Over the past week or so, I have adjusted my expectations for economic strength in the coming months downward. I am perplexed by the American economy’s inability to achieve a self sustaining virtuous expansion. And it seems like I am not the only one. Yesterday, the Wall Street Journal’s most plugged in Fed watcher Jon Hilsenrath, penned a blog piece that wondered out loud why US shoppers refuse to open their wallet.
Dear American Consumer,
This is The Wall Street Journal. We’re writing to ask if something is bothering you.
The sun shined in April and you didn’t spend much money. The Commerce Department here in Washington says your spending didn’t increase at all adjusted for inflation last month compared to March. You appear to have mostly stayed home and watched television in December, January and February as well. We thought you would be out of your winter doldrums by now, but we don’t see much evidence that this is the case.
You have been saving more too. You socked away 5.6% of your income in April after taxes, even more than in March. This saving is not like you. What’s up?
We know you experienced a terrible shock when Lehman Brothers collapsed in 2008 and your employer responded by firing you. We know stock prices collapsed and that was shocking too. We also know you shouldn’t have taken out that large second mortgage during the housing boom to fix up your kitchen with granite countertops. You’ve been working very hard to pay off this debt and we admire your fortitude. But these shocks seem like a long time ago to us in a newsroom. Is that still what’s holding you back?
Do you know the American economy is counting on you? We can’t count on the rest of the world to spend money on our stuff. The rest of the world is in an even worse mood than you are. You should feel lucky you’re not a Greek consumer. And China, well they’re truly struggling there just to reach the very modest goal of 7% growth.
The Federal Reserve is counting on you too. Fed officials want to start raising the cost of your borrowing because they worry they’ve been giving you a free ride for too long with zero interest rates. We listen to Fed officials all of the time here at The Wall Street Journal, and they just can’t figure you out.
Please let us know the problem. You can reach us at any of the emails below.
The Wall Street Journal’s Central Bank Team
-By Jon Hilsenrath
I say I am perplexed by the US economy’s inability to lift off, but I guess it would be better described as dismayed. I understand full well why the economy refuses to enter a self sustaining expansion. We are still mired in a de-leveraging. The economy has too much debt, and the moment the Fed eases up on the monetary expansion, the consumer returns to paying down that debt instead of expanding it. Not only that, but the Fed’s ability to affect the economy in a balance sheet recession is severely muted. So even if the Fed is determined to force expansion (which at the present moment they are in fact doing the opposite and preparing the market for tighter monetary policy), the Fed needs to be credibly irresponsible. The private sector needs to be believe the Fed will keep expanding until inflation is running at target, and not withdraw the moment it gets close. The Fed’s constant pulling out at the first moment it looks like we might achieve liftoff ensures it will never come.
I overestimated the US economy’s ability to withstand the coming tighter monetary policy. I have tons of company as most economists assumed this recovery would behave like previous ones. However it is becoming increasingly clear that this recovery is far from typical.
In the coming weeks more economic optimists will throw in the towel. My suspicion is the Fed eases up on the tighter policy rhetoric. I hate to say it, but all those economic doomsdayers might be right – there is a decent chance we will not even get off one interest rate hike before the Fed is forced to return to easing policy.
Japanese Yen decline
The recent Japanese Yen decline is generating a lot of excitement from the fast money crowd. Even though many of our hedge fund friends gave up on the trade in the beginning part of 2015, once the JPY rate broke out late last month, the technical action has drawn them in like middle aged white urban couples to a farmers’ market.
The CFTC commitment of traders report shows how they almost entirely flattened their position in April, but by the end of May cranked their short position right back up.
I was lucky enough to catch the short position before the breakout, but as usual I am too scared about the crowded nature of the trade to stick with it. And this fear is only getting stronger when I see videos on Bloomberg with the title “How Low can the Yen go?”
When Prime Minister Abe first embarked on his aggressive Abeconomics program, the market was skeptical it would work. They did not believe he had the determination to print enough to offset the deflationary vicious circle. We now know this to be incorrect. Abe has done more than anyone expected, and shows no signs of letting up.
The Yen used to be one of the most overvalued currencies out there. A 55% devaluation against the US dollar over the past three years does wonders to fix that overvaluation problem. In fact, on a purchasing power parity basis the Yen is now one of the cheaper currencies. Now this fundamental metric means precious little over the short run, but it illustrates the fact that continued devaluation will be increasingly more difficult. When Abe was moving the Yen from 75 USDJPY to 100 or 120, it wasn’t easy, but he had the moral justification of claiming he was correcting a Yen overvaluation. From here, if he is going to push the Yen down to 140 or 150 USDJPY, Abe will be making a cheap currency, even cheaper. It will smell more and more like competitive devaluation.
I believe further Yen weakness will be difficult, unless… and I know this makes me sound like a terrible technician that tells you to buy if it goes higher and sell if it goes lower, unless Abe loses control of the decline. Abe has embarked on a printing program of unparalleled size. There is always a chance that he prints so much that he loses control of the process, and the Yen starts doing its best Tom Petty impression.
Notable bear Albert Edwards is forecasting just such a decline:
The break of ¥122 took much longer than I expected but it has just occurred and I think yen weakness will become a dominant driver of markets and economies. We reiterate the particular vulnerability of China to yen weakness – in a replay of the events that led up to the 1997 Thai baht devaluation. China has big deflationary problems and cannot tolerate any further rise in the renminbi. Indeed, on one key measure, China is already in outright deflation.”
He argues the Yen decline will trigger a series of deflationary currency devaluations. Although this is not my base case scenario, I think those betting on further Yen weakness will only be correct if the system becomes unstable.
“The US and eurozone remain a hair’s breadth from outright deflation. A weak yen could push them over the edge into deflation proper as China is forced to finally join the global currency wars.”
If the Yen continues its decline, it will not be a nice tidy affair. Given that I am not prepared to bet on the system coming unglued, I am going to err on not joining the momentum monkeys with the Yen short position. Maybe I will be wrong, and this Yen weakness will cascade into a true crash. But I don’t think that is the right bet. My guess is that by summer we will be stuck back in the 118 to 122 USDJPY range.
Check out the hipster with the Apple watch
I know I have been a little tough on Apple’s new watch. I have slammed it as a half baked product that Steve would have never let out the door. But most of all, I have been critical of Apple relying on their “cool factor” to sell the product instead of focusing on making something that “just works.”
Well, I take all that back. I didn’t realize the true hipness of this new Apple Watch until I saw this recent picture of the latest convert.
If it is good enough for Newt Gingrich, then I am sure the millennials will be right behind him on the style train.
Thanks for reading,