And So It Goes

Steven Hawking once said, "One cannot predict future events exactly if one cannot even measure the present state of the universe exactly." I say don't worry about the universe because we can't even get the economy right.

Several months ago, we said our corporate sources had indicated they were leaning toward granting marginal wage increases and dumping employees on the national health care exchanges. Today, Time Warner Cable and IBM announced they would do just that to retirees, no wage modification needed. To be clear, these companies are NOT the ones we consulted with, so expect more and bigger names to follow.
The employment situation and its Fed policy calibration have numbed market participants into a false sense of understanding that solidifies Hawking's thinking. Vocal proponents of high inflation (due to QE) and debt catastrophe (due to large numbers) were misguided in their understanding of the present and thus proved wrong by time on their predictions of the future, which is now.
Labor arbitrage continues to stifle robust improvement from a geographic and technological trade-off. Equity indexes levitate on the near term profitability of the arb. Eventually, the domestic situation atrophies from the reality that the workers are the customers. Logical managerial decisions with regard to benefits will complicate budgetary negotiations already impacting military might. The vast majority of Congressmen against Syrian involvement stated budgetary reasons for opposition.
We continue to see the Hawking Rule most directly in the concept of LSAP reduction, bastardized as "tapering." Modest growth, sequestration and rates rising have altered the supply side of LSAP dramatically. Paydowns and sharply reduced MBS production point to a cut of 40-50% from the present 85B pace by our calculations. Every month at the present pace is in actuality an "increase." Years from now, we predict the catastrophic prognostications of the policy bears- as to both deficit spending and QE - will prove shallow. Their misunderstanding of the present dooming them from the start.

2 thoughts on “And So It Goes

  1. mike

    I appreciate your thoughts, but do have a question regarding your thinking on the seeming dismissal of the potential harm of our extremely large deficits. If interest rates rise, the percentage of $ going to service the debt rise, and make our economy even less efficient as money goes to interest vs. goods or services.

    If you look at our roads, schools, etc. vs. handouts (corporate and individual) we already have a government that is providing less and less of it’s basic responsibilities (in my opinion) with more revenues. If we add increased expense of servicing the debt, how does this serve us well in the future?

  2. Lawrence Martin

    Good call on the ’employee HC shift’ I do remember that. Your excellent piece brings me recollections of the early 70’s and inevitably some parallels to today. One in particular, was the Israeli-Syrian (yes, Syria, haunting, yes ?) of 1973 ( ) which triggered a crude oil production boycott by the Arabs, long gas lines and higher prices in the US. Another was walkouts by auto unions (Detroit) and they vacationed in Florida for 30-180 days +, living on US govt unemployment and strike benefits as their negotiators demanded and got big wage increases to offset significant price jumps in almost everything(Unions were a lot stronger then). Oh, the labor arb. I spent more than a year in Taiwan (1973-1974) setting up a semiconductor factory to lever $0.10/hr wages. In the meantime, the Taiwan dollar was re-invented to the ‘New Taiwan’ dollar – NT) which was worth half (in US dollars) but took twice as much to buy goods and services in country. The Taiwanese were not happy. Their savings were halved overnight.

    A cruel trick on consumers in the 70’s was to keep the price of a candy bar the same but to 1/2 the size of the candy bar (Zero Bar, my favorite). Saved sugar (sugar was sky high) and profits went to the bottom line.

    In the US in the 70’s a lot of workers had leverage and cud get wage increases. Today, I do not see that same worker leverage. I joke sometimes about the coming $10 Big Mac and the Big Mac indicator. Keep an eye out. I think its coming.

    I think we are reliving the bad things of 1970’s and little of the ‘good’.


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