Guest Post: Second Quarter Economic Commentary by Dorothy Jaworski

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 5^th 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!

Thanks for reading!  07/06/15


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.

Guest Post: First Quarter Economic Commentary by Dorothy Jaworski

Two brutally cold winters in a row!  By this time, we have all had enough of the cold, the polar vortex, the snow, the freezing rain, the ice, and the potholes that are left on our roadways to harass and frustrate us.  At least we are not in Boston.  We need a change of seasons!

A New Year of Volatility

2015 ushered in a whole new season of volatility in the bond and stock markets.  Stocks have seen a large number of trading days with price changes greater than 1% and coincidentally, the Dow and SandP averages are up year-to-date by about 1%.  Longer term interest rates have moved by large amounts in short periods of time.  Witness the 10 year Treasury note- its yield dropped by 0.50% in January to 1.68%, rose by 0.33% in February to 2.01%, rose to a short term high of 2.21% on March 9^th and dropped back to 1.94% for the end of March.  Investment decisions and timing are unusually difficult.  US bonds are also whipsawed every time a geopolitical event rocks the newswires, such as growing Middle East conflicts, ISIS fighting, and the Russia-Ukraine situation.

Speaking of the change in seasons, the Federal Reserve seems determined to begin their own season of change by raising interest rates.  Some Fed officials want to raise rates regardless, saying rates are just too low with an unemployment rate of 5.5% and should be returned to “normal.”  It has been nine years since the Fed last tightened policy in June, 2006; maybe they are getting anxious.  However, some officials, including Chair Janet Yellen, want to keep letting the economy and the data lead them to raise rates if necessary, but to keep rates low if necessary, too.  Just last week, Chair Yellen addressed the slow GDP growth that we have experienced for the past six years of our so-called recovery, which has been anything but “normal.”  She acknowledged studies that suggest that future GDP growth will also be painfully slow due to changing demographics and low productivity.

This slow growth, despite the low 5.5% unemployment rate, would cause the Fed to keep rates at the current low levels for an extended time period.  The studies suggest stagnation much the same as what Japan has experienced in the past twenty years, where zero interest rates and central bank easing campaigns failed to stimulate growth.  Here in the US, short term rates have been at zero since December, 2008 and countless rounds of forward guidance and trillions of dollars of bonds bought by the Fed in QE programs have failed to push our growth rate much above +2.0%.  In 2014, our GDP growth was +2.4%; in the fourth quarter, it was +2.2% with real final sales rising only a measly +0.1%.  The so-called recovery that began in June, 2009 has produced growth rates only about one half of “normal” recoveries since WWII.

Oil Steals the Show

The biggest story of the past year in the markets has to be the plunging price of oil, down 50% in 2014 to below $50 per barrel.  The US has led the world in energy and oil production from its shale and fracking operations.  Suddenly, the extent of excess supply became apparent.  Weak demand for oil from struggling economies in China, Japan, Russia, and Europe, almost assures continued excess supply in 2015.  Falling oil prices, and falling gasoline prices, are like a welcome tax cut for consumers who are saddled with low wage growth and lack of good jobs.  Many people, including myself, thought that the drop in gas prices would lead to higher consumer spending, perhaps even more than the amount they save when filling their gas tanks, but this has not been the case.  Spending has been weak since December and the savings rate has risen to 5.8%, which is the highest since December, 2012.  Energy companies moved to cut production and investment to align to the new $50 per barrel reality and, in the process, would cut jobs.  Since the US is now a larger producer of energy in the world markets, the effects are being felt here at home as well as in OPEC countries and Russia. 

Stock market volatility began after the plunge in oil prices, as fear of the effects on energy companies emerged.  Bonds recognized something else- the reality of falling inflation- and the prospects that inflation is expected to be lower in the next several years.  Year-over-year CPI was flat in February, 2015; there has been only one year-over-year decline since 1955 and that happened at the height of the financial crisis in 2008.  This brings me back to the Fed- slow growth, low inflation- is that a recipe for raising interest rates?  I think not.  But if they do raise rates, they will control short term rates.  Long term rates will still be driven by inflationary expectations and should stay low.  Will the Fed manipulate long term rates by selling some of their accumulated $4 trillion of QE bonds? 

Strong Dollar

While we weren’t looking, the US dollar strengthened by 20% in the past year.  This strengthening is cited as one of the factors that contributed to falling oil prices, since oil is usually denominated in US dollars.  A strong dollar serves to ultimately hurt our exports, and thus our GDP growth, while keeping imports attractive and import prices low.  This is another factor that will be considered by the Fed; a strong dollar will support lower interest rates as demand for US securities increases relative to the bonds of other nations.

So will the Fed raise rates in 2015?  Only they know for sure.  I try not to make bold predictions anymore, because just when you think you can throw a one yard touchdown pass, some guy comes out of nowhere and intercepts it.  Many of the Fed officials keep saying rates should be increased because they want to raise them.  Maybe they will; maybe they won’t.  But I do believe that, if they do, they will be lowering them a few meetings later.  The economic growth we have is too slow and is perhaps unsustainable, wage growth is low, inflation is even lower, and the dollar is strong.  When I enter those key inputs into my formulas, the result is lower rates, not higher ones.  Maybe Janet Yellen’s own words from her speech last week tell it all:  “The tightening pace could speed up, slow down, pause, or reverse.”  If you know what she is going to do, let me know!  Stay tuned!

Thanks for reading!  03/30/15        

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.

Guest Post: Year End Economic Commentary by Dorothy Jaworski

2014’s Biggest Surprise

It never fails.  The markets provide us with completely unexpected surprises and leave us scrambling to update our projections for rates and economic growth.  And so it was in the latter part of 2014.  Oil prices began a massive plunge, down 46% for the year to $53 per barrel.  And who expected this?  Well- no one.  Now we all have to adjust to this new reality.  What are the implications of the crash in oil prices?  And why did they plunge?

We all have been reading for years how the United States was dramatically increasing energy production, especially from a method of extracting oil and natural gas in shale regions of the country known as hydraulic fracturing or “fracking.”  Suddenly the US was the world leader in oil production.  Suddenly the world realized that there was a supply glut.  OPEC members and Russia stand to suffer the most from lower oil prices, but have continually sworn to keep production at current levels, perhaps using low prices to stall US investment and production.  While the US economy is growing slowly and steadily, this is not the case in China, Europe, and Japan, who are experiencing low growth, no growth, and outright recession, respectively.  This is a recipe for weak demand which, when combined with a supply glut, means lower prices.  Also, the US dollar has been strengthening, with a 12% increase in 2014, further pushing oil prices lower as oil is typically traded as a dollar denominated commodity.

Think back, too, as to when oil prices were close to $100 per barrel earlier in 2014.  Geopolitical tensions were running rampant as fighting was ongoing in Israel-Gaza, Russia-Ukraine-Crimea, and Syria with ISIS stepping up as a huge threat.  Supply disruptions were the typical fear but the tensions have since subsided.  These tensions could reappear if unrest rises in Russia, Iran, Saudi Arabia, Venezuela, and other countries that are highly dependent on oil for revenues.  Now US consumers can be the biggest beneficiary of falling gasoline prices, which recently peaked at $3.69 per gallon in April, 2014 and ended the year at $2.23.  Consumers rejoice!  And don’t forget that heating oil prices have plunged, too, just in time for another polar vortex.  I have always believed that cheaper oil and gas prices are like a tax cut that helps consumers save money on their “taxes” and spend it on other discretionary goods and services.  I was gratified to hear Janet Yellen reiterate this same point.  Consumer can and will rejoice and spend.  Economists revised their projections to include new assumptions that consumers will save between $70 billion and $100 billion annually on gas and will spend most of the savings, perhaps increasing real GDP by at least a net +.5%.  Yeah, finally!  A 3% GDP number! Happy 2015!

The Economy in 2015

Most economists were projecting +2.5% in real GDP growth in 2015, prior to the windfall from plunging oil prices.  As mentioned, they have increased projections to +3.0%.  Over the past five years, GDP has averaged +2.2%, which is quite disappointing compared to the average growth of +4.6% for the past ten recoveries.  If we make it to +3.0% in 2015, it will be the first time in six years of recovery that we have touched +3.0%.  Perhaps that is why former Federal Reserve Chairman Alan Greenspan just proclaimed that “we still have a sluggish economy,” which will not fully recover until there is more investment in long lived, productive assets and the housing market recovers.  Despite all the euphoria over a lower unemployment rate of 5.8% (down in 2014 from 7.0%), the fact that many of the jobs created have been part-time, lower wage ones and many experienced workers are dropping out of the labor force.  I do see millions of jobs being created in 2015, but still many are part-time, thanks mainly to Obamacare and other regulations.

Who projected that interest rates would fall in 2014?  Well- no one- except maybe Dr. Lacy Hunt of Hoisington Management, who has been on top of trends most of us do not see.  I read his quarterly newsletters with great interest and you should, too.  The ten year Treasury yield topped 3% at the end of 2013 and fell to 2.20% by the end of 2014.  Why?  Falling inflation and falling inflationary expectations will do the trick.  Falling inflation confounds the Philips Curvers, who read their textbooks and expected higher inflation from the falling unemployment rate.  I’ll bet John Taylor is a little upset, too, with trying to use inflation in his Taylor Rule formula.  Weakness in most world economies other than the US is keeping inflation under control with weak demand- especially as seen with commodity prices.  US rates continue to be substantially higher than rates in Europe and Japan with less risk.  That upsets me, because it is not normal.  Yet, the Federal Reserve stubbornly continues to proclaim that they will raise interest rates by mid-2015.  I say, go ahead.  The Fed will just end up lowering them shortly thereafter when they realize they have tightened prematurely.  New York Fed President William Dudley recently warned of just this risk, when he spoke of the historical classic case of premature tightening in 1937 by the Fed, when recession and deflation followed.   

Risks to Growth

I’m an optimist at heart, but I feel obligated to point out the risks to economic growth.  Measuring and managing risk has been my specialty in a banking career that is now 40 years old, of which 29 years have been spent dealing with risk.  The aforementioned risk of a Fed policy error of premature tightening tops the list.  Economies around the world are struggling and their policy makers are still easing monetary policy, making the spread between US rates and those economies’ rates unnaturally wide.  The ever rising US dollar could contribute to weaker and weaker currencies around the world, leaving countries to struggle and have to raise rates.  We have geopolitical (the word made famous by Greenspan in the early 2000s) risks of war, terrorism, epidemics such as ebola and influenza, and cyber attacks.

And there are two more risks that are not getting a lot of press- deflation- which can lead to deferred demand, declining wages, and slowing GDP- and liquidity risk- where restrictions and regulations have nearly strangled the life out of financial institution market makers, who seem increasingly unwilling or unable to take bonds into inventory and hedge them, instead opting to act like brokers, taking too much time to execute trades and too wide a bid-ask spread.  Market makers are not alone in this regulatory nightmare; 79,000 proposal and final rule pages were published in the Federal Register in 2014 affecting all industries, with a cumulative total of 468,500 since the recovery began in 2009.  Once again, I digress.  But, that’s what I am here for.  Stay tuned!  

Thanks for reading!  01/05/15


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.

Guest Post: Third Quarter Economic Commentary by Dorothy Jaworski

The Bond Guru Switches Teams

The surprise of September was the abrupt departure of the Bond Guru, Bill Gross, from PIMCO, the company that he helped found forty years ago.  Shock went through the bond markets, especially at

PIMCO, who found out about Gross’ exit along with the rest of us.  Between the September 26^thsurprise announcement and October 2^nd, investors pulled nearly $24 billion from PIMCO funds and ETFs.  There is no way to know exactly how much money will ultimately move and land with Bill at Janus Capital, his new home.  And he doesn’t even have to stray far from the beautiful beaches and leisurely lifestyle of Newport Beach, California, because Denver-based Janus is opening an office in Newport Beach, California.  How about that?

She’s Getting Better at Press Conferences, But…

The Federal Reserve has let the talk of rising interest rates hang over the markets like a fog.  We have seen several restless Fed governors, who keep dissenting to the Fed’s statements on policy to keep rates low for a “considerable time.”   Many in the markets thought that the Fed would drop these words from the September statement because they act like a promise to the markets, but the Fed retained them.  Following the meeting, Janet Yellen gave her press conference.  She was repeatedly asked about the words and their meaning and she kept saying over and over again that the Fed’s moves are “data dependent.”  She was not very convincing.  She could have said that returning to “normal” is taking longer than expected and the market projections that rates will rise in the middle of 2015 is about as good as any right now.  Markets build in assumptions for short term rates and this impacts long term rates, of course along with inflationary expectations.  She could have used some coaching to reassure investors.

Growth and Inflation

One would have to question a Fed that would raise rates when the US economy is the only one of the four largest world economies that is displaying any growth, albeit at a very slow 2%.  China, Japan, and Europe are all struggling.  Remember that we are five years in this recovery and we are only managing 2.2% average growth, compared to 4.6% after the prior ten economic recoveries.  Inflation is falling along with many commodity prices (except for gas prices, but I digress).  In China, consumer price inflation is -2.0%, in Europe, it is +1.0%, and here in the US, it is +1.7%.  It would not be unprecedented for the Fed to raise rates with falling inflation, as happened in 1994, but it would be unusual and fairly shocking.

Geopolitical tensions abound in the Russia-Ukraine conflict, Syria, Iraq and a US led group of allies fighting against the evil that is ISIS, and the Israel-Palestinian fighting.  The threat of the spread of Ebola is increasing tensions as well.  This is not an environment that screams for rates to rise; reality may be quite the contrary.

The Unemployment Rate

Much of the fear of Fed tightening springs from the decline in the unemployment rate to the Fed’s “goal.”  For the month of September, the unemployment rate fell to 5.9%, within the NAIRU band quoted by Fed Chair Yellen in her press conference.  NAIRU, or the non-accelerating inflation rate of unemployment, is the unemployment rate below which inflation will rise.  Oh, Phillips curvers, where have you been?

I have a couple comments when I look at the drop in the unemployment rate over the past two years.  First, the drop has been caused more by workers dropping out of the labor force than from job creation.  Job growth has established itself at an average above 200,000 per month, which is fairly good, but well below the pace of other recoveries when the economy was so much smaller.  The labor force participation rate has dropped to 62.7%, the lowest since 1978.  It is not just retirees lowering the rate, but it is young people, too.  Those Not in the Labor Force now total 92.6 million, which is a record.  Many of the jobs created are lower level or part-time, so wages are not rising dramatically.  I cannot believe that productivity will benefit from the structural shifts that we are seeing in employment and I believe we will continue to see sub-par growth in GDP.  I saw this quote on Bloomberg in September and it resonates:  “The economy always appears stronger if you ignore the weakness.”

Cybercrime

Speaking of productivity, we are in the midst of another period where we will pour trillions of dollars of our precious earnings into protecting our computer systems and networks from the scourge of hacking.  I have listed this as a risk to the economy in the past but I didn’t realize the extent to which cybercrime would reach new heights.  The evidence was revealed by JP Morgan in the first week of October.  Hackers got into their bank systems and stole names, addresses, and email addresses (but supposedly not account data) of 76 million households and 7 million businesses.  No system is sacred anymore.   Witness the Acme announcement of a major hack at their stores recently.  We are just getting over Home Depot’s admission of 60 million credit and debit card numbers being stolen over the course of months, eclipsing Target’s data breach.  So, nothing is sacred online.  The complete waste of time and money is an ever-increasing drag on GDP.  Add this to the purported estimates of regulatory costs of $1.86 trillion on our economy, and 2% growth seems like a gift.

Our Bank’s Senior Vice President of Deposit Operations and Information Technology, Karen Shinn, knows all too well the risk and costs of these breaches to banks.  She works continuously with our vendors and has implemented fraud detection tools to protect our customers’ debit cards.  But customers can work closely with the Bank, too, by being vigilant about their personal information and by notifying us right away about any unusual activity.  Hacking prevention and network protection expenses will continue to filter into the costs of every company.  Maybe this will be the inflation that the Fed and ECB so desperately desire.

Last Word

Dr. Charles Plosser, President of the Philadelphia Federal Reserve, recently announced his retirement as of March, 2015.  Thank you for all that you have done for our Philadelphia region over your years here!

Thanks for reading!  10/09/14



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.

Guest Post: Second Quarter Economic Review by Dorothy Jaworski

Summer’s Here

We are all thankful that summer has arrived!  Heat and humidity!  And no one complains!  After the brutally cold and stormy winter, stuck in the perpetual polar vortex, no one dares to complain.

Our winter mood was brutally apparent in the GDP report that was released for the first quarter of 2014.

Actually the report comes out three times with a preliminary report, a revision, and a final report.  The Bureau of Economic Analysis, or “BEA,” a part of the Commerce Department provided their preliminary peak at 1Q GDP at the end of April.  GDP was reported at -.1%, they said.  Hey, great!  That winter wasn’t so bad after all…The second release at the end of May came in at -1.0%.  Wait!  That winter was bad.  Business just didn’t replenish inventories…Then came the shocking final report at the end of June showing -2.9%!  Wait!  The economy was so bad, the weather was so bad, consumers did not spend…

This is supposed to be an economic recovery.  In fact, it is now five years old.  And we get a terrible quarter like that?  What is going on here?  I will tell you that the change from -1.0% to -2.9% by the BEA was the largest downward revision since this GDP methodology was developed in 1976.  And do some math- if GDP grows at 3% (by some miracle) for the rest of 2014, GDP will average 1.5% for the year!  Plenty of excuses accompanied the final report, but I am not completely buying them.  I sum up the revisions by the BEA with a thought from Mike Flynn (06/30/14):  “If you torture economic statistics long enough, they will confess to anything.”

What’s Really Going On

I am still of the view that our economy will continue its growth path at 2% to 2.5%, well under its normal recovery speed and well below its potential.  Numerous regulations burdening all industries and higher capital requirements for the banking industry will weigh down growth.  Investors’ Business Daily has estimated the annual cost of regulation at $1.86 trillion.  Just think about that number as it relates to $17 trillion in annual GDP.  Consumer spending tanked in 1Q14, but should rebound in 2Q14.  Remember the spike in electricity prices in January and February?  That put consumers in a bad spending mood.  Gas prices began a slow climb in 1Q14 and the increases have not yet abated.  Gas prices have passed $3.70 per gallon and are up 12% year-to-date.  I’m outraged, aren’t you?

Having just read an article on Bloomberg that the US has now surpassed Saudi Arabia and Russia with average daily output of 11 million barrels of oil in 1Q14, I would have thought that the concepts of supply and demand were still alive.  Due to the fracking boom (extracting energy from shale rock by using high pressure liquid to split rocks and release oil or gas) has made the US competitive in the energy industry again and there is little impact to reduce our prices?  That leaves me outraged!  Will we approach our all time high gas prices of $4.11 per gallon from July, 2008 and $3.99 in May, 2011 soon?  At both of those times, consumers reached a tipping point where spending fell on most discretionary goods as a result.

Employment

Recent employment reports have been increasingly positive, showing the potential for GDP improvement. The June report showed that 288,000 jobs were created.  The unemployment rate fell to 6.1% in June from 7.5% one year earlier.  Many of the jobs being created are low paying ones or are part-time.  The proportion of part-time jobs to total jobs is now at 19% compared to 17% in 2008.  People dropping out of the labor force have certainly contributed to a falling unemployment rate; Those Not in the Labor Force rose again in June to a record 92.1 million.  The labor force participation rate is still at a 30 year low at 62.8%. These two statistics speak volumes- we are losing the productivity of a great number of persons, probably very experienced ones.

To know if interest rates will rise soon, or sooner than the market expects, my advice would be to watch the Yellen Dashboard on employment and pay attention to whether the measures are improving over pre-crisis ones.  The markets expect the first short term rate increase in mid-2015 and this is built into the futures markets.  The Fed has already indicated that they will be ending the QE program by the fall of 2014.  It is my view that the program initially worked, but in 2013, the Fed lost credibility with it and had to begin to unwind it.  And, as always, watch inflation, too.  It is still tame and at or below Fed targets.

The Economy

Yes, our economy is resilient, but five years into a recovery, growth of about 2% is well under our potential. Since the recovery began in June, 2009, real GDP has averaged +2.2%.  In the ten previous recessions, real GDP averaged +4.6%.  I do think we will continue to grow around 2%.  Hiring is up, albeit with lots of part-time jobs.  Average hourly earnings are up to $24.45, which is an increase of 2% in the past year. Consumer spending may not be much higher than 2% as borrowing to supplement spending is not as prevalent as it was before the 2008 crisis.  Technology is advancing and aiding productivity growth.  Stock markets are reaching new highs with the Dow Jones average at 17,000 and the S&P 500 approaching 2,000, with a PE ratio of 15.7 times.

We would love to grow exports but Europe and Asia’s economies are fairly weak.  I may have to personally go to Europe and investigate!  The European Central Bank, or “ECB,” just lowered rates again and this time tested negative interest rates, at -.10%, on bank reserve deposits.  Speaking of other parts of the world, the unrest and fighting in Iraq, Syria, Israel, and over in the Ukraine make for a very uncertain world indeed.  In the US, children and immigrants from South America are flooding through our borders in huge unmanageable numbers.  Uncertainty is often the enemy of economic growth.

As always, take heed of the roadblocks to higher growth (the Fed calls them headwinds) - high gas prices, regulatory burden, weak world economies, low income growth, uncertainty, and bad pothole repair!  Stay tuned!

Thanks for reading and Happy Summer!  DJ 07/09/14

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.

Guest Post: First Quarter Economic Review by Dorothy Jaworski

Spring-At Last

We are all thankful to leave the brutal winter of 2014 behind, especially the polar vortex! The constant barrage of snowstorms was mind numbing. The ice storm that hit our region (Philadelphia Region) with damage and over 700,0000 power outages was perhaps the worst storm. I missed being on the eastbound Pennsylvania Turnpike by 30 minutes on February 14th. For that, I am truly thankful. The lost productivity cost our local economy greatly. and the lasting legacy of potholes will keep drivers on their guard for months!

But it is pring and a new beginning. The equity markets are reaching new highs, expecting the economy to emerge from the deep freeze in the first quarter. GDP is expected to rebound from 1% to 1.5% in the first quarter to its "normal" mediocre growth rate of 2% to 2.5% in the second quarter.

Long term interest rates remain near their highs of last year, with the 10 year Treasury trading around 2.75%, as a result of the Federal Reserve tapering of their QE bond buying program. The bond markets unwound the benefits of QE during 2013, so it quickly became apparent to the Fed to reduce it. Rates would be much higher today if the economy was expected to grow more than the rates I indicated here. Markets are ignoring would events, such as Russia's annexation of Crimea, further unrest in Ukraine, earthquakes, and the missing Malaysian Airlines Flight 370.

We have a new beginning at the Federal Reserve, too.  Janet Yellen was sworn in as the first female Fed Chairwoman and she is expected to rule an empire in the same traditions as her two predecessors, the Maestro and Big Ben.  She worked for both men and is a fan of each.  She is a proponent of studying the data and is not fooled by numbers that do not provide the full picture of economic health, such as the unemployment rate.  She learned her first lesson at her first press conference.  When asked to define “considerable time,” she blurted out “six months or that type of thing” without thinking.  What?  “Considerable” is that short?  Bernanke always implied it was years!  Bond markets quickly adjusted to rate hikes sooner than expected.  I don’t think she meant that at all.  Nearly five years into our “recovery,” she knows that she must keep short term rates low to improve employment and prevent inflation from getting too low.  She knows if she tightens too soon, economic growth could stall.

Cautious Growth for 2014

We still expect that GDP growth for 2014 will be between 2% and 2.5% nationally.  Once the country recovers from the brutal winter in most parts of the US, growth will resume but uncertainty will remain, as businesses and consumers adjust to the new healthcare laws, regulatory burden, and general discomfort with the economic outlook.  Many of our bank customers remain reluctant to borrow and spend on large projects.

The Federal Reserve released their updated economic projections on March 19, 2014.  Generally, they lowered their GDP projections for this year and the next two slightly, kept their inflation forecasts about the same- still at 2% or below, and lowered their unemployment rate projections due to structural problems with the rate falling from persons exiting the labor force and lower paying jobs being added.  They slightly raised their Fed Funds projections, including an earlier increase of the Fed Funds rate from the prior December projections.  The market interpreted this as tightening sooner than had been built into the term structure.  Janet Yellen, when asked directly about this change in the scatterplot, stated that we should “ignore” it and pay attention to Fed statements released after their meetings.  Here we are- back to the good old days when everything the Fed says is vague!

Fed QE Programs

I am of the opinion that the QE bond buying programs served to reduce long term rates and were initially successful.  During 2012 and 2013, long term interest rates, including mortgage rates, fell and contributed to an improvement in the housing markets, allowing home price increases to gain some momentum and prompt the new construction markets to improve.  Then, the Fed mishandled their message on QE early in 2013 and the markets abruptly removed its favorable impact, sending long term rates soaring over 100 basis points.  This type of increase is very rare in a declining inflationary environment, but we live with it.  With the markets having removed the benefits of QE, the Fed began “tapering” the program, which started at $85 billion per month last year and is now at $55 billion per month.  Markets expect the Fed to continue reducing purchases by $10 billion per month until it is down to zero- in October or November, 2014.  So our question to Janet is:  What will you do if the economy stalls and you need to ease?  Her answer:  More QE!

By the way, Europe is about the start up a QE bond buying program for the first time- to the tune of $1 trillion Euro to help the struggling economies, where growth turned positive, but only by about +.5%.  Mario Draghi, the head of the European Central Bank, is revealing his plans to the International Monetary Fund for buying sovereign debt, or maybe even private debt!  Later, he will make a public announcement.  The European markets are abuzz with speculation, but it will not be the first time Draghi has proposed something big and not followed through on it.  Yeah, like negative interest rates, Mario!  Stay tuned!

Discovery of the Waves

Albert Einstein predicted in 1915, in the general theory of relativity, that the universe contained gravitational waves, left over from the Big Bang billions of years ago.  A second theory developed in the 1980s predicted these waves as part of a process known as cosmic inflation.  An instant after the Big Bang occurred 13.8 billion years ago, the universe expanded exponentially, inflating in size trillions and trillions of times.

An announcement by the Harvard-Smithsonian Center for Astrophysics in Massachusetts on March 18, 2014 stated that researchers have discovered the gravitational waves, confirming both theories, by looking through telescopes on the South Pole.  This is another monumental breakthrough in understanding the universe, after the discovery of the “God particle” by the Large Hadron Collider team in Switzerland last year.  Yeah, now we know!  Now, if we could only predict interest rates!

Thanks for reading and Happy Spring!  DJ 04/07/14

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.

Guest Post: 2013 Economic Year in Review and Outlook by Banker Dorothy Jaworski

We’ll Miss You, Ben

Now that the holidays are over, it is time to recognize that January, 2014 marks the last month as Federal Reserve Chairman for our favorite helicopter pilot, Ben Bernanke. He was just in Philadelphia on January 3rd delivering his last public speech and he nostalgically proclaimed that “the recovery remains incomplete,” which will qualify his comment for the understatement of the year award. 

Despite his heroic efforts, including a Fed Funds rate near zero for the past five years, forward guidance, scatterplots, press conferences, a new “openness,” and his trillion dollar QE bond buying programs, economic growth has not returned to “normal.” Our student of the Great Depression tried everything. He succeeded in saving us from true disaster in 2008, but has not been able to accomplish his goal of strong economic growth.

To put that GDP growth into perspective, consider that, in the three years following the recovery which began in June, 2009, real GDP averaged +2.2%. In the ten previous recessions, real GDP averaged +4.6% during a recovery. This helps to explain the Fed’s continued easy money policies, stretching now into year six. It also helps to explain my constant whining about sub-par growth!

Ben, we will miss you tremendously when you ride into the sunset on January 31st and we eagerly anticipate the reign of your successor, Janet “She Devil” Yellen. She will continue your zero rate policy and will “taper” your QE 3 program, because the markets have already dismissed its impact and tightened long term rates despite your wishes.

Incidentally, your QE 1 to 3 programs ran for six years, accumulated three trillion dollars of securities, and pushed long term rates lower when your forward guidance could not do so. But in nine short months of 2013, you and the Fed stumbled with mixed signals and miscommunication and the markets pushed the 10 year Treasury yield up by 130 basis points to 3.00%, removing all of the good attained by QE over the years. 

This anomaly occurred despite inflation readings that are trending downward in both the producer and consumer price indices. Mortgage rates rose just as much and they may potentially damage the housing market recovery. Another anomaly continues in that the 3.00% yield on the 10 year Treasury is much higher than the dividend yield on the S&P 500 index of 2.15%. Stocks are supposed to have more risk. That is all I will say on stock markets, because they usually sell off once I write in depth about them, although PE ratios are fairly average and don’t call for huge correction. It shows that while the Fed may have a tight grip on short term rates, the market will decide long term ones.

Cautious Growth for 2014

We expect that GDP growth will continue in a cautious mode in 2014, likely between 2% and 2.5% once again. Many of our bank’s customers remain cautious about borrowing and spending on large projects. Many businesses remain uncertain due to the increased regulatory burden, the drama in the insurance markets due to Obamacare, income tax changes, and a still high unemployment rate at 7%, which serves to keep personal incomes in check and consumer spending under wraps.

Despite the “headwinds” mentioned above, the Federal Reserve has very optimistic GDP forecasts for future years, with 2014 at 2.8% to 3.2%. The National Association of Business Economics, or “NABE,” is almost as optimistic at close to 3%. Some of Wall Street’s brokers expect more moderate growth, with Sterne Agee at 1.7% to 2.3% and Janney Capital Markets at 2.1% to 2.5%. 

I find it interesting that these same forecasters expect continued drops in the unemployment rate, with the Fed lowest at 6.3% to 6.6% in 2014, yet growth is not even returning to the normal post-recession pace of 4.6%.

That is because the unemployment rate itself is also an anomaly, having fallen from above 8% in the third quarter of 2012 to 7% in November, 2013, mostly from people dropping out of the labor force and not from the measly pace of job creation, whether viewed from the payroll or household survey. The labor force participation rate has fallen from 66% pre-recession to 63% currently. The primary aggregate impact on the economy of this difference of 3 million workers no longer participating in our labor force is reduced income and thus, reduced purchasing power.

And So…

And so, we find ourselves over four years removed from the end of the last recession, a time when most recoveries would be ending, and this one has barely begun. The data as of late has continued to improve. Real GDP grew by 4.1% in the third quarter of 2013, but the strong growth numbers were the result of huge inventory building, to the tune of nearly $116 billion annualized. No wonder retailers were slashing prices for the Christmas holiday spending season. 

This high GDP number aside, we still have slow growth and structural changes occurring in our workforce, resulting in less income, less spending, and more incessant whining by me. 

Businesses are still cautious in capital spending. Several wild cards may improve growth—such as energy availability and prices, improvement in overseas economies in Europe and Asia, and our new Fed Chairman, Janet Yellen, who should follow the low rate policies. And so, all of this adds up to cautious optimism for 2014. 

Our Philadelphia Eagles excited us and made us optimistic that their 2014 will be bright. We can be proud of what they achieved this year under new coach, Chip Kelly. I keep thinking back to the Phillies playoff loss in 2007, which taught them “how to lose” before they came back strong and won it all the following year in 2008. Just saying... 

And so, as I finish writing this, the polar vortex is about to give us two of the coldest days and nights in over twenty years. But we count our blessings; it will be back above freezing in a few days.

Stay tuned!

Thanks for reading and Happy New Year!  DJ 01/06/14

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.

Guest Post: 3rd Quarter Economic Review by Dorothy Jaworski

QE3 Taper—Never Mind

If you are a fixed income investor, you are still shell shocked. Throughout the summer, the great bond market selloff of 2013 continued on. Treasuries, Agencies, mortgage backed securities, corporate, municipals- all were battered because the markets believed that the Federal Reserve was about to cut the amount of, or “taper,” its $85 billion of monthly purchases of long term bonds.

The Fed had been telegraphing a taper since April and May, when Bernanke and the Fed governors began giving mixed signals. By the time the September FOMC meeting arrived, 100% of Wall Street believed the taper would be $5 billion to $20 billion per month. What did the Fed actually do? Nothing. Well, never mind!

So why did the Fed decide not to taper QE3? I can see five reasons: 1) the government shutdown and its negative effect on GDP was looming, 2) data releases had become weaker, including housing data, and job growth was weakening, 3) the markets had already tightened long term rates, as unwelcome as that has been, 4) the velocity of money remains at a 50 year low, and 5) a nascent upswing in consumer and business loans this year could be cut off, reverting to deleveraging. The Fed’s own mixed messages caused the extreme selloff. They have no one to blame but themselves.

Europe

We landed on the shores of Europe in August. What we experienced was the vacation of a lifetime. What we saw were beautiful old cities, castles on the riverbanks of the Rhine, breathtaking cathedrals, and the wonders of Paris and the friendship of citizens of the small towns near Metz. What we know is that we will go back. What we felt and learned was that the European people are confident that the worst of the recession is over in Euroland.

GDP reflects that, too, as Europe’s economy grew by +0.3% in 2Q13 and is expected to grow by +0.2% in 3Q13. Perhaps part of the reason for our bond market selloff is that the flight to quality due to Europe’s prior problems is abating.

She Devil to Head the Fed

Janet Yellen, affectionately nicknamed “She Devil” by Washington and Wall Street, has finally been nominated by the President as Fed Chairman. Her nomination had been in doubt until Lawrence Summers withdrew from consideration. Wall Street gets the Chairman they want—the one with a decade of Fed experience and the one most likely to continue Bernanke’s policies. She spent time in the Fed with the Maestro, Alan Greenspan. She has hopefully learned to deal with a crisis aggressively and to take actions and make statements that are credible, not like the mixed messages we received for the past six months regarding QE tapering.

I feel bad for Ben Bernanke; he will not get to finish what he started. When “normal” recovery finally arrives, She Devil will get the credit. If all goes well, she will take over as FedChairman at the beginning of February, 2014.

But it will not be all smooth sailing for our favorite dove. She will inevitably face crisis and have to deal with it decisively. Greenspan faced the 1987 stock market crash when he was new and in the late 1990s, faced the Asian currency crisis and the collapse of Long Term Capital Management, and the stock market crash of 2000.

Bernanke, as we all remember well, faced the bursting of the housing market bubble and the 2008 financial market crisis with the Lehman Brothers bankruptcy. We must believe that the toughness implied by her nickname will guide her through trouble.

Government Shutdown and Default Danger

We are in the middle of the 18th government shutdown since 1976. One estimate is that 83% of the federal government is still functioning—something about “essential”—so it is not much of a shutdown. We have great Washington drama with both sides refusing to give ground on their issues. But give they must, negotiate they must, to avoid the unspeakable horror of a default on US debt that would destroy trust in our nation and trust in the dollar.

A drop dead date of October 17th for default was given by Treasury, but this date seems suspect, with expected receipts in October of $200 billion and $25 billion in interest payments due, it is hard to understand why default would occur mid-month. Maturing debt could be rolled over and replaced with new debt without breaking the debt ceiling.

But regardless of when that date arrives- someone, anyone in Washington, are you listening? Debt default is not an option. You must act now. As this newsletter goes to press, only days before the October 17th date, I cannot imagine that a default will occur. I must believe that a midnight deal will happen.

The shutdown is impacting the release of economic data of government data, the timing of which is poor as the data had been weakening prior to the doors of 17% of the government being closed on October 1st. The private data being released has been weak, most notably the ADP private payrolls report, which showed measly job growth of 166,000 in September, after 159,000 in August.

Remember, the government payroll report for August showed measly growth of 169,000 for the month, with the labor force participation rate down to 63.2%, the weakest since the late 1970s. The unemployment rate continues to drop, most recently to 7.3% in August, from hundreds of thousands of workers exiting the labor force. This is not a good trend.

Jamie Dimon

We were hoping that there would be a savior to the great bond market selloff of 2013, a voice of reason able to reassure the markets. We usually look to the Fed, but not this time. We were hoping it would be someone like Jamie Dimon. But, alas, we learned in the 3Q13 J.P. Morgan earnings release why he has been in hiding—he has his hands full of legal issues.

JPM reported the first quarterly loss since Dimon’s tenure as CEO with $9.3 billion in legal charges in the 3Q13. This brings the legal reserve at the Bank to an astounding $23 billion! We know he continues to defend JPM from the ongoing extortion fines (recently $900 million) from the federal regulators, UK regulators, and the SEC over the London Whale’s bad trades. We know he continues to defend Bear Stearns from the ongoing demands of state and federal regulators for more and more money for mortgages that defaulted.

But $23 billion—Wow! Stay tuned.

Thanks for reading. DJ 10/13/13

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.

Guest Post: 2nd Qtr Economic Review by Dorothy Jaworski

Shell Shocked

If you are a fixed income investor, you have seen the worst that the markets have to offer in the second quarter of 2013. Between May 1st and June 24th, when rates peaked, longer term Treasury yields rose by 86 to 100 basis points. The 5 year Treasury more than doubled from 0.65% to 1.51% and the 7 and 10 year Treasuries each rose 1% to 2.07% and 2.61%, respectively.

Mortgage rates fared poorly too, with the 15 year FNMA posted yield moving up 1% to 3.12% and the 30 year yield moving up 1.20% to 4.12%. Mutual funds and ETFs specializing in mortgage backed securities saw their worst quarter in terms of losses and outflows since 1992. However, all bond portfolios have suffered losses in this blood bath.

You are not alone in trying to understand how quickly the markets changed. If you are looking for a villain behind this madness, you can look no further than the Federal Reserve, the once proud institution who prided themselves on communication and transparency, but whose credibility sank as fast as bond, stock, and commodity prices. If you are a fixed income investor, you are clearly shell shocked.

In the past decade, we have seen several Treasury routs that resulted in huge selling in the markets, most notably in 2003-2004, 2005-2006, and 2009. The selloffs in 2003 to 2006 came during periods of higher GDP growth (4%+), healthier home prices, moderate core inflation, rising commodity prices, strong stock prices, a weak US dollar, and Fed tightening.

The selloff in 2009 was an adjustment following the extreme crisis in late 2008. In this 2013 selloff, we have sub-par GDP growth of less than 2%, rising home prices that are still 20%+ on average below their former highs, core inflation that is very low with inflationary expectations declining, falling commodity prices (except for oil), Fed easing, and a relatively stable dollar. We have the strong stock market, but of course that is where Ben Bernanke wanted you to put your money. By the way, rates have risen so violently that the advantage stocks enjoyed for the past one to two years with a higher dividend yield than the 10 year Treasury has been erased.

As we witness the last several months of the term of the once great Ben Bernanke as Fed Chairman, we long for the nostalgic “promises,” “forward guidance,” and scatterplot Fed Funds projections that defined Bernanke’s wish to be open about Fed activity. And in a few short weeks during May and June, the message from Ben and the Fed was mishandled very badly.

The only one who has not said much is our favorite dove, Janet Yellen, seen to be in the running to replace Bernanke. The Fed Governors’ conflicting messages, miscommunication about current and future policy moves, especially as they relate to the QE3 bond buying program and rate guidance left the markets unable to believe a word they said. Even though nothing had changed in the economic realm, the Fed implied that easing is about to end and then they said it will not end—short term rates will remain low until 2015.

When the Fed first made their “promise” to keep short term rates low for two years in the third quarter of 2011, Treasuries were as follows: 5 year at 0.96%, 7 year at 1.44%, and 10 year at 1.93%. If they do not tighten until 2015, two years from now, shouldn’t the math be similar—especially with lower inflationary expectations today?

When asked about bond buying, the Fed said that it will end soon and then they said it will end later, maybe when the unemployment rate gets to 7%. Then they said that the bond buying could increase! Exactly where did that come from? It then said that the QE buying doesn’t matter, but the size of the Fed’s balance sheet does. Confused yet?

When given a chance after the Fed meeting in June to reassure the markets and clear the confusion, Bernanke did nothing to convince the markets that tightening is years away, that a healthy employment market is years away, that sustainable GDP growth is years away, or that the Fed cannot predict the future with their crystal ball any better than we can. Instead, he let the markets think that the Fed will soon abruptly “taper” and then end the QE bond buying program, which was the reason rates were staying low.

He let the markets think that rising long term rates, including skyrocketing mortgage and municipal bond rates, are acceptable. Well, Mr. Bernanke, we are here to tell you that they are not. Why did you even bother with QE3 if you were going to work so hard now to negate its impact now?

Animals

The Fed Governors were quick to talk about the markets and the volatility that they themselves created. The war of words has begun. My personal favorite was when Dallas Fed President, Richard Fisher, stated that “Big money (on Wall Street) does organize itself somewhat like feral hogs.” I am surprised he did not talk about sheep, herds of cattle, or lemmings jumping off a cliff. Instead, he tried to reassure the markets with “I don’t want to go from Wild Turkey to cold turkey overnight.”

Indeed. During the last week of June, other Fed Governors have been feeding quotes to the Wall Street Journal in an effort to let the markets know that the Fed is not tightening anytime soon, that the market reactions have been “outsized” and likely wrong. But here we sit in the new, volatile reality. I personally am waiting for Jamie Dimon to save the day.

What About the Data?

Real GDP growth for the first quarter of 2013 was just revised down to 1.8%, following the anemic 0.4% growth in the fourth quarter of 2012. The nascent housing recovery will likely see home prices face some resistance as mortgage rates moved higher so quickly. Housing affordability is still good, but mortgage borrowers are shell shocked, too.

The index of leading economic indicators for May was only up 0.1% after the stronger momentum in April of +0.8%. Payroll employment growth has averaged 189,000 per month for the first five months of 2013, which is

lackluster for a recovery this old. The unemployment rate is at 7.6%; the labor force participation

rate is at a 30 year low at 63.4%; the pool of available workers stands at 18.5 million people—

representing tremendous unused capacity. This does not seem like an environment where growth

will break out anytime soon.

If we are hoping for growth to come from international trade, we will be sorely disappointed as China’s growth is slowing, almost all of Europe is in recession, and Japan is not likely to go on a buying spree. Oil prices have held in recently much to the delight of OPEC; gasoline prices are 3-4% higher than last year and continue to strangle consumer spending.

Ever increasing regulations, health care law enactments, and now the newly approved Basel III increased capital requirements for banks make it more difficult to achieve sustainable GDP growth. The future direction of Fed policy will be determined by data that is not yet even created. I don’t care what they say.

Complacency

I have come to the conclusion that we are becoming too complacent. Why do we accept what is placed in front of us and not demand something better? One case in point is the still high price of gasoline, currently at $3.50 per gallon. Why don’t we work to increase the supply here by approving a new pipeline? Why don’t we provide incentives for researchers to find viable alternatives, ones that do not include plugging in my car for recharging like a phone! Come to think of it, why don’t we provide incentives for researchers to improve battery life for our phones?

Now is the time to incent people to improve and invest in the economy. Otherwise, we will just move along this mediocre economic growth path—QE3 or not.

Thanks for reading. DJ 07/03/13


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.

Guest Post: 2012 Economic Year in Review by Dorothy Jaworski

Looking Back at 2012

Every year, I usually write about the past year with mixed feelings, at times nostalgic for those events and at times, glad that the year is over. 2012 brought us highs, lows, and surprises. As to the latter, the Federal Reserve is always good for a couple of surprises. They continued to run their easing campaign, now going on six years strong and counting, pushing down on Treasury yields, spreads, mortgage rates, and pushing up on money supply. The result has been high bond prices, historically low rates, with the 10 year Treasury ending the year at 1.73% (below most inflation measures!), more “promises,” and a constant flow of new money into the markets.

The biggest beneficiary of all this Fed activity has been the stock market—which ended the year at some pretty good “handles,” with the Dow above 13,000, S&P 500 above 1,400, and the Nasdaq above 3,000. Price gains for the year ranged from just over 7% for the Dow to almost 16% for the Nasdaq. Stocks remain an attractive asset class with the dividend yield of 2.2% on the S&P 500 exceeding the yield on 10 year Treasuries of 1.73%. 

Housing markets have begun to improve with the national indices showing year-over-year growth of 3% to 4% recently. We have a long way to go before recapturing the home price highs of 2006 and 2007, but it is a start. Auto makers continue to enjoy their rebound, with the Big 3 US Automakers enjoying their best month in December, 2012 since the Great Recession took hold. Gas prices are finally coming down, making people able to drive their brand new cars more; I am glad to be testing the $3.00 per gallon price level rather than the $4.00 one.

The dominant theme of 2012 was the Presidential election. Over $2 billion was spent by both campaigns and nothing changed. I don’t know about you, but I want my money back! That $2 billion pales in comparison to JP Morgan’s losses of $6.2 billion so far from trading of credit derivatives by the London Whale. Boy, wasn’t Jamie Dimon humiliated when he found out it was more than a “tempest in a teapot!” 

Superstorm Sandy battered the coasts of New Jersey and New York with devastating results. Another of the year’s lows was watching our lawmakers and politicians argue until midnight on New Year’s Eve over the “fiscal cliff” and vote in the wee hours of the morning to “save” us. A new low, indeed, but more on that later.

The Fed—At It Again

The Federal Reserve keeps experimenting with their monetary policy moves, continually trying something new without waiting to see how the past moves are working out. In December, they announced that they would change their “promise” from keeping rates super low through the arbitrary date of mid-2015 to a “promise” to keep rates super low as long as unemployment exceeds 6.5% and core inflation between one and two years out is less than 2.5%, with inflationary expectations well anchored. So in effect, they have changed to a performance based measurement system that may not manipulate the yield curve as violently; this is clearly an improvement over the “pick-a-date” strategy. They could have included GDP growth as a benchmark; they will figure that out later and add it, I’m sure.

The Fed continues to buy bonds and more bonds. They announced another quantitative easing program—this time, QE3—part 2, in which they will buy $45 billion a month in Treasury bonds in addition to the $40 billion per month of mortgage backed securities that they are buying for QE3. Yes, folks, that would be $1 trillion per year! Since QE3 is open-ended, we have no idea how large it will grow. My thoughts are that, someday, they will want to sell the $2 to $3 trillion of bonds that they have accumulated in all of their QE programs. Nobody can buy that many bonds. Ben Bernanke probably does not have to worry about it; he has telegraphed his intention not to serve another term when his current one expires early in 2014. Who will bring Happiness then?

The “Fiscal Cliff”

Who in their right minds would have so many critical tax codes and laws expiring all on  the same year-end date? Oh, wait, our Congress! Once again, we saw the mad scramble to prevent a “crisis” and the secret meetings to get a deal done at the midnight hour. In the early morning of New Year’s Day, the Senate voted to pass legislation to make permanent most of the lower Bush tax rates, adjust deductions, extend unemployment benefits, continue tax credits and tax breaks, and, for some, just plain raise taxes. 

The stock markets rejoiced and rallied 2% to 3% on January 2nd, because the fiscal cliff was now manageable, not an apocalypse. Higher wage earners will see an increase in the top tax bracket, from 35% to 39.6%, and an increase in their capital gains and investment income levels from 15% to 20%. All workers will be impacted by the expiration of the payroll tax “holiday,” which means the Social Security tax goes from the temporary level of 4.2% to its original 6.2%, translating to an extra 2% tax to be paid in 2013 for 77% of households, costing them about $110 billion more in 2013 than 2012.

Aside from the secret negotiations and last minute crisis atmosphere that surrounds Washington DC, overall, it is a good thing that the cliff is resolved for now. The tax bracket changes become permanent and that will allow planning to resume. The estate tax exemption was raised to $5 million per individual. A permanent fix was placed into the tax code to index the AMT tax and save tens of millions of taxpayers from one of the more evil tax code provisions. 

The original estimates of the economic damage from the cliff were over $600 billion for the year in higher taxes. With the deal and the passage of the American Taxpayer Relief Act of 2012 on New Year’s day, the damage will “only” amount to about $160 billion (from the 2% rise in Social Security tax and higher taxes and capital gains/investment income on higher income taxpayers- $400,000 for individuals and $450,000 for couples). The estimated reduction to GDP would be -.3% to -.4% in 2013, rather than -1.2% for the whole cliff.

Spending cuts were not addressed in this latest deal. In fact, the sequestration cuts of $1.2 trillion over 10 years that were mandated to start on January 1st were postponed by two months. Isn’t that always the way? Spending will someday have its day of reckoning. We are currently at the debt ceiling limit of $16.4 trillion and the US deficits keep running at over $1 trillion per year, or about 8% of GDP. The debt of $16.4 trillion is well over 100% of our GDP, which should bring on more concern, especially as we watch our European friends deal with the same issues of too much spending and too much debt.

Finally, the IRS is warning that they may not be ready with the revised forms to address the new law in January. If forms are delayed until February at the earliest, there will be delays in filing and receiving tax refunds—you know, those interest free loans so many people grant the government each year. The average refund last year was $3,000, so spending early in the year may be weaker than we would normally expect.

Wrapping It Up

So, every year I talk about a Santa Claus rally. Did we have one? Yes, indeed; the S&P 500 was up 2.3% for the last five trading days of December plus the first two of January and the Dow was up 1.7%. Average Santa Claus rallies typically range from 1.5% to 1.7%. Happiness over the fiscal cliff deal made it happen, I’m sure, because all of the gain came on January 2nd. While there are still tax increases occurring in 2013, at least the deal made the impact a little more manageable. Stay tuned! 

Thanks for reading. DJ 01/04/13

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.