The Fed and the weekly economic analysis by Lou BarnesTrying as always to grasp the present, it seems to me the financial markets today reflect a world wandering through an odd passage. Not aimless (plenty of people have aims… too many), but without direction in two senses: not headed anywhere in particular, and certainly not led by anybody greatly worth following.

The financial markets are preoccupied by Fed leadership in the absence of any other. Recent Treasury Secretaries have been a collective void (back to Rubin in 2000), while Congresses and White Houses have been committed to fruitless disagreement.

The Fed has been pressed forward too far, doing the best it can to describe its response to an estimated future economy. Fridayā€™s employment report is Fed-confounding. Job growth may have decelerated from the 200,000-monthly range to 150,000, or may be distorted by seasonal adjustments. Unemployment near 5% may soon produce wage-paying competition among employers, but has not — which should embarrass Fed forecasters into alternate thinking, but has not.

The stock market has no idea what to do, declining for months because earnings are falling. Early Friday the Dow went down 250 points because the jobs data says the economy has slowed, then back up 200 because the slowing may hold the Fed at bay.

The bond market has held in contempt all of the Fedā€™s threats, long-term rates herkily-jerkily dropping since July. The 10-year T-note is now below 2.00%, and mortgages back in the threes.

But is that bond-buying because of U.S. weakness, or overseas fear and foreign money coming here? Vladimirā€™s new adventure is disturbing, although itā€™s hard to see how even he can add to Middle East instability. Europe is giving new and transcendent meaning to ā€œpassive.ā€ China? Who knows if they donā€™t? The emerging world is again submerging in debt as its exuberant horizon re-recedes.

Another Fed speech

Stick with the Fed. Last week I deconstructed Chair Yellenā€™s overlarge and defensive speech. This week itā€™s John Williamsā€™ turn. He is Yellenā€™s replacement as president of the important San Francisco Fed (the regionals reflect 1912 America, the Frisco Fed the only one of twelve west of Dallas), a dove and in Yellenā€™s policy camp. He gave a speech last Monday, and was so impressed that he gave it again Thursday.

One part is fun, applicable to our directionless world: ā€œBritish Prime Minister Harold Macmillan said when asked what worried him most: ā€˜Events, dear boy, events.ā€™ā€

Williamsā€™ concluding paragraphs are important, frightening, and overlooked (with all self-caution about allegedly unique discoveries). His thread follows similar lines from Rosengren (Boston), Dudley (NY), the Fed staff, and Yellen herself, but in stark and oblivious language. Relative to reasonable understanding of our economy today, professional and civilian alike, a complete, staggering Looney-Tune.Ā Williams is worried about a bubble: ā€œ…High asset prices, especially in real estate… the house price-to-rent ratio is where it was in 2003, and house prices are rapidly rising.ā€ Sir, um… you are the only person in or out of authority to see this bubble.

Then, ā€œ…What we want to see is an economy thatā€™s growing at a steady pace of around 2 percent. If jobs and growth kept the same pace as last year, we would seriously overshoot our mark… itā€™s actually desirable, that the pace is slowing.ā€
Last yearā€™s economy was too hot? Really? The Fedā€™s theoretical speed limit is 2% — 1% population growth plus 1% productivity. Nice theory. But the game is reality.Ā ā€œLooking to the future, weā€™re going to need at most 100,000 new jobs each month.ā€

Imagine in a current debate among presidential aspirants, either party, or next year for Congress, or a governorship, or County Coroner… a candidate saying that we need to cut job growth in half. That person would never be heard from again. But thatā€™s what the Fed intends. Isolation does funny things to people.

The bond market is trading as though expecting the U.S. to slow, and any ā€œnormalizingā€ by the Fed to knock it over. If the Fed internally — the doves! — is on Williamsā€™ track, better they be silent, and after tightening go outside only when wearing Groucho Marx eyeglasses, eyebrows, and nose.

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10-year T-note, last week. The drift down is clear, as is fading overreaction to the employment report:

10-year T-note, last week. The drift down is clear, as is fading overreaction to the employment report:

10-year T-note, last two years. ā€œTechnicalā€ traders will see a return to the 1.90% area, maybe prolonged and then testing the all-time lows:

10-year T-note, last two years. ā€œTechnicalā€ traders will see a return to the 1.90% area, maybe prolonged and then testing the all-time lows:

2-year T-note, last week. These traders are the best of the Fed-watchers, and today was more decisive for them than 10s:

2-year T-note, last week. These traders are the best of the Fed-watchers, and today was more decisive for them than 10s:

2-year T-note, last two years. This week was a trend-breaker — a perfect ascension of bottoms clear back into 2013… broken. Among other things suggesting that if the Fed does begin an upward march, it will soon about-face:

2-year T-note, last two years. This week was a trend-breaker -- a perfect ascension of bottoms clear back into 2013... broken. Among other things suggesting that if the Fed does begin an upward march, it will soon about-face:

The Atlanta Fedā€™s GDP Tracker has been extraordinarily accurate. The newest computation showed a weak trend before the poor data in the first two days of October. 3rd quarter GDP is going to be sub-1%, and maybe worse than that via inventory and trade adjustments:

The Atlanta Fedā€™s GDP Tracker has been extraordinarily accurate. The newest computation showed a weak trend before the poor data in the first two days of October. 3rd quarter GDP is going to be sub-1%, and maybe worse than that via inventory and trade adjustments:
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  • Danny Johnson

    Danny Johnson has flipped hundreds of houses over the last 11+ years in San Antonio, Texas. He blogs about flipping houses at FlippingJunkie.com and is the author of "Flipping Houses Exposed: 34 Weeks in the Life of a Successful House Flipper," a best-selling book on Amazon. He also provides real estate investor websites atĀ www.LeadPropeller.com.

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