The Crisis Begins
If your country was in default on its debt, in economic distress, and
almost out of cash, would you vote “no” to a potential deal to get out of
immediate trouble? Even if it meant
spending less money- that you don’t have?
None of us would do that, but tell that to the Greeks. 60% of them voted “no” in a national
referendum on July 5th and thus rejected a deal with creditors and
the likely chance to stay in the Euro.
Greece may have to go bankrupt, impacting the many financial
institutions who own the sovereign debt of Greece and impacting the many
consumers who will lose part of their deposits as banks fail.
And so, the crisis the world has feared for several years is here. Investors will now worry about the ripple
effect from other countries with debt levels that are unsustainable, including
Spain, Portugal, Italy, and closer to home, Puerto Rico, and who have economies
that are weak. All of this Greek drama could
hurt the Euro initially, but it could actually improve if Greece exited. If selling in stocks and bonds begins in
earnest over this crisis, we will have some of the first tests of liquidity in
the markets since new regulations kicked in and restricted financial
institutions from trading or making markets.
After calls by the IMF and the World Bank for the Federal Reserve to
postpone interest rate hikes, the calls seemed to be falling on deaf ears. Fed officials keep telegraphing rate hikes
later this year “if the economy improves.”
The Greek referendum and Puerto Rico’s threat of bankruptcy may do the
trick. The Fed keeps insisting that they
will tighten this year enough though we have had negative growth of -.2% in
1Q15 and 2Q15 growth does not look all that great. Inflation remains low. The European drama may change their minds,
along with a greater than expected, or publicized, slowdown in China and
recession in Brazil and Russia. Japan
seems to have the only economy with decent GDP growth near 4%.
Unemployment Measures
The Fed keeps pointing at the low unemployment rate and saying that is
their reason to raise rates. Have you
seen the unemployment rate in June? It
was reported at 5.3%, down from 5.5% in May.
Payroll jobs grew a modest +223,000, but household employment fell by
-56,000, while the labor force was declining by -432,000. So job growth is negative and the labor force
declines, making the unemployment rate drop.
And that is supposed to be so good that rates have to rise? Perhaps it is that the Fed “thinks” they have
to tighten. They “think” they have to
return short term rates to “normal” in order to be able to lower rates when
recession comes. Yes, I actually read
this recently! It would be strange to
see the Fed tighten when job growth is pathetic, wage growth is stubbornly low,
and inflation is not threatening anyone.
While the unemployment rate may appear to be “good” at 5.3%, so many
other employment measures are weak. The
labor force declined in June and the labor force participation rate dropped to
62.6%, matching a low from 1977. The
pool of available workers is still high at 14.4 million, with the augmented
unemployment rate high at 8.8%. Greenspan
would never tighten with the pool of labor so high! There are plenty of job openings, over 5
million, but employers are having trouble matching workers with the requisite
skills. Part-time jobs are still the
only alternative for many workers who actually want full-time work, showing how
prevalent underemployment really is. Meanwhile,
workers continue to exit the workforce, including the retiring baby boomers,
who are taking with them knowledge, skill, and expertise without providing that
knowledge to others. So my question to
the Fed is- do you “think” you should tighten now or wait until we actually
have sustainable growth?
The so-called economic recovery is now six years old, as of June. The longest uninterrupted recovery lasted
10.7 years under the Maestro, Fed Chairman Alan Greenspan, in the 1990s. Growth over the past six years has averaged
about 2.0%, compared to +4.5% for the past ten recoveries. The data still point to a mix of strength and
weakness, with housing showing the most strength and inflation and
manufacturing data releases showing the most weakness. Growth is high enough to just move along, but
not much more. Am I proud of the
+200,000 to +250,000 payroll growth each month?
No. Am I proud of the 5.3%
unemployment rate? No. Do I “think” the Fed should tighten? No.
Why do I keep questioning the Fed?
Because I see an economy barely able to generate growth and that same
economy fragile enough for growth to slip away, before it ever gets to a
sustainable level. Like I have said
before, go ahead and tighten. Then you
will be able to lower rates again- soon.
Large Hadron Collider Update
Our favorite machine is back in business- bigger and faster than
ever! On Easter Sunday, the Large Hadron
Collider of Switzerland started up again after a two year period in 2013 and
2014 for maintenance and upgrades to add twice as much speed to the
machine. In June, the Collider began
smashing protons together at 13 trillion electron volts, or “TeV,” in an effort
to find new particles. In 2012,
researchers found evidence of the Higgs Boson particle, which is the particle believed
to give everything mass. What will they
find this time?
First Federal Update
After our merger is approved by regulatory agencies, we will become part
of Penn Community Bank. We have great
team members and everyone will be working to combine our banks and systems so
that we can better serve our customers.
Stay tuned!
Dorothy Jaworski has worked at large and small banks for over 30 years; much of that time has been spent in investment portfolio management, risk management, and financial analysis. Dorothy has been with First Federal of Bucks County since November, 2004. She is the author of Just Another Good Soldier, which details the 11th Infantry Regiment's WWII crossing of the Moselle River where her uncle, Pfc. Stephen W. Jaworski, gave his last full measure of devotion.
