Monthly Analyses

The “Ides of March”

Trump is becoming increasingly isolated politically. He got clobbered both in his immigration restriction initiative and on his promised repeal of Obamacare… Meanwhile, March also saw the Fed confirming our conjecture that it was “Fed up with foot dragging”. And that´s not a pretty sight. According to San Francisco Fed president John Williams: I recently gave a talk to some business leaders back in California, and I found myself describing the Fed as an “amazingly nerdy group of people who pore over data, computer models, and statistical analysis.” So I hope you’ll take it as a compliment when I say that being… Read More

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Fed “Fed up with foot-dragging”

The second half of the month of February was notable for Fed “consistency” (note: nv=non-voting member) 14-Feb Janet Yellen: “Further adjustment likely needed if economy on track”. 14-Feb J. Lacker (nv): “Next hike should come sooner rather than later”. 15-Feb E. Rosengren (nv): “2017 growth could require faster rate hikes”. 15-Feb N. Kashkari: “Have to wait and see on new fiscal policies”. 22-Feb D. Lockhart (nv): “March is a live meeting”. 24-Feb J. Powell: “March hike is on the table”. 27-Feb R. Kaplan: “Should move sooner rather than later”. 28-Feb P. Harker: “3 hikes are appropriate this year”. 28-Feb J.… Read More

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What do markets believe?

The November 2016 election gave “birth” to the “reflation story”. There was a lot of excitement, with long-term yields, the dollar, stocks and inflation expectations all rising. But this is illusory. Since mid-2014, the economy was testing new depths. Soon after Janet Yellen took the helm, the Fed embraced the “tightening talk”. In late 2015, it even went ballistic, raising rates for the first time in 10 years and saying it expected rates to increase at least four times during 2016. The market reaction was a “bloodbath”. That forced the Fed to turn tail, so in the spring the markets… Read More

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Cooling down

During the month of December, the “Trump-jump” observed following the November 8 election cooled down. The charts for Bonds, Stocks, Inflation Expectations and the Dollar illustrate. Those moves are consistent with expectations of higher growth and somewhat higher inflation, brought about by market participants focusing on talks of supply-side reforms (deregulation) and increases in government spending (infrastructure). As the weeks progressed and cabinet appointments announced, the “negative side” of possible Trump changes, things like protectionism and China-bashing, invited a pause. There was also the “Fed factor”, sending a slightly more hawkish message following the December 14 FOMC Meeting. Note in… Read More

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The month of Trump

The market moves since election day are big, but not new. They are mostly the acceleration of a trend that was under way since mid-year. But the acceleration is telling us something about the President-elect. According to Mark Lilla, a Columbia University political scientist and historian and author of “The Shipwrecked Mind: On Political Reaction” (2016), Trump differs from other present-day reactionaries like Erdogan, Modi and Le Pen. They´re all geared by nostalgia, for example, “Make America Great Again”. While Erdogan, Modi and Le Pen offer a precise image of where they want to return to. Trump doesn´t. He reminds… Read More

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This was never just a recession

Maybe to start with, but not for long. What does a recession look like? Take, for example, the 1981/82 recession, which was deep. Real output falls strongly, but reverts to the long-term trend. The present cycle looks very different. Real output also fell strongly, but never recovered. That´s what happens when the outcome is a depression! The picture illustrates: Are we looking at these pictures as if they pertained to different phenomena? Apparently not. Even at the Fed, analysis goes from a high degree of concern to unfettered jubilation in a very short period. Recently, Yellen asked some pertinent questions… Read More

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The calm before the storm?

September was a very boring month. At months’ end, asset prices remained about the same as they were in the beginning, with intra month fluctuations being almost perfectly offset.   August 31 September 30 S&P 500 2170.95 2151.13 Dollar Index 86.77 86.37 10-yr Yield 1.57 1.59 At the beginning of September, the probability of a rate hike in the September 21st meeting was around 25%. Getting closer to the meeting date, the probability fell to 12%. The meeting came and went with nothing new, except Yellen´s statement that “the case for an increase in the federal funds rate has strengthened…”.… Read More

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In the early part of the month there were tentative signs that the Fed would do something.  Bill Dudley, of the New York Fed, recognized that growth was weak and monetary policy only moderately accommodative. On August 15, John Williams of the San Francisco Fed published “Monetary Policy in a Low R-star World”: [M]onetary policy frameworks should be critically reevaluated to identify potential improvements in the context of a low r-star. Although targeting a low inflation rate generally has been successful at taming inflation in the past, it is not as well-suited for a low r-star era. There is simply… Read More

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Someone once said “humans are pattern-seeking story-telling animals”. That´s true in general and for economists in particular. At times like the present, when uncertainty is high and sentiment volatile, trying to “pin-down” where we are and get some indication of where we are going is a useful endeavor, even if the suggested outcomes are not “comforting”. Forecasts give us an indication of the road ahead, even if the uncertainty around the forecast may be wide. To gauge where we are we look to the past to check for patterns. Those may be thought of as road signs that say, for… Read More

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During the month of January, we heard the word “recession” quite a bit. Just google “US recession in 2016” for a sample. Maybe the Fed´s blunder in raising the Fed Funds rate in December 2016 was the “sentiment trigger”. As Narayana Kocherlakota said recently: The FOMC’s current policy framework goes back to at least mid-2013. It can be defined by two key words gradual and normalization. Both words refer to the level of monetary accommodation. In terms of the target range for the fed funds rate, the word “gradual” is generally interpreted by those who watch the Fed closely to… Read More

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