The Peter Pan Economy

Lowering interest rates is not necessarily a bad thing. It can make borrowing cheaper, which – at least in theory – will stimulate business investment. It can weaken the dollar, making American goods cheaper abroad. It can lower payments on the federal debt.

The problem with lowering interest rates is that eventually they have to be raised again. If rates were to remain at zero indefinitely, the Federal Reserve Board could not lower them to stimulate the economy during a recession, unless it created negative interest rates, which cause a whole new set of economic problems.

And history says a recession is likely to come sometime soon. The current recovery, which has frequently been described as anemic, celebrated its eighth anniversary in June. Now in its 97th month, it is the third longest recovery on record. The average recovery since the end of World War II has been 58 to 61 months.

While the length of the recovery may not determine how long a recovery will last, when unemployment drops low enough to spur inflation, the probability of a recession climbs. And unemployment is allegedly at a 16-year low of 4.3%.

“Expansions, like Peter Pan, endure but never seem to grow old,” according to Fed economist Glenn Rudebusch.

But the current expansion has much more in common with Peter Pan. It’s a fairy tale. And the Fed has run out of fairy dust.

The Fed’s Conundrum

The conundrum the Fed faces is that as it raises interest rates so that it will be able to drop them in case of a recession, it may actually cause one.

Read more

The Fed’s Abnormalization Plan

The Federal Reserve Board has issued an addendum to its “Policy Normalization Principles and Plans” for reducing its bulked up $4.5 trillion portfolio, but there’s nothing normal about unloading $4.5 trillion in bonds.

That’s a lot of bonds.

The Fed’s policy, which virtually no one has read since it was issued in November 2014, is an update of its 2011 normalization policy, which no one read. It crams quite a few words into a single page, which we would summarize by saying that the Fed hopes to unload as much of its bond holdings as it can without causing the bond market to collapse.

Fed Will “Cease or Commence”

In case you don’t believe me, here’s a sample paragraph: “The (Federal Open Market Committee) expects to cease or commence phasing out reinvestments after it begins increasing the target range for the federal funds rate; the timing will depend on how economic and financial conditions and the economic outlook evolve.”

Note the “cease or commence.” In other words, the Fed will either stop buying bonds to keep its portfolio close to $4.5 trillion or it won’t. Talk about commitment issues!

Read more

The Fed Thinks Higher Prices Are Good For You

The Federal Reserve Board’s quantitative easing program was an unprecedented monetary experiment that dumped trillions of dollars of new money into the economy.

Historically, adding that much money to the economy should have caused hyperinflation, but the economy was so weak, it took the Federal Reserve Board eight years of loose monetary policy to boost the U.S. inflation rate to 2%.

Now, though, some Fed members think that 2% isn’t enough.

Readers old enough to vote during the Carter and Ford years remember when the Fed’s role was to lower inflation, not raise it. In 1974, inflation hit 11.03%, and from 1979 through 1981 inflation reached 11.22%, 13.58% and 10.35%. In the Ford era, Whip Inflation Now (WIN) buttons were created. They did little to control rising prices.

We haven’t seen any Boost Inflation Now buttons, fortunately, but helping the economy by increasing inflation is the dumbest idea since negative interest rates. Given the Fed’s recent history, that may be its appeal.

Read more

All You Gotta Do Is Act Naturally

The U.S. Supreme Court isn’t the only influential government entity that President Trump will have an opportunity to make his mark on.

The Federal Reserve Board will likewise bear the Trump brand in the not-too-distant future. Two of the seven seats on the Federal Reserve Board of Governors are already vacant and now a third governor, Daniel K. Tarullo, has announced that he will step down in April. Called the “lead architect of post-crisis financial regulations plans” by The Wall Street Journal, Tarullo is not likely to be replaced by a pro-regulation governor.Natural Rate

In addition, the Fed’s influential general counsel Scott Alvarez, who has sometimes been referred to as “the eighth governor,” will retire this year after a 36-year career at the central bank. And the leadership term of Chair Janet Yellen expires in January 2018, while Vice Chair Stanley Fischer’s term expires in June.

The changes are likely to result in a different perspective for the board, which has been dominated by ”academics who don’t know how finance and the economy really work,” according to Danielle DiMartino Booth, a former Federal Reserve Bank of Dallas staffer and author of a new book, Fed Up: An Insider’s Take on Why the Federal Reserve Is Bad for America.

Booth describes “a tribe of slow-moving Fed economists who dismiss those without high-level academic credentials,” and she counts Ms. Yellen and predecessor Ben Bernanke among them.

“Central bankers have invited politicians to abdicate leadership authority to an inbred society of Ph.D. academics who are infected to their core with groupthink, or as I prefer to think of it: ‘groupstink.’”

We hope the final copy offers more wit and insight than that, but you likely get the idea. 

Read more

The Good, the Bad and the Ugly

For the past eight years, the Federal Reserve Board has been the primary force behind the U.S. economy. That hasn’t worked out so well.

Now President Trump is in charge of the U.S. and its economy.

Whether that will revive the economy and make America great again remains to be seen. While the Trump presidency is still brand new, we’ve already seen more action take place that will affect the economy than we saw in the past eight years.trump_cowboy_2509705

Some of what’s taking place appears to be good. Some of it appears to be bad. And some of it appears to be ugly.

The good. Already, President Trump has signed a slew of executive orders. While we’re no fan of executive orders, every president has used them to a degree–and it was one way to make a quick impact, even before his cabinet has been confirmed.

Regulation, as we have frequently noted, has paralyzed the economy, having its greatest impact on small businesses. That President Trump is serious about deregulation is clear by what he’s done to date.

One of his executive orders requires that whenever a new regulation is approved, it must be offset by “the elimination of existing costs associated with at least two prior regulations.” The order adds that the “total incremental cost of all new regulations, including repealed regulations, to be finalized this year shall be no greater than zero, unless otherwise required by law.”

Read more

Good News: Fed Predicts Slow Economic Growth

We can now be assured of improved economic growth in the years to come.

Why?  Because the Federal Reserve Board is predicting slow growth.  And the Fed is always wrong.

That may seem harsh, but throughout the Obama administration, the Fed predicted stronger economic growth than the U.S. ultimately experienced.united-states-gdp-growth-forecast@2x

Consider the Fed’s record for the past five years. The Fed projected growth of 3.0% to 3.6% for 2011; actual growth turned out to be half that–just 1.6%. For 2012, the Fed projected growth of 2.5% to 2.9%; the actual rate was 2.3%. For 2013, the Fed projected 2.3% to 3% growth, but actual growth was 2.2%. For 2014, the Fed projected 2.8% to 3.2% growth, and the actual rate was 2.4%. Finally, for 2015, the Fed projected 2.6% to 3.0% growth and the actual rate was 2.4% again.

Are you seeing a pattern here? Five years of predictions, five years of overly optimistic projections. The Fed has been almost as incompetent about predicting growth as it’s been at producing growth.

Fed Goes Conservative

Now we have a new Republican administration, but it’s the Fed that’s gone conservative. The allegedly nonpartisan Fed is predicting that the economy will grow by just 1.9% in 2016, 2.1% in 2017, 2.0% in 2018 and 1.9% in 2019. Longer term, the growth rate is projected to be just 1.8%.

Read more

New Year’s Resolutions for Others to Break

We all make New Year’s resolutions and typically break them by the time the ball drops on Times Square.

With the same good intentions and low expectations of success, this year we’ve decided to suggest New Year’s resolutions we want others to follow. Some of our suggestions below may be carried out by the stated parties, but others have no chance of even being considered. They should be though, and that’s why we’ve included them. 2017

President Obama: Resolve to golf daily. It seemed as though President Obama was always golfing when there was work to be done. Now, when he should be out golfing, he’s busy working on his legacy.

And what a legacy it will be! The economy failed to achieve 3% growth during any year in which he was president, which is a first. The federal debt doubled, Russia and China have filled the void left by leading from behind, and Iran and North Korea have moved closer to becoming nuclear powers.

He’s ignored Congress, using executive orders to break all records for new regulations. But he hasn’t ignored the world’s dictators, having lifted sanctions on Cuba and Iran, two of the world’s most repressive regimes.

And now, post-election, he’s shown his disdain for Israel by abstaining from a United Nations vote and “allowing a nasty and harmful anti-Israel resolution to pass the United Nations Security Council,” The Weekly Standard reported. The resolution says Israeli settlements in occupied territory have no legal validity and are a violation of international law.

Read more

The Fed Is No Longer Boring

We’ve ignored the Federal Reserve Board for weeks now and with good reason. We’ve been bored with the board.

There have been no taper tantrums. There’s been no pontificating about macroprudential supervision, quantitative easing or even forward guidance. No one is talking about negative interest rates anymore.

How boring is the board? The Fed has even issued the same policy statements after each meeting with only a few word changes. And the original policy statement was not too exciting, either.

In fact, the Fed has done next to nothing in the three years since Janet Yellen was appointed to chair it. What’s happened over that period? The Fed has increased interest rates twice, by a total of 0.5% to 0.75%.

The latest yawner was in December, when the Fed raised rates by a whole 0.25%. Even the economists and experts predicted that one. Heck, even The New York Times predicted it correctly.

Financial journalists who have the misfortune of covering the Fed attempted to make it a big event. Google “taper tantrum” and you’ll find that virtually every journalist who wrote about the rate increase compared it to the May 2013 “taper tantrum,” which was when then-Fed Chair Ben Bernanke caused the stock market to tank by indicating that the Fed would end quantitative easing … someday.

A typical headline: “Mortgage rates surge past 4% as taper tantrum fears rekindle.” At one point, when the world was far more rational, a 4% mortgage rate would have been unimaginable low. Today, it’s a

Read more

Investing Under President Trump

Is Donald Trump a narcissistic blowhard or an astute businessman with the ability to make America great again?

We will all find out over the next four years, but we should also keep in mind that he will not be running the country by himself. He has a Republican majority in Congress and most states are now run by Republicans (the party that most media were writing obits for a month ago).

trump

Although President-elect Trump is a former Democrat and has expressed support for expanding many government programs, the advisors he has picked to date signal that the regulatory state we’ve lived under for the past eight years will be reined in. That would be good news for the economy and for the markets.

Regardless, he is not Hillary Clinton, who was poised to tack left of President Obama and bring us closer to the socialist state that U.S. Senators Bernie Sanders and Elizabeth Warren have been advocating.

While we worry about his stands on trade and immigration, President Trump will undoubtedly be stronger than President Obama, more bipartisan and more focused on economic growth. In all cases, it wouldn’t take much.

Read more

Deceptive Pricing

If you had to believe one of the following people, who would you choose?

Heather Bresch, CEO of Mylan, makers of the EpiPen: “The misconception about our profits is understandable, and at least partly due to the complex environment in which pharmaceutical prices are determined.”

John Stumpf, CEO of Wells Fargo: “First of all, this was by 1% of our people.”

Janet Yellen, chair of the Federal Reserve Board: “In general, I would not say that asset valuations are out of line with historical norms.”yellen

Two of the three people above were brought before Congressional committees so they could be scolded by U.S. Senator Elizabeth Warren and other upstanding, ethically pure members of Congress. Which two?

And finally, which of the three people above have had the greatest impact on you and on the economy?

Stumpf Grilled

Mr. Stumpf’s days as CEO of Wells Fargo are apparently numbered, because some of his company’s minions decided to open accounts for bank customers who never authorized them to be opened. This was done by employees to make quotas and earn bonuses.

Read more