Mish's Global Economic Trend Analysis

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Fed Admits It's Clueless How QE Works; Radical Suggestion Posted: 04 Jan 2014 06:07 PM PST Inquiring minds are investigating three articles from today, stating opinions of three different Fed governors. Boston Fed President Against Tapering Boston Fed President Eric Rosengren says Rapid QE withdrawal could permanently harm U.S. workers A dovish U.S. central banker on Saturday again urged the Federal Reserve to be patient as it trims its support for the economy, in part because it risks permanent damage to the labor market. Boston Fed President Eric Rosengren dissented against the central bank's landmark decision last month to reduce its bond-buying program by $10 billion to $75 billion in purchases per month. In a speech here, he repeated it was a mistake because unemployment remains too high and inflation too low. "Policymakers have the opportunity to be patient in removing accommodation, speeding up the process of achieving both elements of the Fed's dual mandate" of maximum sustainable employment and inflation of around 2 percent, he said. Plosser at Odds with Yellen's Approach Yahoo!Finance reports Fed's Plosser at odds with policy approach favored by Yellen. The Great Recession could have done permanent damage to potential U.S. output, a top Federal Reserve official said on Saturday, taking an indirect shot at more cyclical approaches to policy-making that is favored by many economists, including the next Fed chair. Philadelphia Fed President Charles Plosser said in a speech he is skeptical of so-called "optimal control" approaches to monetary policy in which mathematical models are used to predict when things like unemployment and economic growth will return to more normal levels. Fed Vice Chair Janet Yellen, who is set to take the reins at the U.S. central bank next month, has often touted this approach, including tolerating higher inflation for a short time in order to speed up the overall economic recovery. Dudley Admits He's Unclear How QE Works Rounding out our trio of articles from today, please consider Still unclear exactly how QE eases conditions: Fed's Dudley. Extensive research into massive asset-purchase programs has not yet clarified whether such policies ease financial conditions primarily as a signal to investors or more directly through private portfolios, an influential U.S. central banker said on Saturday. "We still don't have well-developed macro-models that incorporate a realistic financial sector,' William Dudley, president of the New York Fed, told an economics conference. "We don't understand fully how large-scale asset purchase programs work to ease financial market conditions, there's still a lot of debate ..." he said. "Is it the effect of the purchases on the portfolios of private investors, or alternatively is the major channel one of signaling?" Radical Suggestion While these Fed governors are grasping at straws in a tornado bickering over whether to taper or not, let me propose a simple idea: The Fed cannot figure out how QE works because QE doesn't work. Two decades of Japanese QE is sufficient  proof. In the US, the Fed did ignite massive stock and bond market bubbles, but who in their right mind thinks bubbles are a measure of success? All of the Fed's modeling is nothing more than a chasing one's tail exercise of economic stupidity.  Simply put, the Fed is nothing more than a bunch of Soviet-style central planners with inflated opinions about what they can or cannot do. If the Fed came out tomorrow and stated it would set the price of orange juice, everyone would think the Fed was insane. And they would be correct. Yet amazingly, people think the Fed can set the correct interest rate policy and the correct monetary easing policy, not only to control the proper amount of inflation, but to manage unemployment as well, even though the central planners themselves readily admit they are clueless as to how their policies even work! If that's not a bubble belief in wizard fools, what is? Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

Boeing Result: Everyone Wins Posted: 04 Jan 2014 09:23 AM PST In a rare vote in favor of common sense and local jobs, Boeing machinists Approve Contract securing 777X jet manufacture in Washington state. Boeing's machinists on Friday narrowly approved a crucial labor contract that secured thousands of jobs and billions of dollars of economic activity for Washington state but will cost workers their pensions. The vote of 51 percent to 49 percent to accept the deal means Boeing Co will build its new 777X jetliner and wings in the Seattle area, where Boeing has built aircraft for more than 90 years. Had the workers rejected the offer, Boeing would have considered making the successor to its popular 777 widebody jet elsewhere, and had received offers from 22 states interested in hosting the new factory. Common Sense Vote Boeing secured a no-strike agreement that lasts until 2024. As part of the plan, workers will shift from defined benefit plans to defined contribution (IRA-type) pension plans. Those are huge union concessions. But the all important counterbalancing force is people keep their jobs. 10,000 or so jobs stay in the region. Simply put, this was the best possible result for Boeing workers in the Seattle area. Shocking Result The result is unusual in that unions seldom do what is best for workers. It is even more unusual because local union leadership was staunchly against the agreement. This was a rare case in which Contract Debate Divides Union Leadership On a local union poster were the words ... "We need every member to stand with us in solidarity, and just say no to this takeaway offer. We are under a great deal of pressure to give up our pension, pay dramatically more in healthcare costs, and stagnate wage growth so we have less take-home pay going forward. We are asked to accept less when Boeing has record profits, record backlogs and approved a $10 billion stock buy back. Machinists stand ready to build the 777X. We are the key to a successful 777X future. Rejecting this concessionary offer, does not diminish all the advantages of building the plane here. Our current wages and benefits are less than 5 percent of airplane costs without these concessions. Vote no and tell Boeing to focus on building the 777X here because analysts, customers and shareholders agree — that is the right choice!" The difference in opinion between local and national leaders is unusual, but it likely arose because the national union is more concerned with keeping dues-paying members than it is evaluating the contract's terms, as experts in union politics have indicated. "The theory that this is a way to preserve IAM jobs (and therefore membership) of IAM's largest District certainly seems plausible, as Leeham Co. aviation analyst told Bloomberg via email. "I certainly can't think of another reason, and I'm sure International is hardly altruistic." Heads, Not Hearts Union workers voted with their heads, not their hearts, in approving the deal. 10,000 immediate jobs would have been lost had they not done so. Countless other local jobs (restaurants, hotel, limo, etc) jobs would been lost in the process. Of course, Seattle's loss would have been some other region's gain. In the grand scheme of things it seems to even out. But it doesn't. There are huge moving costs and huge disruptions on local economies. Win-Win All things considered, this vote was a huge win for Boeing as well as the local employees. Congratulations to the union for ignoring tremendous pressure from local union leadership. That said, the local "scorched earth" plan of opposition was so horrendous, one might wonder why the vote was close at all. Had the jobs left Washington state, none of them would have been union jobs. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

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