Why Everyone Should be a Fed Watcher

Heading into Jackson Hole, many financial market participants are eagerly watching Fed Chairwoman Yellen’s every move. As if they are not already, they will be glued to their smartphones and tablets, watching out for any pop up news of Yellen’s speech. They want to know if September is a go.

This go means Fed hikes rates. To profit and loss minded investors, this will be huge news. The rate hike will determine whether the dollar will resume its appreciation, the equity and bond market will deflate, and international markets will slow down. To casual followers of capital markets and the economy, this means that the government believes in the strength of the US economy and maybe their mortgage rates will go up. However, to most people, this means nothing. Whether young or old, they will look up at their TV, stare across at their computers, or swipe away on their smartphones, thinking “I don’t care and this is boring.”

I do not blame them, but I believe everyone should be paying attention to the Fed and this is to their own benefit. The anticipated 25 basis point interest rate hike, when and if it comes, has a butterfly effect on everyone and those who predict it well has the best chance of survival and prosperity. You may think I am exaggerating, but hear me out.

Just like farmers rely on the weather, modern workers rely on the economy. A farmer can be diligent and resourceful with seeds, but if the weather and conditions are bad, the farmer’s crops will go nowhere. Similarly, a modern worker can be hard working and endowed with money or education, but if the economy trajectory and economy are bad, the workers will have very limited success. A new home buyer couple, a college graduate and a middle management dad during the 2008 financial crisis all suffered. The couple ended up overpaying for a house and are stuck paying mortgage for the next 30 years. The student who did everything right, but still fell short of finding a job after school. The dad, who helped the company throughout the year, got laid off because the corporate said so.

As a result, it is easy to see that the weather and economy have a great impact on the farmer and worker. The difference is that good farmers try their best to predict the weather and adapt to different conditions while good workers generally have little understanding of the economy and allow the economy to batter them around without any adjustment or a clue. At this point, one may have two burning questions: what can workers do and how can they predict the economy?

For the first question, it is no different from the farmer. Just like the farmer who foresaw the poor rains this season and decided to plant a less water intensive crop, one should evaluate conditions before making a big purchase or investment. Whether it is buying a house or going to school, people should make sure their plans (crop) fit the economy (weather). If their plans do not fit, then they should be open, if not eager, to change. The ever growing students at coding schools are a perfect example of this change. Perhaps interested by tech or discouraged by their current field, people adapt to learn skills that seemingly will fit the economy. There is no way for sure to know whether this will work out, but it beats the odds of the stubborn farmer who refuses to leave his barren land.

As for the second question, I say watch the Fed. The Fed is not only stacked with brilliant economists and researchers, but also it is tasked with changing the economy (weather). To understand what I mean here, imagine how farmers observe and predict the weather. The Fed is more than just a wise and experienced farmer who watches the clouds, feel the wind, and observe seasonal patterns to predict the weather. The Fed is an Elon Musk like disrupter who will play god to change the weather and economy. The Elon Musk reference is to his proposal to nuke Mars to induce create a sun and warm up the planet for future inhabitants. Well, unless one thinks Fed’s QE is on the level of Elon Musk’s idea, one should just think of the Fed as a modern day engineer who cloud seeds for rain and build dams and levers to control water. (I will stop here because this is not a blog on Fed’s monetary policy channels, communication, and impact) Therefore, by following the Fed, one should be able to understand the current and future trajectory of the economy. Before people were treated as robots and shuffled inside giant factories or office buildings, they paid attention to and adapted to weather. Today, people should take back this skill and pay attention to and adapt to the economy.

Just like sailors do not set sail without checking for storms, people should not live their lives without paying attention to the economy. The captain and crew can pray to their gods all they want and wish for smooth sailing, but the storm will find them if they do not check and prepare for the weather. People can find “the economy” boring all they want, but the economy will find them if they act like it has no relevance to their lives. Fast forward a few 100 years, it is now easy to find any weather information that is timely and accurate. However, information and accurate views on the economy is more difficult. Given there is no app that will tell you everything you need to know about this week’s weather with just a quick swipe, just do your homework and study the Fed.

So is Murph’s brother Tom a good farmer? He is on a doomed planet, but he does switch around his crops…

Moon, Stars, Wage Growth Next?

We all know the cliched saying, "always aim for the moon, even if you miss, you will land amongst the stars." This saying usually applies to parents who are trying to motivate their children, but it is increasingly taking shape in the economic and finance world. I got the idea reading the diplomat's coverage of the World Bank President, Dr. Kim. Dr. Kim aimed for the moon with his "3-by-5 pledge." He states that he aims to treat 3 mn people in developing countries with an anti- HIV/AIDS drug by 2005 during his tenure at the UN. The pledge ended up being unfulfilled, but the 3 mn target is reached in 2007, earlier than previous expected. Kim says his policies worked because "you have to set a really difficult target and then have that really difficult target change the way you do your work.” He has employed the same philosophy at the World Bank, but tackling poverty's causes and effects simultaneously is a very difficult challenge. Needless to say, he has yet to "land amongst the stars" at the World Bank.


This idea has also played out in industrial policies. South Korea's Park Chung Hee implemented policies that led to Korea's future industrial dominance. South Korea is now market leaders in steel, shipbuilding, autos, chemicals, and electronics. By striving to reach difficult output or export targets, chaebols were pressured to make significant breakthroughs in short amounts of time. This achievement did not come easily since the foreigners, importers, consumers, and laborers' interests were sacrificed in the process, but they did it. Though they often missed out on short term targets, the difficult goal helped them move with more urgency in improving their operations, technology, and management. This all sounds well and good, but China under Mao was a different story. Ambitious targets to beat US and UK in steel output during the Great Leap Forward led to disastrous outcomes. Drunk with hopes of a new China, wishes for a egalitarian society, and spells of Mao's cult of personality, people dived into this project with fervor. Seemingly overnight, useful bicycles, cookware, and machinery were dumped into giant furnaces and turned into giant heaps of metal crap. Great Leap Forward's bold goals were equivalent to aiming for mars, but China did not land among the moon or the stars, it landed into an era of shortage, starvation, and social upheaval.

Increasingly, this idea has expanded to foreign currency and inflation. Taiwan, the lagger in the four Asian tigers, has failed to meaningfully upgrade its manufacturing industries. Sure TSMC is a big name, but Taiwan has performed below its potential and created fewer competitive firms than expected. One criticism is that the central banks' cheap currency policy has shielded exporters from competition and deprived them of the urgency to upgrade. Recently the central bank has even released a 33 page report responding to a magazine critical on the central bank and its foreign exchange policy. In Japan, academics like Paul Krugman are calling for a 4% inflation target in Japan; the higher inflation rate is expected to help reflation policies since a failure to hit the target will still result in inflation higher than that of today's 0.7%. This policy also gives the government cover for much bigger forms of monetary policies. These talks seem tantalizing, but foreign currency and inflation targets are complicated and policy makers will always err on the side of caution. Considering it is difficult enough to maintain the status quo rather than improve the current situation, do not expect much aiming for the moon.

One part where the cliched saying may evolve next to is in wage hikes. Seeds planted from the 2008 financial crisis has grown to many social movements. From the on start of the Occupy Wall Street movement to Bernie Sanders and Donald Trumps' rise, economic inequality has played a big role. At the moment, given US's high debt and overall political leaning, wage hikes rather than welfare is a more realistic situation. In a country built by self-sufficient and dreamer immigrants, working to help one escape poverty is an acceptable narrative. As the likes of Wal-Mart laud the positive business effects in paying their employees' above market wage and Dimon announces wage hikes at JP Morgan, more meaningful wage hikes has gradually turned into expectation. Furthermore, as cities around the country, from LA to SF to NYC aim to raise wages to $15 an hour, this movement just keeps on growing.


Despite this trend, there is no lack of opposition. Citing price and quantity crosses featured in economic 101 courses , economists believe that wage hikes will decrease overall employment. This economic law is sensible and logical, but the price and quantity cross is not everything. The supply and demand curves are dynamic and next to impossible to capture in frameworks that assumes "ceteris paribus," or everything else the same. However, the louder the critics sound off alarms on wage hikes' negative effect on employment, the less likely cities and corps will stand idly watching their jobs flow out or payroll bloats up. In anticipation of wages hikes' effect on lower employment, cities and companies may compensate for this by adjusting policies to create more opportunities or productivity. Local governments may remove previous red tabs; companies may use new methods to increase productivity. Overall, despite the set backs, perhaps the wage hikes will be a disruptive force that leads to positive shifts in the supply and demand curves rather than a mere change in the price and quantity cross points. I do not have a good way to validate this narrative one way or another, but I do wonder if wage policy will become the next hot bed for the "aim for the moon and land amongst stars" philosophy.