Cherry Creek Mortgage
Commentary 02 March 2018

Jerome Powell’s Congress Testimony on Employment and Rates

Before stocks, rates, and the economy, an introduction to new Fed chair Jerome (“Jay”) Powell -- which so far the mainstream media has flubbed.

This week we got to see his demeanor while testifying to Congress. This is a most interesting man, and very different from his predecessors -- both in pedigree and behavior.

Media thus far have accurately described Powell as “not an economist,” which itself separates him from predecessors back to 1979. He is also described as some sort of Wall Street operator, which press and public lump into one (usually unpleasant) line of work.

Powell’s Wiki-bio is here. Summarizing, his education began by Jesuits at Georgetown Prep. Every Jesuit-trained person I have known is distinguished by clear and self-critical thinking, and although respectful of others in discussions cannot be intimidated, and while not acting in a manner superior to others grants no superiority to anyone else. Your title adds nothing to the merit of your argument.

All commanding personalities have their traits and tricks. Volcker was a banker and Treasury under-flunky standing six-foot-seven. Between that mass and his cigar, Volcker was a threatening physical presence. And so he ruled: punishing to the point of brutality.

Greenspan was artfully opaque, concealed behind millions of no-content words which made him seem more an oracle than he was. The longer we watched him, the more he seemed a salesman than a wizard, and at the end he bought the worst of his own stuff.

Bernanke was all professor, chair (and herder) of the Princeton economics department, and ran the Fed in the same collegial way. He was kindly, firm, and so clearly the smartest man in the room and with the best intentions that disagreement was silly.

Yellen was an academic, too, but also a Fed insider. She was Yoda. Deeply wise and kind, and more than any predecessor had the courage to say what the Fed did not know.

Powell trained as a lawyer, editor of the Georgetown Law Journal, and clerked and practiced for five years. Then to investment banking, with old-line “white shoe” Dillon, Read & Co. On to a stint at Treasury, including regulatory work adverse to Warren Buffett and his Salomon Brothers subsidiary. Briefly at Bankers Trust (he quit after the bank misbehaved with derivatives), back to Dillion and then a partner at Carlyle Group where he worked on mergers and acquisitions of industrial companies -- not whizz-bang financial devices. Before joining the Fed as a governor in 2012, he was managing partner of the Global Environment Fund investing in sustainable energy, a director of the Nature Conservancy, and worked on US debt with the Bipartisan Policy Center.

That resume is unlike any in Fed history. So is his net worth.

His appearance this week... on sight he seemed perfectly cast for the role of the undertaker in a Western. But he knows the game: dead-pan is best, give away nothing by a change in expression, offer more words only in repetition. The more he performed, the more I fought back the sense of Obviousman! about to rip open his coat and dress shirt to reveal his Duh! T-shirt.

Somebody tried to pin him down on the natural rate of unemployment. “It could be 5% and could be 3.5%.” Will more people enter the work force and suppress wage pressure? “The only way to find out is to find out.”

Bless you, sir.

Powell’s prepared remarks repeatedly affirmed the conflicted “dual mandate” of maximum employment and stable inflation. His first-day testimony was interpreted as hawkish, “hair trigger,” worried about overheating, but he killed that on his second day.

The misunderstanding about overheating resulted from his remark that “headwinds have become tailwinds,” specifically fiscal stimulus. Bi-partisan idiocy has resulted in an intention nearly to double deficit spending in 2018 -- almost as much as the emergency spending in 2009. Looking back at Yellen’s testimony one year ago, that fiscal splurge is the only real change in government policy and prospects for the economy. A “tailwind?” Obviousman! Overheating? The only way to find out is to find out.

Markets... the 10-year T-note yield dropped almost to 2.80% on Thursday at the stock market worst, and after the steel-aluminum tariff surprise. Essentially everyone had assumed we’d be making a run at 3.00% for 10s, and passing 4.75% for mortgages.

However, as of midday Friday the rate drop was just a breather. The problem with stocks is not the Fed or economy but having gone up too fast. There is solid support at Dow 18,000, a little at 19,800, and a little more at 21,000, the all-time highs in spring one year ago. From there to the top at 26,616 on January 23rd -- no support whatever. No news, no Fed, no nothing, the Dow could easily unwind to that 18,000-21,000. Which in our loopy world would be helpful to the Fed. A tailwind switching to headwind.

The tariff announcement is hard to handicap because it is so crazy -- “Trade wars are good, and easy to win!” -- reversing 90 years of US policy and standing economic common sense on its head. The most profound economic tailwind in the lifetime of anyone alive today has been global trade, and the US may have triggered a headwind.

Markets have largely ignored the current presidency, except for exuberance at the worst tax bill in modern US history -- worst if only for business-cycle timing. Markets are not so pleased by tariff insanity, but it has the same source.

Live by the sword, die by the sword.

 

The 10-year US T-note in the last week tells several stories. On Tuesday the overreaction to the Undertaker. On Wednesday the yield declining as stocks caved and frightened money ran to bonds. On Thursday, the instant of the tariff announcement is plain. Today, stocks found temporary bottom, long-term rates back up, Fed on the march:

 

The ultra-Fed-sensitive 2-year T-note in the last week tells the same story: 10s are watching the Fed more than anything, miles away from anticipating an economic slowdown caused by the Fed, stocks, tariffs, or anything:

 

The Atlanta Fed GDP tracker is now a tad volatile. The Undertaker may be right that the economy is not overheating, but it’s hot:

 

The ECRI confirms: