyone actually does want to see the institution of policies that can alter the situation quickly, we’ll get more of what we’ve been getting.
There are fixes for this. A draconian tax on fortunes above certain thresholds, for example. Giving the Fed the legal authority to send money (literally) to the poor and/or make discretionary choices about where to deploy its balance sheet, even if that means the FOMC owns a chain of small restaurants in rural Kentucky (or something). Instructing banks to lend to certain people or businesses, where “instructing” doesn’t mean harsh words at a hearing featuring Elizabeth Warren, but rather Beijing-style “you’re going to lend to these folks or else the C-suite is going to prison forever.” Or the IRS saying “Hello Mr. Johnson, we see you made $2 million last year. Congratulations. The first $1 million is taxed according to last year’s schedule, and the second $1 million will go to a charity of your choice, or else you’re going to prison with the bank executives. You’ll feel good about your newfound philanthropy once you’ve thought it over.”
I’m exaggerating for dramatic effect, of course.
My point is simple. Everyone complains (everyone’s a critic) but nobody seems to want to give up any of their own good fortune or otherwise countenance the adoption of policies with a real chance of making a difference. Because “inflation.” Or because “deficits.” Or because “meritocracy.” After all, you deserve your money, right? If those poor people had just made better decisions or worked a little harder…
The problem comes in when you try to explain the single mother working three jobs to feed one child. Or the father that works a regular job during the day and then mans the counter at a gas station all night so his kids can have clothes for school. Are they not working “hard enough”? Is there just not enough “merit” there? Or is it, perhaps, that “meritocracy” isn’t a real thing? That it’s mostly just luck? (Gasp!)
In any case, “it is what it is,” as Trump once put it, when asked about hundreds of thousands of Americans dead to a pandemic on his watch.
I’ll leave you with a passage from Rabobank’s Michael Every:
[Powell] underlined the US economy is 10 million jobs down on where it was a year ago: And let’s recall that to replace them by end-2022, and account for natural labor-market growth, means we will need an average payrolls figure of over 500,00 through to next December. That’s an awful lot of heating up. Markets will continue to do all the heating for the labor market, and very happily. Like a microwave meal, we are overheating some parts and leaving others cold: No central-bank rhetoric is capable of stirring things – is the government?