23 May CHANGE IS THE ONLY CERTAINTY
Change is the only certainty. Can I argue there will be another reinvention of basic economic assumptions? There was a change in general economic consensus thought following the Great Depression and again during the stagflation days of the 1970s.
Following the Great Depression most adopted the Keynesian philosophy that the economy can be managed via taxes and spending. In my view this philosophy blew up in the 1970s using interest rates to manage the economy.
I vividly recall reading commentaries in the early 2000s that the business cycle was dead and the era of massive economic collapse is over, primarily via the adept use of monetary policy. This illusion was shattered in 2008.
A major response to the Great Recession was QE and negative interest rates. The Federal Reserve’s “Central Tendency” from 2010-2015 was a 4% and 2.5 % growth and inflation rate, respectively. The Fed has stopped publishing it “Central Tendency,” partially the result such greatly missed the mark.
Today it is generally accepted trade wars will greatly impact economic activity. Contrary to popular belief, growth in the US is accelerating partially the result of job creation. I will not comment about the unemployment and labor participation rate but only opine jobless claims are around a 50 year low and consumer confidence “future expectations index” is at a 15 year high, the result of job creation.
It is partially against this backdrop why I believe one the greatest threats to the markets is growth that is stronger than expected which then challenges monetary, inflationary and interest rates assumptions.
I believe a major risk to the debt markets is the gargantuan amount of BBB- debt that must be refinanced over the next four years. This debt was primarily originated to finance stock repurchases and dividend increases, debt that may had a negligible impact upon increasing economic output.
Are these concerns baseless, partially predicated upon my view of stronger than expected growth that should support increased debt service requirements? Maybe.
I again ask to where are we going? What will be the basic change in macroeconomic assumptions? Unfortunately only history can answer this question but I think the path will be the continuing collapse of the multipolar/interdependent environment, replaced by the strengthening of nationalist and populist sentiments. Such should support the companies that have the vast majority of their sales in the US.
In other words, Main Street will outperform Wall Street just as it had from 1900-1996. The Great Recession ushered in the greatest transfer of wealth to Wall Street in history, a trend whose reversal is perhaps today now in its infancy.
Changing topics to the here and now, there was little reaction to the Minutes of the May 1 FOMC meeting as such closely resembled remarks made three weeks ago. Moderate and strengthening growth and inflationary pressures that are “transitory.”
Last night the foreign markets were down. London was down 1.34%, Paris down 1.61% and Frankfurt down 1.61%. China was down 1.36%, Japan down 0.62% and Hang Sang down 1.58%.
The Dow should open significantly lower on the simmering trade dispute. A senior Chinese government official stated trade tensions can last to 2035 as none of the key American demands can be “realized in the short term.”
Earlier I opined about a change in the general economic consensus and the return to nationalism and populism as the possible prevailing geopolitical and macroeconomic thought over mutlipolarity and interdependency. Has this Chinese government official partially validated this view?