“Whatever, Janet” Indeed – Fed’s Yellen Outfoxes the Bond Bullies, Finesses Rate Policy, Buoys Investors

U.S. financial markets have been highly volatile but with little to show for investors, as opposed to traders, who make their best livings from pointless volatility, for all the swaying back and forth since the start of 2015.

We all know the basic economic facts: U.S. Gross Domestic Product was down into the low 2% range for the 4th quarter of 2014 as compared with the robust 5% gain in the 3rd quarter; the U.S. dollar’s recent, almost parabolic 17% gain against the Euro was causing major American multinational corporations, dependent on foreign sales, to lower their projections for 2015 revenue and earnings. This, in turn, led to reduced expectations for 1st quarter 2015 GDP: oil was falling with the dollar’s rise (it’s priced in dollars) and the positive aspect for U.S. consumers of lower gas prices seemed to be muted by their enhanced saving rates and cautious post-Christmas spending. Retail sales into the New Year were weaker than expected (probably also affected to some degree by the bad February weather); so were housing starts and sales (probably for the same reason).  Meanwhile, the European Central Bank was initiating its own quantitative easing program to stimulate the flaccid European economy and reverse a trend toward actual deflation, while the U.S. Federal Reserve seemed to be on an opposite course of action – raising interest rates – by middle of the year, as job growth continued at a fast, 295,000 net positive growth trajectory, even in cold, snowy February.

These frustrating and somewhat conflicting facts led many investors to sell first and ask questions later as markets reacted with 1% or more multiple daily loses, interspersed with occasional equivalent one-day (but never two-day) gains if there was any hint of bad economic news to push against the perceived headlong direction of the Fed to raise rates no matter what the dollar’s fall or oil’s fall or the Euro’s fall was doing to both U.S. and overseas economic growth prospects. The financial markets were positioned so that any economic “good news” (like the February jobs data and lower unemployment rate) was perceived as “bad news” for stocks and bonds because it would lead the Fed to raise rates prematurely.

Where did the notion that the Fed would supposedly raise rates during a “soft patch” in the economy come from? The focus began in earnest after the Fed’s January 28 meeting when the Fed refused to remove the word “patient” from its statement describing its stance regarding the process of beginning to lift its benchmark interest rates for the first time since 2008.  That word “patient” was understood by the markets, based on previous statements by Fed Chair Janet Yellen, to mean that no increase would be initiated at its next two meetings: i.e., not in March or April.  But inferentially, that language also opened the door to a rate hike at its mid-June meeting, which many in the markets felt would be too soon based on the softening GDP and retail data despite continued job strength (albeit without the wage growth the Fed said it was looking for).

Investor fears were increased when commentators first read the January statement to suggest a rate hike in June, while major investment banking firms like Goldman Sachs and Morgan Stanley cautioned against any rate rise before the autumn or even at all until 2016 because of weakening world economic conditions and major deflationary trends offsetting the positive effect of more hiring in the U.S. Meanwhile, as noted in a prior blog (http://www.huffingtonpost.com/terry-connelly/maybe-the-federal-reserve_b_6648240.html) CNBC’s Rick Santelli and his guests were continuing to attempt to bully Chair Yellen and other Fed members into raising interest rates immediately in order to satisfy the economic notions of options and futures traders in Chicago frustrated by the “artificial” pricing of risk they saw as a result of the Fed’s stimulus policies (not to mention the reduction in their trading income).  The situation was not clarified for investors when a non-voting Fed Regional Bank President, James Bullard of St. Louis, seemed to agree with Santelli to some extent when he urged the Fed to remove the “patient” language (and thus its effective two-meeting hold on rate increases) in its March statement to pave the way for a rate increase move in June (with the added support of some voting members like President Williams of the San Francisco Fed).

Even Chair Yellen, who never gets ahead of herself or her Committee colleagues in Congressional testimony, conceded to Senators that the word “patient” could be dropped in March (but that such a move would not automatically mean a June rate increase).  Markets were left to speculate and consensus quickly drove to a certain expectation of an end to “patience” and a move toward a summer rate hike despite the soft data – with many viewing this as a mistake as evidenced by eight days of triple digit moves in the Dow before the Fed’s March 18 meeting.  Just before the meeting, such diverse market participants as Christiane LeGarde, head of the International Monetary Fund, and Ray Dallio, a major hedge fund player, both warned against the Fed repeating its 1937 mistake of raising rates too quickly as a recovery was just taking hold, and the dire consequences of such an error for the rest of the world as well as the U.S..

Fed “whisperer” (or, more precisely, “whisperee” ) Jon Hilsenrath of the Wall Street Journal summarized the contours of the “box” the Fed found itself in with respect to market expectations; the Fed wants “wiggle room” to act on the basis of incoming data, not tied to a fixed schedule, and doesn’t want to either surprise the markets or necessarily telegraph its timing by continued “forward guidance” like a two-meeting window.

Market commentators got busy in the days before the March meeting predicting an investor “panic” if the “patient” word were to be eliminated (much like the “taper tantrum” of late spring and summer 2013), to the delight of short-seller hedge funds. Scared investors followed suit with several triple-digit down days.

But Janet Yellen outfoxed them all. She engineered a unanimous Fed statement that both eliminated the “patient” language and also stressed that the Fed was indeed mindful of the softer economic data and would wait to see if inflation data actually made a higher turn and labor market slack actually tightened along with job growth before raising rates! The markets didn’t panic; the Dow jumped nearly 400 points from bottom to top. She also held master class press conference to follow up where she summarized the whole new scenario in a very investor-friendly phrase: “just because we have removed the word “patient” from the statement doesn’t mean we’re going to be impatient.” The Chair knows how to turn a phrase to advantage – and the market held its gains into the close.

Unfortunately, there is no hyperlink as yet to Rick Santelli’s hyperbolic post-Fed meeting, anti-Yellen rant on CNBC (which was typically busy promoting him for Fed Chair earlier in the day). But watch for it on your favorite website. It was a doozy.

Recently published on Huffington Post.


Terry Connelly is an economic expert and dean emeritus of the Ageno School of Business at Golden Gate University in San Francisco. Terry holds a law degree from NYU School of Law and his professional history includes positions with Ernst & Young Australia, the Queensland University of Technology Graduate School of Business, New York law firm Cravath, Swaine & Moore, global chief of staff at Salomon Brothers investment banking firm and global head of investment banking at Cowen & Company. In conjunction with Golden Gate University President Dan Angel, Terry co-authored Riptide: The New Normal In Higher Education.

First Impressions of the 2016 Field

HILLARY CLINTON: She is now famously known as the inventor of ‘ME-Mail” – maybe better than Snapchat for ultimate privacy and “control,” because you have your own server and thus can “wipe the slate clean” before the hackers or Congressional committees or Republican National Committees can get in to your trash bin. But has the ensuing controversy – about whether the public or the press at least can ever know whether she has truly released or handed over everything or just “everything that is relevant” (it depends on what the word “is” means, yet again) – moved her candidacy or election from the “inevitable” category to, say, somewhat more “evitable?” The more immediate question is which reporter and network will land the “inevitable” first interview on this subject (enough of the self-serving tweets, already)? What a way for Katie Couric to come back to NBC; Brian Williams probably wouldn’t be the best “contextually.”

JOE BIDEN: He’s Bide’n his time (“’cause that’s the kind of guy I am”) but look for an appearance in the Des Moines area shortly. He’s back from the “Guatemala Getaway” that took him “out of the picture” – literally – at the Bibi Netanyahu showcase at the Capital.  He should be in no hurry because all the negative focus now is on Mrs. Clinton, which is what he should like. Thus far it appears (i) he had nothing whatsoever to do with Benghazi; (ii) might have used the exactly right dirty participle to describe the Affordable Care Act; (iii) figured out that Iraq was three real countries (at best) before anyone else here did; and (iv) got wind of the change early on gay marriage among senior politicians – just like Gavin Newsom did years ago among junior politicians (watch him if he gets to be Governor of California someday).

MARTIN O’MALLEY:  The highly progressive Maryland governor gets a standing ovation in South Carolina? Wow. But then again, there are more than a few Irish roots in the Low Country.  Perhaps Democrats are just anxious to have at least a real scrimmage in the Presidential primaries next year if only to get Mrs. Clinton or whoever ready for the regular season; every sport does it, especially blood sports like politics. Question: will O’Malley be the Eugene McCarthy of 2016? Remember, McCarthy only got 42% of the vote – not a majority – against sitting President Lyndon Johnson in 1968, but it was enough to push Johnson out of the race after Senator Robert Kennedy announced he was “reassessing” his position and ultimately declared his candidacy. If either McCarthy,  or Vermont’s Independent Socialist BERNIE SANDERS (of Brooklyn originally), or Virginia’s ex-Senator and novelist JIM WEBB plays through to Iowa and holds Mrs. Clinton’s victory margin to a bare minimum, could we witness a scenario similar to 1968?

In the current case, Clinton would be the de facto “Restoration Incumbent” (the role Kennedy fit in ’68) but who would play the role of Kennedy this time around? It must be someone not yet in the race. Can you say Massachusetts’ Senator ELIZABETH WARREN (who could raise money quickly)? Or perhaps DEVAL PATRICK, also of Massachusetts? Or another Governor, ANDREW CUOMO of New York (whose father famously decided at the last minute not to run against Bill Clinton in 1992) or MARK WARNER or TIM KAINE (the sitting, swing state Virginia Senators)? How about KIRSTEN GILLIBRAND (Clinton’s successor in a New York Senate seat); or even good old JERRY BROWN, the once and current Governor of California who gave Bill Clinton his toughest fight in 1992? There’s more than enough psychological drama to play out on the Democratic side in 2016 if Hillary slips up at or before Iowa. And, of course, there’s always Vice President JOE BIDEN (see above) in the wings to play the Hubert Humphrey role from 1968 of the actual nominee once the Convention convenes. Stay tuned (and check your e-mails).

JEB BUSH: Gets early style points for taking on his critics about his support for comprehensive immigration reform, perhaps realizing he has already lost the Rush Limbaugh, Michael Savage, and Mark Levin talk radio primaries anyway. The Far right wing (that Obama is an Islamo-Fascist traitor and communist who should be disposed of like a rabid dog is just a mild everyday sample) is a very effective force among the Republican “base,” but it collectively failed to prevent the Mitt Romney nomination even in the Tea Party heyday of 2011-12. Bush is clearly trying to be “not-Romney” (i.e., by consistently being himself) while appealing to residual Romney voters among the many Republicans who believe Romney should have won and would have been better than Obama. Of course, a lot of these folks didn’t bother to vote: not quite “buyer’s remorse” in their case!

SCOTT WALKER: Has been “beamed up” by kicking the public employee unions while they’re down, but jumped the shark when he compared their protests to ISIS and sought to turn the University of Wisconsin into the DeVry Institute (with apologies to DeVry, which is pretty good at what it does). Walker may be peaking too soon (like an overripe Wisconsin cheese?).  He has set himself up as the current poll favorite and front-runner in Iowa, but is therefore as vulnerable as the failed student government candidate he once was: he quit the race and then quit school. Doesn’t sound like a quitter now, but he is a “flip-flopper” (a tried and true GOP blood-phrase), since he now has embraced the full-on anti-abortion “personhood amendment.”  And he at least has the transparency to straight-up endorse deportation of all illegal immigrants, unlike GOP rivals who are “against amnesty” but afraid to resultant utter the “D-word” outcome publicly.

BEN CARSON: The doctor in the house distinguished himself by diverting his own announcement of his exploratory committee with his discourse on the supposed “choice” roots of homosexuality – a diagnosis by the good doctor that amounted to a ridiculous cross between “Orange is the New Black” and “Fifty Shades of Gay.” He later issued a non-apology apology. He’ll need to memorize that phraseology for the primaries. Meanwhile, he’s moved up in the rankings, probably at the expense of TED CRUZ, who has the opportunity to embarrass himself daily in the Senate, and clearly is an unabashed opportunist who could probably come off as fairly smart, decent guy if he’d drop the Joe McCarthy-style hysterics. But he won’t.

BOBBY JINDAL: Has traded caffeine for bitters in his approach to issues: quickly endorsed the Rudy Giuliani-view of President Obama’s lack of love for America and Americans, trashed the Common Core he once supported, and ultimately failed to get much attention for his efforts; still in the back row.

CHRIS CHRISTIE:  Who? Went to Iowa and looked like he just left a long, state-imposed Ebola quarantine. Claimed to know a lot about farming because he is Governor of the “Garden State.” He should re-watch the movie by the same name – it’s not about corn. Maybe he was spooked by the Bridges of Madison County.

RICK PERRY: Do not underestimate this fellow. He does know farming. He has done his homework this time around and not just about a pair of new glasses. He will parlay his on-the-ground experience with immigration as well as his realism about the folks already here borne of multiple terms as Texas Governor into what will pass as a “centrist” position on immigration reform in the GOP.

MARCO RUBIO: Watch this man also. He is gaining respect for reaching for command on both domestic and foreign affairs.  Although he has been burned once on immigration reform, he won’t be burned twice. He has successfully changed the subject in terms of his own themes to incorporate the tax reform issues that will be central to the 2016 campaign. Has generation change appeal and could climb rapidly especially if Bush falters.  Jeb has not, as expected, choked off Rubio’s money supply, or his news-making oxygen.

CARLY FIORINA: Has defined herself as the un-Hillary, but there has not been a more obvious VEEP audition since Julia Louis-Dreyfus got the part! But then again, Julia is President now, if only on TV. Probably won’t be the same for Carly in the end, but she has likely made many new friends.

RAND PAUL and LINDSEY GRAHAM: The “odd couple” ticket: one never met a war opportunity he liked, the other just the opposite. Would make quite a compromise ticket. Holy Southern Strategy! Paul has a great chance in early primaries with a vast number of candidate because (i) his core 20-25% libertarian support is solid as a rock and that could be enough to win; and (ii) at least he has a foreign policy.

JOHN KASICH: Governor of the swing state next time around. But for the moment, he’s Just-in-Kasich.

More later.


Recently published on Huffington Post.

Terry Connelly is an economic expert and dean emeritus of the Ageno School of Business at Golden Gate University in San Francisco. Terry holds a law degree from NYU School of Law and his professional history includes positions with Ernst & Young Australia, the Queensland University of Technology Graduate School of Business, New York law firm Cravath, Swaine & Moore, global chief of staff at Salomon Brothers investment banking firm and global head of investment banking at Cowen & Company. In conjunction with Golden Gate University President Dan Angel, Terry co-authored Riptide: The New Normal In Higher Education

Obamacare Dominoes: If Federal Subsidies Fall At The Supreme Court, So Do The Individual And Employer Mandates — Game Over!

Everybody seems to be missing the real issue at stake in the decision by at least four Supreme Court Justices to hear an appeal of a Fourth Circuit Court of Appeals decision affirming the applicability of Federal insurance subsidies for qualified individuals who purchase “ObamaCare” insurance policies on Federal Exchanges set up for States whose governments chose not to establish one for their State.

This case, King v. Burwell, involves not a Constitutional question per se but rather a challenge to an IRS interpretation that allows subsidies for insurance purchased on Federal Exchanges despite statutory language that could be read to limit their availability only to those who purchase insurance only on an Exchange which a State has chosen under the law to “establish” itself directly rather than leaving it to the Federal government to set one up for it. The plaintiffs in the case (King et al) are Virginia residents who argued that the IRS decision allowing subsidies provided via the Federal Exchange set up when Virginia’s government refused to establish an ObamaCare Exchange on its own deprived them of an exemption from the Affordable Care Act’s “individual mandate” to purchase health insurance. They claim that absent such subsidies all policies available to them on the Federal Exchange would cost more than the 8% of their income that serves as a trigger for such exemptions.

While the legitimacy of the IRS determination to allow such subsidies would seem to simply involve a Federal  statutory question concerning  the scope of administrative flexibility in interpreting the ACA’s grant of subsidies, the plaintiff’s argument in King v.  Burwell opens the door to a much broader impact on ObamaCare than just the matter of subsidies. It would be huge if the Supreme Court determines the Court was wrong in affirming the IRS interpretation.  Estimates indicate that, for the poor and lower middle class, upwards of seven million would lose over $ 36 billion in subsidies. These losses would affect residents of Texas and Florida (the biggest losers) and 32 other states subject to the King v. Burwell Supreme Court decision.  These states are mostly in the hands of Republican governors and legislatures that oppose ObamaCare in principle and the potential “work-around” would depend on those  governors and legislators agreeing to “establish” State Exchanges possibly “outsourcing” their operations to the existing Federal Exchange, using their states’ own money instead of the Federal funds provided under the ACA  because eligibility for those funds just happens to have run out on November 14, 2015! No word as yet on whether the Centers for Medicare and Medicaid would consider extending that deadline in view of the pending Supreme Court decision.

With no “work around,” moreover, the dominoes at the heart of the ACA would, as noted above, begin to fall. If no subsidies are available in a particular state (or in the 34 states subject to a King v. Burwell reversal), then the premiums on the policies now on offer in the Federal Exchanges serving those states would exceed 8% of their income and therefore they would automatically become exempt from the individual mandate to purchase any health insurance at all. This result would not just affect the poorest families. Young, healthy college graduates – many burdened by tens of thousands of dollars in student loan debt – would be free to opt out of buying any insurance on a Federal Exchange or otherwise, and the economics of the Federal Exchange would be severely adversely affected without a balance of relatively healthy individuals to weigh against the insurance claims of more mature families and sub-Medicare elderly. Premiums would go up, enrollments would go down with a ruptured individual mandate.

But that’s not the end of the effects of a Supreme Court decision to invalidate Federal subsidies obtained through the Federal Exchange in two-thirds of our states. The employer mandate under the ACA  requires employers of more than 50 full-time workers (currently defined as all those working at least 30 hours per week) to either provide a Federally-approved health insurance package or pay an increasingly onerous per-worker tax penalty. For a variety of reasons, some clearly operational, some probably political, the Obama Administration gave employers extra time to comply, but the mandate will now begin in 2015 for employers with over 100 full-time workers, and for those with between 50 and 100 in 2016. But if the Supreme Court reverses King v. Burwell by overturning the IRS rule with respect to Federal subsidies, which are in fact delivered by means of tax credits which is why an IRS rule is at issue, the employer mandate is just as fatally wounded as the individual mandate, and the biggest ObamaCare domino of all falls.

The ruling by a Federal Court panel majority in another case brought against the IRS rule on ObamaCare tax credit subsidies, Halbig v. Burwell, points directly to this conclusion. The majority ruled against the IRS subsidy interpretation (the decision has since been appealed to the entire D.C. circuit Court of Appeals), and along the way to this conclusion, laid out its objections to the IRS interpretation precisely focusing on the effect on both the individual and the employer mandate:

“[B]y making tax credits available in the…states with Federal Exchanges, the IRS Rule significantly increases the number of people who must purchase health insurance or face a penalty.”

The IRS Rule affects (sic) the employer mandate in a similar way. Like the individual mandate, the employer mandate uses the threat of penalties to induce large employers – defined as those with at least 50 employees, see 26 U>S>C> section 4980H9c) (2) (A) – to provide their full-time employees with health insurance.  Specifically, the ACA penalizes any large employer who fails to offer its full-time employees suitable coverage if one or more of those employees “enroll…in a qualified health plan with respect to which an applicable tax credit… is allowed or paid with respect to the employee.’ Id. Section 4980(a)(2); see also id. Section 4980h (b) (linking another penalty on employers to employees’ receipt of tax credits).”

Lest there be any mistaking the view of this judicial panel majority as to the impact of their ultimate decision precluding tax credit subsidies to purchasers on the Federal Exchange, the judges went on to rub it in quite precisely:

“Thus, even more than with the individual mandate, the employer mandate penalties hinge on the availability of tax credits. If credits were unavailable in states with Federal Exchanges, employers there would face no penalties for failing to offer coverage.”

If a majority of the Unites States Supreme Court were to agree with the Halbig v. Burwell majority, the last ObamaCare domino would seem to fall, more or less automatically.

And yet the media and even the most ardent supporters of ObamaCare seem to ignore this potential effect. Assuredly, the “large employers” and their lobbyists who are funding the Halbig and King cases have not. Not to mix too many metaphors, but it is most important to understand that both the King and the Halbig cases are twin Trojan Horses: ostensibly about killing ObamaCare subsidies, but really all about indirectly but effectively destroying the individual and employer mandate. In the concluding words of the majority in the Halbig case, its ruling against Federal Exchange subsidies “will likely have significant consequences both for the millions of individuals receiving tax credits through federal r exchanges and for health insurance markets more broadly.” (Halbig v. Burwell at p 41.)

All the more so if the Supreme Court agrees.


Recently published on Huffington Post.

By Terry Connelly, Dean Emeritus, Ageno School of Business, Golden Gate University

Terry Connelly is an economic expert and dean emeritus of the Ageno School of Business at Golden Gate University in San Francisco. Terry holds a law degree from NYU School of Law and his professional history includes positions with Ernst & Young Australia, the Queensland University of Technology Graduate School of Business, New York law firm Cravath, Swaine & Moore, global chief of staff at Salomon Brothers investment banking firm and global head of investment banking at Cowen & Company. In conjunction with Golden Gate University President Dan Angel, Terry co-authored Riptide: The New Normal In Higher Education

IOU 240 Euros, It’s My Problem; IOU 240 Billion Euros, It’s Your Problem!

The first thing to know is that nobody should sell or buy a lot of US stocks or bonds because of the unfolding late-inning melodrama between the new government of Greece and the same old government of the Eurozone community about whether or not to extend Greece continuing credit despite its insistence on breaking the terms of its existing 240 billion euro bailout from the Eurozone, the European Central Bank (ECB) and the International Monetary Fund (IMF). At least for the next several days, all that’s going on are negotiations, carried out in a variety of public threats and private acrimony, signifying nothing until the very last minute. That’s what games of “chicken” are, even if they are carried out under the influence of modern “game theory.”

For five years, the Germans have essentially insisted on severe austerity (that must have a German root word, as in root canal) measures on the Greeks in exchange for temporary support in the wake of their nation’s de factor bankruptcy – classic “shock therapy.” While leaving the Greek public debt to European institutions under the bailout in place at normalized market interest rates, the program focuses on attracting external investment that would ultimately lead to the growth needed to repay the Greek debts and put the nation on sound economic footing by mandating externally supervised market structure reforms. These include liberalizing employment laws making it easier to fire workers, lower minimum wages and pensions, later retirement ages, reduced welfare payments, privatization of state assets like ports, media and roads, and crackdowns on corruption and tax cheating. This approach is also “standard issue” for the IMF when dealing with troubled economies. Enforcing this line of thinking before the start of critical Eurozone meetings this week with Greek representatives, German Finance Minister Wolfgang Schäuble summed up the situation as requiring Athens to stick to the existing bailout terms with no room for compromise just for the sake of compromise because Greece had lived beyond its means and no one wants to lend them any money without guarantees of the already agreed structural reforms being implemented, however painful to the Greek electorate.

The new Greek government is basically fine with corruption and tax cheat crackdowns, but parts company with previous Greek administrations by rejecting the “investment” model and instead proposes breathing-room financing to provide time to set up a new “contract” with its European institutional debtors.  This is based on a “demand stimulus” agenda that would put more money in workers’ and pensioners’ pockets through minimum wage increases and a halt to draconian spending cuts, as well as a reduction in the bailout’s requirement that the Greeks produce an operating (before debt service) surplus of 4.5% of GDP. Put simply, the government won election on a promise to voters to re-do rather than renew the deal with its Eurozone and IMF creditors when it expires on February 28. But that would mean that it would not receive 1.5 billion euros due to it in March under the existing bailout program, and risk end to day-to-day bank funding support from the ECB.

But the new Greek government seems prepared to take that hit and risk in order to honor its electoral commitment to the voters. Moreover, the crux of the Greek government’s case seems to be that it makes no sense, at least to the new Greek Finance Minister, to load more debt onto a bankrupt economy in an effort to stimulate growth – that “fiscal waterboarding” has only served to make Greece a “debt colony.”

It is clear that the two main antagonists (Schäuble and his Greek counterpart) agree that loaning more money to Greece, without reforms, is not the answer. But clearly the nature of the reforms required is a matter of profound disagreement, both substantively and procedurally. While the Germans have let slip the idea that perhaps the 4.5% surplus benchmark could be cut by one-third rather than the two-thirds proposed by the Greek government, but that such a deal could only be accomplished within the framework of the existing bailout agreement, which the Greeks want to scrap and start over.  Asked what happens if the Greeks insist on this posture, German Finance Minister Schäuble said simply that the Greeks can’t “negotiate about something new,” and if they forego the next bailout payment due to their insistence on abandoning the current deal, then “it’s over.”

Indeed, it looked to be fairly well over on Monday evening, February 16, when the meeting of Greek representatives with other Eurozone Finance Ministers, Eurozone and ECB officials broke up early and bitterly over the wording of a draft document, which, while showing flexibility on reforms and timetable, committed the Greeks to working within the existing bailout structure – essentially, the German position triumphant except in outcome. The Greek Finance Minister quickly insisted that Greece would do “whatever it takes”  to reach a deal, the lead Eurozone negotiator just as quickly shot back that it would take a commitment to the existing bailout to get a real agreement. Some have likened the situation to a classic case of “game theory” at work in the political/economic field rather than in Las Vegas or the drivers’ game of “chicken,” the Greek Finance Minister himself  (who once taught game theory at university) denied on the record that he and his country were playing games, a position that Minister Schäuble would also probably assert about himself and Germany if asked.

What the financial markets want to know, however, is whether the apparently semantic game of “chicken” about whether “flexibility” on Greek reforms and debt repayment timing (about which there appears genuine maneuvering room) must come under the “existing “or a “new” bailout framework or not at all, will instead turn into a “chicken little” situation for Greece, the Euro and the European community. Not only are the consequences of a potential Greek exit from the euro currency a “known unknown” to the markets, it is not clear if such an exit (or banishment) is legal or feasible, or if either the Greek economy or the Euro itself could survive the event in present form.  Moreover, existing Greek economic ties with Russia suggest that Putin may introduce his own form of “game theory” into the equation if the talks collapse and Greece needs a “white knight,” a potentiality that brings the US and even Israel (which has benefitted from Greek support in the region) into the mix of “stakeholders” in the outcome of current negotiations.

The lead Eurozone negotiator left open the possibility of further negotiations before the end-of-February bailout expiration deadline, even as soon as February 20. But he reiterated an ultimatum that the Greeks must play within the existing bailout deal. Some observers said that could again backfire, while others suggest that only more political turmoil about the uncertainly could bring all parties to a real deal in time. Let’s hope that doesn’t mean financial market turmoil as well.


By Terry Connelly, Dean Emeritus, Ageno School of Business, Golden Gate University

Recently published on Huffington Post.

Terry Connelly is an economic expert and dean emeritus of the Ageno School of Business at Golden Gate University in San Francisco. Terry holds a law degree from NYU School of Law and his professional history includes positions with Ernst & Young Australia, the Queensland University of Technology Graduate School of Business, New York law firm Cravath, Swaine & Moore, global chief of staff at Salomon Brothers investment banking firm and global head of investment banking at Cowen & Company. In conjunction with Golden Gate University President Dan Angel, Terry co-authored Riptide: The New Normal In Higher Education

Maybe the Federal Reserve Has Been Right about the US Economy All Along

Hard as it may be for its legion of economic, political and media critics (and even some of its own members) to accept, the most recent bullish jobs report from the Labor Department looks like a ringing endorsement of Federal Reserve policies and perspectives on the economy. The Fed has kept its benchmark short term interest rate near zero for six consecutive years and also provided three huge batches of “Quantitative Easing” in the form of aggressive monthly bond purchases to hold longer-dated bonds within a range of interest rates that made mortgages attractive and stock investing less risky, all in the face of a constant barrage of criticism from its internal dissenters and external antagonists.

Just as the Fed itself has consistently averred that its monetary policy decisions would be “data dependent” rather than be driven by predetermined rules, theories or timetables, is it not fitting that judgment of whether the Fed has been right or wrong in its decisions also be driven by the incoming data more so than preset ideology, political persuasions or trading positions?

Moreover, would not a sense that those at the helm of our monetary system really have proven to know whereof they speak add a needed measure of confidence in government that would itself act as a boost to economic recovery (but of course only if it has been duly earned)? It looks from here like the Fed has indeed earned a much fuller measure of respect for its judgments and current posture than has been offered so far.

The Fed bashing certainly started early and often in the Great Recession, exemplified by the constant clamor for an “audit” of the Fed’s decision-making first proposed in 2009 by Texas representative and GOP presidential candidate Ron Paul and now championed by his senator son Rand. These two vigorously opposed the Fed’s monetary policy (indeed, the Fed’s very existence) in terms echoed and amplified with a bond trader’s perspective by Tea Party cable TV champions Peter Schiff and  Rick Santelli of CNBC.  They lambasted Fed Chair Ben Bernanke for his “easy money” policy, with Santelli warning it would lead to hyper-inflation and economic failure.

While Santelli has continued his attack on Bernanke’s successor Janet Yellen for creating conditions that would destroy the US dollar as well as the economy, he was finally taken on late last year by one of his CNBC colleagues, Steve Leisman, who asserted that even at that point Santelli’s Fed critique had proven wrong on all counts given the strong position of the dollar and the revival of US GDP growth.

Meanwhile, both Chairs Bernanke and Yellen and their governing majorities faced critiques from within the Fed’s membership, especially from regional Fed Bank Presidents Richard Fisher of Dallas and Charles Plosser of Philadelphia, both of whom actively took their dissents public arguing for urgent increases in the benchmark interest rates and quick termination of “QE,”  in each case because of their concerns about inflation. Both Fisher and Plosser had been dissenting from Fed policy off and on since 2008, when they resisted Fed moves to reduce rates in the face of an incipient recession. Nothing like being wrong both coming in and going out!

In point of fact, even before the most recent report on jobs and unemployment, US economy data showed that the annual inflation rate had decreased in December to 0.8% from even the low (in terms of the Fed’s 2% target) 1.3% rate shown in November, undercutting the anti-Fed case of Santelli, Fisher and Plosser quite decisively. The Fed, in fact, has been quite consistent in terms of holding its interest rate fire in view of the fact that inflation has been running too low during the recovery to support the growth in incomes that a solid recovery demands. Check out the Fed’s focus in its most recent policy statement concerning when it would begin to raise rates on the “progress – both realized and expected” toward full employment and 2% inflation.

The Fed got a fist full of progress in the results of the Labor Department’s monthly jobs and unemployment survey for January 2015 – progress which should put the Fed’s doubters to shame. Not only did the report show a 257,000 jump in net jobs for the month – the 11th straight increase over 200,000 and the best streak of growth in nearly two decades. Even the slight uptick in unemployment was due to the “good news” of the many thousands of individuals who were encouraged enough by “expected” jobs   growth to return to the job search themselves! Those expectations, as noted above, are as important to the Fed as the “realized” progress that the January report documented.

Moreover, the report also went some distance in proving that the Fed had been right in its January statement, cited above, when it observed that the jobs market had been showing both strong job gains and a reduction in the under-utilization of labor resources generally. And how! The January jobs report showed major corrections to the upside in previously reported figures for the two prior months, to 423,00 new jobs in November (up 20%) and 329,00 in December (up 30%).  These adjustments mean that America has created a million new jobs just since November 1, 2014.

In addition, a surprise increase of .5% in wages in January, possibly due to the onset minimum wage increases in several of the 29 states with their own wage standards over and above the federal law, should also encourage the Fed in its view that the economic recovery is on a good path, since such a turn toward a reasonable level of wage inflation has been cited by Chair Yellen as one of the key indicators  of emerging recovery that the Fed would be looking for (and may now have found). The Fed, in its January statement referenced above, agreed to be “patient” in initiating a rate increase and be guided by the incoming data. It may soon be getting additional indications of the economy’s progress toward normal growth which could further validate the Fed’s deliberate approach.

The upward revisions in the recent job statistics could be a signal of a forthcoming upward adjustment in the somewhat disappointing initial estimate of 4th quarter 2014 GDP growth, which came in at 2.6%, off the projected level of upwards of 3%. If that statistic is revised upwards by 25% like the average of the past two months of jobs data, it would bring the revised number right back on to the expected target, at 3.5%. That prospect should give Janet Yellen some measure of confidence as she delivers her semi-annual economic assessment to Congress on February 24 asserting that the Fed’s largely positive assessment of the US economic recovery in its January statement was fundamentally correct.

The revised GDP data for the last quarter of last year will be released just a couple days after Yellen’s testimony, and if the second and third quarters’ data are any guide, the revision will be upward just like the jobs report. Looks like the “academics” at the Fed do know a good deal about the real world after all – maybe even more than Congress and Cable TV. But that’s setting the bar low.


 Recently published on Huffington Post.

By Terry Connelly, Dean Emeritus, Ageno School of Business, Golden Gate University

Terry Connelly is an economic expert and dean emeritus of the Ageno School of Business at Golden Gate University in San Francisco. Terry holds a law degree from NYU School of Law and his professional history includes positions with Ernst & Young Australia, the Queensland University of Technology Graduate School of Business, New York law firm Cravath, Swaine & Moore, global chief of staff at Salomon Brothers investment banking firm and global head of investment banking at Cowen & Company. In conjunction with Golden Gate University President Dan Angel, Terry co-authored Riptide: The New Normal In Higher Education

Blocking Minimum Wage Increase, Boehner Relies On Lies

In the January 25 broadcast of CBS television’s “60 Minutes” program, House Speaker John Boehner dismissed any chance of increasing the current federal minimum wage as: a bad idea. “I’ve had every kind of rotten job you can imagine,” he said, “growing up getting myself through school, and I would not have had a chance at half those jobs if the federal government had kept imposing higher minimum wage.”  Well, let’s see about that.

John Boehner was in the vanguard of the post World War II  baby-boomers, born  November 17, 1949, and his biographical information notes that he got his first job working in his family’s bar (at age 8), which means around 1957.  At that point in time, the federal minimum wage was set at $1.00 per hour. Maybe this was even more than young John got from his dad and granddad. In any event, by 1961, that figure had been increased by the federal government by 15%, to $1.15. Boehner did not mention in his interview that this increase cost him his sweep-up job. In any event, let’s be fair to Boehner and look where the minimum wage was when he was just out of high school: in 1968, it was up 60% from when Boehner started, all the way to $1.60.  That is equivalent to over $10.69 in current dollars, higher than the level Boehner now rejects as imprudent. But more on that later.

By the time Boehner left the Navy due to a bad back and was, to his great credit, working his way through Xavier University as a janitor, the federal minimum wage had been further increased to $2.00 per hour in 1974, $2.10 in 1975, $2.30 in 1976, and $2.65 in 1978, by which time Boehner was settled in a job with the local manufacturing company that would eventually install him as its president.

In short, what Boehner said to CBS was a double lie. First of all, the federal government in fact did increase the minimum wage multiple times while he was working his way up the ladder, and secondly, none of those increases seems to have stopped him from getting the “rotten jobs” that kept him moving up the ladder to eventual success.

The fact that Boehner, like so many politicians, got away with these bald-faced lies is a “tribute” to modern sloppy TV journalism, in this case, as practiced by his underprepared interlocutor, CBS’s Scott Pelley. (Mike Wallace, where are you when “60 Minutes” really needs you?) But the problem of finding the truth in debates about increasing the minimum wage goes well beyond Boehner’s misleading sound-bites.

Let’s start with the notion that current proposals are calling for an “increase” in the level of the federal minimum. That’s true only in nominal terms. The current proposal to increase the standard from $7.75 to $10.10 over two years merely moves the level of purchasing power, as noted above, to the level in effect when John Boehner finished high school. In fact, the purchasing power of the US minimum wage has been steadily decreasing since 1968: to reach parity it would have to be raised by $3.44 (47%), far less than President Obama has proposed but in line with the range of state and local changes recently enacted or under discussion.

The other prevalent “big lie” about minimum wage jobs is that they are largely held by teenagers. This blogger has personally heard multiple commentators on CNBC, a cable TV financial news source, routinely parrot this outright lie, at least for anyone who has bothered to look up the facts. But they may have an excuse. Congressman Paul Ryan, widely celebrated for his command of economic and budgetary facts, stated outright that “the majority of those on the minimum wage are young people just entering the work force.” Not so. Eighty-eight percent of those earning the minimum wage are over 20. Their average age today is 35 and “she” is most likely to be a full-time bread-winner for her family.

In citing these facts pulled together by the Employment Policy Institute, The New Yorker magazine also called attention to the most common and persistent argument used against any proposal to increase the national minimum wage level: namely, that it would be a “job killer.”

While it may have been one thing to argue against Roosevelt’s proposal in the late 1930’s as a communist plot, and for Ronald Reagan to link the very idea of minimum wage to the decline and fall of the Roman Empire, the “modern” version now equates fighting off any increase in the minimum wage to the fight against terrorism. A Koch Industries executive told a gathering of high-roller political donors in Dana Point, CA last year that the 500,000 he expected to be unemployed due to an increased minimum wage would constitute the main recruiting ground for totalitarianism, for fascism, even for suicide bomber recruitment.

The tens of millions of minimum wage workers who would benefit from a minimum wage increase (estimates range from 15 to over 25 million) would far outnumber such minimum wage “victims.” Moreover, again the facts belie the lies: research showing that minimum wage increases either have no adverse effect, or have even a minor positive effect on job creation have never been effectively discredited.

In calmer times, it has also been argued that direct tax-system income subsidies to the working poor are a more economically efficient means of addressing the problem of poverty-level wages in a free-market system where businesses should not have to pay more than the “value add” of any worker. Even the godfather of interventionist economic policy, John Maynard Keynes, himself took up this argument for while. (See “The Battle of Bretton Woods; John Maynard Keynes, Harry Dexter White, and the Making of a New World Order”, Benn Steil, Princeton University Press 2013, at p. 82.)

In fairness, this argument is not a lie but a reputable economic theory, which does omit, however the wage-depressing effect of the earned-income tax credit, which in the real world can only be counteracted by some level of minimum wage increases alongside. Moreover, why should the American taxpayer be obliged to subsidize the business plans of McDonald’s and Walmart in a free-market system? Or is the real lie that we continue to believe in the American dream that if you work hard you can get ahead – just like John Boehner, who clearly benefited from minimum wage increases as he was working his way up, even though he denies it. Washington is sometimes an alternative universe.


Recently published on Huffington Post.

By Terry Connelly, Dean Emeritus, Ageno School of Business, Golden Gate University

Terry Connelly is an economic expert and dean emeritus of the Ageno School of Business at Golden Gate University in San Francisco. Terry holds a law degree from NYU School of Law and his professional history includes positions with Ernst & Young Australia, the Queensland University of Technology Graduate School of Business, New York law firm Cravath, Swaine & Moore, global chief of staff at Salomon Brothers investment banking firm and global head of investment banking at Cowen & Company. In conjunction with Golden Gate University President Dan Angel, Terry co-authored Riptide: The New Normal In Higher Education

CNBC – The Lame Duck Network: Shilling For Short Sellers and Hating Obama Are Not Enough Anymore

Daytime ratings for the financial news network CNBC have been in free fall since the summer, when they hit a rock-bottom 21-year low.  The CNBC response, of course, has been to shoot the messenger by firing Nielsen as its rating agency! In fairness, CNBC has a point: Nielsen only logs at-home viewership and the financial news networks all have considerable out-of-home audiences, in gyms, offices and trading floors for sure. CNBC will design its own ratings system using the market research firm Cogent to include its mobile viewers,  while its competitor, Fox Business, sticks with Nielsen, and Bloomberg continues to sidestep the ratings game. But is there something more behind the change in CNBC’s fortunes besides not counting the office and gym audiences? After all, the same audiences also watch Fox and Bloomberg as well.

Just a couple years ago, the beginnings of CNBC’s ratings fall was attributed by some commentators to the allegedly more “liberal” or at least “market promotional” bias of the network.  This despite its history of championing the views of its Chicago commentator Rick Santelli, who was the godfather of the Tea Party and actually coined that phrase during an on-air rant against the then-new Obama Administration’s initiatives to help homeowners with underwater mortgages.

Santelli now enjoys a privileged position in CNBC’s morning programming, including his own “Santelli Exchange” segment that features animated, if somewhat repetitive and predictable, rants against Obama, ObamaCare, federal spending, “quantitative easing,” Central Bankers in general and the US  Federal Reserve in particular, as well as its Chair Janet Yellen and European Central Bank President Mario Draghi. This steady stream of daily invective against Obama and the Fed is amplified by “interviews” Santelli conducts with various market participants and commentators who share (not to say ‘parrot’) Rick’s views.  Typically these “interviews” represent the  views of some Chicago-based  option, futures and bond traders who hate Obama ideologically and have similar sentiments about the Fed , which has taken a lot of juice out of their trading activity by maintaining interest rates next to zero to help the broader (i.e., non-trading) economy recover from the near-depression of 2007 to 2009.

Santelli’s daily stream of invective-laced advice has not generally been beneficial for CNBC’s viewers who may have taken it. Santelli, for example, consistently argued, over several years, that the Fed’s easy money policies regarding interest rates and quantitative easing would have by now produced rampant inflation and a crash in the value of the US dollar, and advised investors accordingly. But in his usual manner he simply screamed and interrupted when CNBC’s only true expert on Fed policy, Steve Leisman, called him out in a live discussion. While Rick apparently simply denied he had made such forecasts, it is clearly on the record that he did (hat-tip to Business Insider).

But Rick Santelli is not the only reason certain viewers may be turning off CNBC, at least those at home (i.e., the retail investor).  Just last Friday, prominent “Fast Money” CNBC regular Guy Adami flatly declared that the US “economy is lousy” despite the most recently reported 5% quarterly GDP growth rate, in order to support his generally anti-Obama and anti-Fed views. Expression of such views is now obviously encouraged on CNBC as led by its key executive editor Patti Domm, who regularly posts blogs such as the one posted early on Friday, January 9 predicting material downturns in the market on the basis of ideological views, generally in line with the Tea Party and short-oriented hedge fund traders’ views of the economic policies of Obama and the Fed.  Beyond Ms. Domm, other CNBC staff writers who regularly post pieces suggesting imminent “corrections” or even crashes in the market include Jeff Cox, whose views seem to coincide with short-selling hedge funds as in his disparagement of the 321,000 November job creation report, which no doubt surprised some short-the-market hedge funds.

CNBC has been tracking Tea Party positions on issues like ObamaCare since 2009. This is perhaps understandable given Santelli’s paternity, but even more, he has been correlating the balance of its market commentary to promote the views of some short hedge funds that bet against the market in 2014 (and were wrong) and who seem poised to double down on that negative view entering 2015,  according to the Wall Street Journal. Not to be outdone, CNBC’s Jeff Cox jumped in a few hours after the Journal to propose that the recent dramatic fall in oil prices would  necessarily lead to poor corporate profits in the coming earnings season. This view, of course, is certainly within the pale of possible outcomes – that’s what makes markets.  But the fact is that you won’t find a contrary view on CNBC, just the negative, which tends of course to send retail investors to the “sell” button: just as when the same Jeff Cox made a similar downbeat prediction just before the 2014 earnings season started in mid-April. It turned out to be a pretty good year for investors who did not sell off stocks despite his advice and for the short hedge funds who profited on the stock market’s way down, and then could buy them up cheap before the stellar earnings reported during the rest of 2014

In short, CNBC should be asking itself why on earth it continues to show such favoritism for the views of market pessimists and short sellers – indeed, even facilitating such traders profit strategies – at the expense of their retail TV audience. Maybe the hedge fund titans take the CNBC folks to some fancy lunches, or maybe they’re mostly just like Rick Santelli who are heavily invested in their Tea Party political views and determined to impose them on its coverage patterns. But at the end of the day, why should anyone watch CNBC for actual market “news” on finance and the economy when the network seems determined to turn off its audience with programming that just mimics the style Fox News and at best helps only the short hedge fund crowd by scaring off retail investors just when the hedgies want them to be scared? If viewers want pure unadulterated negativity, they can get that on the Fox channel.


Recently published by Huffington Post.

By Terry Connelly, Dean Emeritus, Ageno School of Business, Golden Gate University

Terry Connelly is an economic expert and dean emeritus of the Ageno School of Business at Golden Gate University in San Francisco. Terry holds a law degree from NYU School of Law and his professional history includes positions with Ernst & Young Australia, the Queensland University of Technology Graduate School of Business, New York law firm Cravath, Swaine & Moore, global chief of staff at Salomon Brothers investment banking firm and global head of investment banking at Cowen & Company. In conjunction with Golden Gate University President Dan Angel, Terry co-authored Riptide: The New Normal In Higher Education