The Federal Reserve stated on 3-20-19, “In light of global economic and financial developments and muted inflation pressures, the Committee will be patient as it determines what future adjustments to the target range for the federal funds rate may be appropriate to support these outcomes.” Patient is the key word. That means that interest rate policy will look to continue cheap money for the near term or even longer.
Q4 2018 turned dramatically negative as the Fed sent signals that rising interest rates and Quantitative Tightening (removing money from the financial system) was ongoing and likely to continue or even accelerate. The Fed has sent much more dovish (easy money, lower rates) since the beginning of 2019. This has fueled a powerful rally.
The fed does comment periodically that more fiscal restraint, IE less deficit spending is important for American financial stability. Congress has not been able to slow the pace of federal spending growth for decades. The Fed is less forthcoming regarding the structural conflict of interest between Fed Policy and the consequences to our federal debt interest costs. This dilemma may create a long-term bias towards cheaper money which could create of positive environment for equites. In other words, the Federal Debt is a potential buffer against rising interest rates. The Federal debt could also drive rates higher in a spiral that would cause an international crisis. Stay tuned, stay tough, stay calm.
People like to say that the conflict is between good and evil. The real conflict is between truth and lies. Don Miguel Ruiz
Anecdotes aren’t data: That’s a favorite expression of scientists. Anecdotes— stories— may be illuminating in the manner of Shakespeare. They may also alert us to something that needs scientific investigation.
…the advance of science and technology has made it all the more important. We can now measure in microns and light-years and detect in parts per billion. Information and numbers are piling up. To really understand this proliferating information, we must do much more than tell stories.
Gardner, Daniel (2008-07-17). The Science of Fear: How the Culture of Fear Manipulates Your Brain (p. 93). Penguin Publishing Group. Kindle Edition.
Narrative Fallacy
The Narrative Fallacy illuminates our limited ability to look at sequences of facts without creating an explanation for them, or forcing a logical link, an arc of relationship upon them. Explanations that tie facts together often ignore the underlying randomness and alternative paths that were just as likely, but we are oblivious to. Our stories make events more easily remembered and help them make more sense. This heuristic increases our impression of understanding that may be ill informed or utterly mistaken.
A common investor trap is the notion that markets, and macro-economic trends fit a theme or story. These scripts are based on a wide range of theories, or construction of past events to fit current dynamics. These narratives will proclaim “It’s 1929, 1973, or 1987 all over again” and then fit the current dynamics into a tidy story. This is very often pattern-seeking gibberish as the dynamics of today and the unknowable future will not fall neatly into a template that can be recognized in past events.
Emotions and the subconscious yearn for story lines to follow. For most of the human evolution timeline, stories are all that there was. Printed words began in the year 1440. Thousands of years of human development prior to the written word was based on visualizations, talking, and stories. This ultra-evolved component of the human mind is composed of intricate threads that are woven together in a story or script that develops conclusions and meaning. Assessment and emotions are heavily influenced by anecdotes as the reality of randomness breeds uncertainty and anxiety. We are drawn in by the narrative fallacy just as powerfully as gravity attaches us to the earth, yet these tendencies will mislead and foster irrationality.
Feeling and story alone are often dangerous traps. This is where our cool, methodical thinking needs to restrain and evaluate. Take your time. Dramatizing what we face clouds judgment. Mindful recognition and acceptance of complexity, randomness and the raging competition that makes our world is the only path to our best self.
One major narrative that we are witnessing in the US and larger western world is the stark divide between wealthy and the masses. The symbols of decay and loss of opportunity are prevalent in media and a strong leftward / populist trend in our political discourse. The disenfranchised “worker” is a target of numerous political narratives both from progressives and conservatives.
The decline of heavy manufacturing in the American industrial heartland has driven populist trends that are marketing the idea that government will foster opportunities through better trade policy. The emphasis is not on the modern skills demanded by our digital economy but rather how we have been taken advantage of by other countries and globalization.
There is not much talk about how previous generations were able to finish with high school level education and work in factories that are never coming back. The dominant post WWII American manufacturing colossus was a blip in the path of history. The demands for higher tech and engineering skills are drivers of the opportunities of today. Sadly, political messaging is focused on the vague bogeyman on “globalization” and the questionable notion that deal making or disengagement and even isolationism will bring back the good times in the heartland.
It is likely that skills training, investment in education and American mobility are the keys to redemption for the displaced workforces of the rural communities. It would be refreshing to hear a political message to an unemployed worker in Dayton Ohio that they may need to move to an area of the country that has more economic activity. Although this may be harsh, was that not the same thing that happened as America transitioned from a significant percentage of the population being employed in rural agriculture down to around 2% today. I am not aware of any slogans relating to bringing the farming jobs back.
Our economy evolves and grows exponentially. Think of the story of Mendel Berlinger, better known by his stage name, Milton Berle. He was the original TV star featured on NBC’s Texaco Star Theater in 1948. There was little programming in the nascent industry of TV production, but it spawned a massive economic powerhouse in California that continues and indicates no signs of decline. Our current times are experiencing another boom in creative production with the advent of Netflix, Amazon Prime, Hulu and numerous others entering the streaming entertainment business. In 1948 few people owned televisions. Today, every cell phone user is a potential subscriber. The economic impacts of this surge in creative product development is massive and one of many examples of booms that are breaking out throughout the economy.
Sectors experiencing strong gains in economic activity and employment opportunity has always challenged the “buggy whip” makers. Solar energy, biotechnology, digital advertising, app development, tech training / support, and numerous innovation driven sectors are growing rapidly. The shortage is in skills and imagination, not jobs. These areas tend to cluster in regional zones as delineated in “Who’s Your City” by Richard Florida.
From the book; Globalization is powerful. Places that never had a chance to participate in the world economy are now seeing some action. In that sense, economic activity and innovation have spread to more places around the world. But not all places, just certain places. So not all places participate and benefit equally. Innovation and economic resources remain highly concentrated. As a result, the really significant locations in the world economy remain limited in number. Globalization has two sides. The first and more obvious one is the geographic spread of routine economic functions such as simple manufacturing or service work (for example, making or answering telephone calls). The second, less obvious side to globalization is the tendency for higher-level economic activities such as innovation, design, finance, and media to cluster in a relatively small number of locations.
Florida, Richard. Who’s Your City? (Kindle Locations 267-273). Basic Books. Kindle Edition.
On March 20, 1999 The Economist Magazine published a cover with the heading “How not to deal with China”. From the essay, “The correct response would be for presidents hereinafter to abandon the role of export-salesman, to concentrate trade-policy efforts on bringing China into the multilateral forum of the World Trade Organization, and to press for tighter campaign-finance rules.”
https://www.economist.com/leaders/1999/03/18/how-not-to-deal-with-china
The Economist was prescient as China entered the World Trade organization on 12-11-2001. The prescription for tighter campaign rules has not been heeded.
There are significant efforts by current White House administration salesmen / “deal” negotiators to raise the quantities of American goods that that are exported to China. It seems intuitive that America’s capitalist principals would dictate that markets and competition would be the best arbiters of the export / import balances and the complexities that they represent.
Andy Rothman of the Financial Times noted on FEBRUARY 15, 2018, “While it is true that US firms continue to battle against non-tariff barriers and non-transparent government regulatory policy in China, many American companies have done well in that market. Boeing, for example, has over the last five years delivered more aircraft in China than in the US. The American Chamber of Commerce in China recently reported that nearly three-quarters of their member companies are profitable, the highest proportion in three years. Exports to China create American jobs You’ve probably read reports that imports from China led to 2.4m US job losses. But those jobs were lost over a more than 10-year period, while another study found that US exports to China directly and indirectly supported 1.8m new jobs in just one year, 2015. Another overlooked point is that imports from China are good for American household budgets. A study by economists at the New York Fed and other institutions concludes that “US consumers gained from China’s WTO entry through lower prices on varieties of manufactured goods”.
https://www.ft.com/content/9ebf9e36-1271-11e8-940e-08320fc2a277
Recently there has been daily drumbeat of speculation and “tweets” regarding the US / China trade negotiations. It is likely that the pressure on the administration is intense. The short-term economic consequences of tariffs could impose dire political costs. The political risk to tariff escalation is likely the factor that suspended the March 1-2019 deadline / threat of increasing broad US tariffs on Chinese goods to 25%.
It is comforting to note that this trade relationship has been contentious all the way back to Nixon, or further back to the post WWII era. The costs to US heavy manufacturing and job loss may have occurred regardless, just as the change from agrarian to industrial occupations. The ultimate global trade dynamics will hopefully be centered on competition and innovation, rather than populist theories that are unlikely to see effective implementation or positive results.
The reality is that The United States has historically avoided industrial policy in favor of…markets! It is a dangerous path that populism leads with all this talk of “deals”. Brexit, new NAFTA, China, Europe, South Korea are all beyond comprehension in the complexity of trade relations. The unintended consequences combined with potential for corruption will likely lead to disappointment and endless renegotiation. Look no further in the empty rallying cry of the UK freeing itself from the heavy hand of the EU via some vague path to greater “autonomy”. Yet the UK still wants access to the benefits of one of the largest economic marketplaces in the world.
Living standards and global wealth has increased exponentially in the post WWII era of expanding global engagement. This economic reality will overcome the reckless political marketing of both political parties in the US and others in the Eurozone. Globalization has broad benefits and ghastly uneven costs. Most of human history moves in this challenging pattern. It is not some conspiracy by elites to exploit the masses.
The low and mid skill worker has and always will be vulnerable. It is ludicrous to suggest that the US should fear the costs of international engagement economically and accept the twisted notion that “deals” will lead to better outcomes. This is a path that risks isolationism instead of the great American innovation machine that invented TV, The Internet, the cellphone, the bomb, Hollywood, The Motor City, Discovered Oil, and went to the moon. Were these events the product of Deals or isolationism…NO! Are we going to sell into only the US market and ignore the vast populations of the rest of the world? That would likely be a path to stagnation and decline.
On February 25-1969 The New York Times had a headline that stated, “New Debt Ceiling is Asked By Nixon”.
The fiscal position of our federal government is endlessly complex. In the near term the financial markets are going to be faced with new partisan battles regarding additional debt limit increases. Since 1978, the debt limit has been raised or suspended 56 times. Apparently, the limit is more of a flexible debate idea, rather than an economic guardrail.
The scary story of US Federal debt will be making headlines in Q2 2019 and beyond. It is troubling to hear that Federal debt passed $21t, yet the number must be taken into context of the enormity of the US $19t annual GDP. Servicing the debt is at a sustainable percentage of GDP and there does not seem to be any credible threats to the US Dollar as the currency standard of the global economy.
This story is not going away any time soon. It may be the greatest threat to the global financial system. The disturbing trend is that both political parties are developing platforms that do not even discuss how to pace or begin to rein in federal spending. The trend is moving towards evermore expansive spending with vague notions of “free” university and Medicare expansion on the left and unlimited military spending on the right. The 2020 presidential campaign will ramp up this disturbing trend with all manner of overpromising and uneconomic proclamations of future policy.
The thesis of interest rates staying low will be confronted with many challenges and monetary uncertainties as always. There is a current debate of so called Modern Monetary Theory. “MMT proposes that a country with its own currency, such as the U.S., doesn’t have to worry about accumulating too much debt because it can always print more money to pay interest. So the only constraint on spending is inflation, which can break out if the public and private sectors spend too much at the same time. As long as there are enough workers and equipment to meet growing demand without igniting inflation, the government can spend what it needs…”
https://www.bloomberg.com/news/features/2019-03-21/modern-monetary-theory-beginner-s-guide
MMT is akin to a fiscal blank check in perpetuity. It is unlikely that the USA is the home to a magic money tree, but rather an extended period of low interest rates seems to be the real time reality. These trends are likely to punish those holding cash as we may be very early in the global expansion of money via QE and negative interest rates. The value of our buy and hold philosophy may help create greater wealth as the free money debate rages. The path will be arduous, but the potential rewards are likely to be worth it.