Jackson Hole Showdown

Jackson Hole Summit
Federal Reserve Chairwoman Janet Yellen and European Central Bank President Mario Draghi at the Economic Policy Meeting, Jackson Hole, WY, USA. Photo by John Locher, AP

This editorial from the New York Times takes the side of Federal Reserve Chairwoman Janet Yellen against the “inflation hawks” in the aftermath of the Jackson Hole annual meeting of central bankers.  The NYT’s editors challenge the wisdom of raising interest rates citing the Federal Reserves own prediction of a 2.3% rate of economic growth in the US for 2014. I call it a “showdown” because Yellen had to prevail against such as Dr. David Kelly, Managing Director, and Chief Global Strategist for JP Morgan Chase who in this: JPMorganChase3Q14 market update argues for increasing interest rates for fear of inflation and higher wages.

Another source of support for Yellen’s position comes from Dean Baker at the Center for Economic and Policy Research (CEPR) in his weekly “Beat the Press” blog; my original source for the Times’ editorial. Baker’s post is decidedly in the camp of lowered unemployment and higher growth. Unlike the inflation hawks he remembers a similar instance. In 1997 there was clamor among economists for increasing interest rates to head off inflation. Federal Reserve Board member Janet Yellen was among those. Perhaps she remembers that the Chairman, Alan Greenspan ignored these cries, kept the rates low and saw unemployment fall to 5% in 1998 and to 4% by the year 2000. Yellen might also recall that the growing economy led to Federal budget surpluses for the last three years of the Clinton presidency. I might also add that contrary to Kelly’s claim that higher employment leads to lower stock prices due to lowered earnings per share (corporate profits); 1990-2000 was the biggest and longest running bull market in history; especially in each of the last three years which saw gains of more 25%.

Baker’s column goes further to cite a study by one of his colleagues that indicates that for every 1% drop in unemployment there is a nearly 10% increase in wages for the lowest quintile of wage earners. For a worker earning $20,000 a year this means another $2000 in earnings; a significant sum. This is the “tight labor market” effect that has Dr. Kelly of JP Morgan so worried.

It is astounding that rarely is the connection made between higher wages and increased consumer demand. Higher wages are almost consistently cited by such “global strategists” as Dr. Kelly to be inflationary. However, it takes a significant increase in consumer demand over a significant period to cause price increases, especially in an environment where productive capacity is still under-utilized by almost 20% as is the case in the USA today. The reason for this is that if corporations can produce more goods or provide more services without the need to expand plant and equipment, costs per unit do not increase significantly. Since almost 90% of our economy is driven by consumer demand, let’s hope that Yellen, our first Fed chairwoman can hold her ground, keep rates low and allow this tepid recovery to grow into a strong economy with more and better jobs and a higher standard of living first and foremost for those on the lower rungs of our society. All of us will be ahead.




A New Era of Fiduciary Capitalism?

capitalismAn Encouraging View

John Rogers, CFA, President and Chief Executive Officer of the Chartered Financial Analyst Institute weighed in at the Society’s Journal in June with a guest editorial about the state of finance as an industry in today’s economy. Rogers observed that the proportion of GDP attributable to this industry has almost doubled since 1980 and wants to know what the benefit was to the larger society.

He describes the history of interest rate suppression and its effect on the financialization of the economy. The rapid growth of this industry absorbed tens of thousands of bright young people at its height. He laments that the sole objective of this engorged industry was “rent seeking”; the search for greater “alpha” or the margin between principal and current value. Rogers observes that with the advent of institutional investors who control enormous market share, the relentless drive for alpha to the exclusion of all other considerations might be ending.

He asserts that these institutions understand that their role as perpetual entities have, at the core, a fiduciary obligation to their beneficiaries that extends beyond the lives of those who are currently recipients. Because they have this realization, they must take a strategic orientation to the companies in whom they invest. Rogers observes that they are concerned with governance in those corporations because the way a corporation is governed has a tremendous impact upon its future viability. This creates a phenomenon he calls “patient capitalism”. Such a pervading atmosphere in the financial markets would change the objective of capital investment from the search for greater alpha today towards a questioning how the long term interests of the shareholder (for the institutional investors this means the interests of their beneficiaries for generations to come) are being met by this corporation, its products and/or services. Rogers observes that more and more frequently, large institutions are investing directly between each other on private trading platforms, bypassing the exchanges,  their high speed trading programs and excessive fees.

Rogers does not express it directly but in governance, executive compensation is a massive proportion of total costs and easily reduced as a cost of doing business. He does not explicitly address future costs that have enormous social impacts such as developing alternative energy resources and reducing fossil fuel consumption to fight global climate change, but when the outlook is strategic, the beneficiaries numerous and intergenerational these considerations must be included. The aggregate of 1,000 of the largest (fiduciary) institutions accountst for more than half of the world’s capital. This gives them tremendous clout in the global markets. They can bring about enormous social benefit if they were to demand and assert their fiduciary orientation on global corporations.

John Rogers, in conclusion hopes for the supplanting of 30 years of finance capitalism with a new era of fiduciary capitalism and warns the financial sector that if it causes another meltdown then it should expect more regulation even to the point of making them into public utilities. He decries the era of stratospheric managerial bonuses and is fervently wistful and optimistic for “…efficiently and cleanly connecting capital with ideas, long term investing for the good of society, and delivering on promises to future generations”. We should insist upon, be on the lookout for and prepared to spotlight the coming fiduciary capitalism.