Friday, September 30, 2016

El-Erian on Our Economic Malise

"The longer the economic malaise endures, the greater the influence of anger politics," so said Mohamed El-Erian, former head of bond giant PIMCO.

Here's a quote from El-Erian, who is a big government lefty by the way:

"Such disappointing economics acts as fuel for political polarization and dysfunction.  It feeds mistrust about 'expert opinion' and, when combined with the worsening inequality of income, wealth and opportunity, accentuates suspicion of the ruling elites and the establishment...."

The strong economic growth of earlier generations provided opportunity and hope for the average citizen.  That is over.  Now the move to slice up a pie that no longer grows inevitably leads to social discord and political craziness.  These trends will accelerate.

El-Erian, of course, is mainly disappointed that the so-called 'experts' and 'ruling elites' like himself are not getting their way in their advocacy of increasing the size and scope of government. 

The El-Erian/Clinton path leads to what I call the "new feudalism" -- rule by a small elite with limited scope for free markets and free enterprises.  The lower orders will be kept in check by political promises, doles, and the heavy hand of political repression.  This is the dream of El-Erian.

A different path would be to return to free markets.  There would be some instability from time to time, no doubt, but the average citizen would welcome the return of the doubling of their income and wealth that occurred every fourteen years before the big government gang took over and put an end to western prosperity.

The whole point of capitalism is that you don't need 'experts' and 'ruling elites' like El-Erian.  The simple actions of average citizens in an effort to improve their lot provide all the necessary energy to fuel a system of constantly rising living standards and improved opportunity for the least advantaged among us.  El-Erian is not too hip to this idea, but he recognizes the true source of today's social and political unrest -- the end of economic growth in the developed world.




Thursday, September 29, 2016

Maybe Zero Rates are Market Rates

The idea that the Fed can control interest rates, while widely accepted, is not well supported by empirical analysis or theoretical considerations.  This is especially true now when an unwieldy balance sheet makes tightening credit an unlikely policy choice.

The Fed itself, in its December (2015) liftoff used an artificial trick to move the repo and funds rates up, but no other rates of importance moved up with them.  In fact, rates fell across the board after the famous Fed liftoff.

What if?  Maybe zero rates are mostly market determined and the Fed is irrelevant.  We have been assuming that inflation is 1 -2 percent, but what if that isn't right.  Measuring inflation is a notoriously difficult project.  Maybe inflation is not 1-2 percent, but is actually minus 1-2 percent.  If so, zero rates would make perfect sense.  The real rate, actual rates minus expected inflation, would then be slightly positive.

If inflation is actually negative, not positive, then the a low real rate of interest would be consistent with sub par economic growth.  It would explain a lot.  However, it suggests that risk assets may be over-extended since the risk premium is unlikely to be much higher than four or five percent at best.

This means the stock market is not your grandfather's stock market.  With a zero risk free rate, risk assets will only earn a risk premium, which, it seems, has been fallling -- maybe one percent, maybe less, but certainly less than the real growth rate of GDP.

This suggest that while recessions are likely, major recessions are unlikely.  What is most likely is that economic growth will simply grind to a halt.  The Fed, meanwhile will, at some point, push repo rates and funds rates higher, but other rates will remain on the floor (until the reality dawns that sovereign debt is probably not a good bet).

So, what zero rates are telling us is not that the Fed has its thumb on rates.  Instead zero rates are consistent with mild deflation and a declining risk premium.  This means unexpectedly low, though still positive, expected stock market returns, and a stagnant economy.

Congress Continues to Embarrass Itself

Poor John Stumpf.  No should have to go through the inquisition that he is dealing with today before a Congressional committee.  The ignoramuses on the House Banking Committee are pilloring the poor guy for a problem that there is no real indication that he could do much about.

If there is a problem, it is not for the Congress to do anything about it.  It is a job for shareholders and, if criminality is involved, the appropriate law enforcement authorities.

The net upshot of all of this will be more regulation, higher fees, and fines that shareholders will have to pay (not the bad guys, but innocent shareholders pay the fines that are levied).  So, who loses? Middle class Americans.  They will face higher fees, fewer services from a banking system that is constantly looking over its shoulder to see if some ignorant Congressman or Congresswoman is looking to make a headline.

Who wins?  No one really.  But a bunch of ignorant, arrogant Congressmen and Congresswomen get to put this guy through a public hell for no real purpose.  Shame on Congress!

This is a perfect example of how middle class Americans will be hurt by politicians seeking a headline.  Shareholders should not be punished for this, but they will be and so will consumers.  The punishment dished out to average Americans by the Congress and the regulators will be far, far worse than the original problems that have surfaced at Wells Fargo.

Cheering 1.4 Percent Growth

It's really hard to believe.  A country that saw at least two elections won by candidates decrying the pitiful level of 4 percent economic growth (Kennedy and Clinton) now cheers a paltry 1.4 percent growth for the second quarter 2016 (up from 1.1 percent estimated earlier this year).

That's what we've become -- a stagnant, growth-less economy.  No wonder all manner of social ills are coming to the surface in an economy where the pie no longer grows.  That shifts the attention to dividing up that stagnant pie.  This puts us back in the middle ages.

Modern economies are no longer modern when they cease to grow.  The US, Europe and Japan are no longer growing.

Wednesday, September 28, 2016

Wells Fargo Board Takes Action

Yesterday, the Board of Directors of Wells Fargo Corporation voted to "clawback" some of the compensation of it's Chairman, John Stumpf.  Some $ 41 million in unvested options were held back by the board.

Assuming this board action wasn't dictated by the obvious political noise from the Congress, this then is the way things should proceed.  Unless criminality is involved, Congress should butt out.  Congressional ineptitude, much on display for the past two weeks, can only serve to intimidate the private sector and further restrain economic activity.

America's economic decline, which by now is obvious in the data, is mainly a result of political interference in free markets and over-regulation.  But there is nothing wrong and everything right about boards taking action to deal with problems in their companies as they see them.

Tuesday, September 27, 2016

Trump Was Bizarre in the Debate

What was Donald Trump thinking?  Totally unprepared for last night's presidential debate, Trump fumbled along for an hour and a half without presenting any coherent reason to think that he could serve effectively as President.  Stylistically, Trump seemed intent on interrupting Clinton at every available opportunity.

Clinton was, as usual, a poised, bureaucratic, spokesperson for the far left.   The economy, to Clinton, is a pie to slice up and dole out to your favorites.  Gone is the old Kennedy commitment to growing the economy.  Interest in economic growth hasn't been a topic of interest in the Democratic party since the 60s.

But, is Trump a viable alternative?  The only thing that keeps the Trump presidency going is the drudgery and banality of the Democratic ticket.  As the country slides further into a modern version of feudalism, the Clinton and Trump candidacies are frightening and embarrassing.

Sunday, September 25, 2016

Choosing No Economic Growth Causes Inequality

Income and wealth inequality are axiomatic in countries with no economic growth.  Getting rich through influence peddling, or "rent-seeking" as economists call it, is the only way if economies are sledgehammered into submission by politicians. The Clintons understand that.  They have never produced a product or met a free-market payroll. Instead, they have uses political power to "entice," "extort", -- hmm, what is the proper term?  Anyway, the Clintons now have hundreds of millions of dollars, gained merely by using the political system.  No market tests required.

But, for folks in what is left of the private sector, for the vast majority of poor and lower middle income Americans, the absence of economic growth gradually but surely reduces their economic standing.  Big government can't help.  Only economic growth can help.

Yet, the goal of the Elizabeth Warrens is to eliminate the private sector, or, better yet, to control the private sector in a neo-fascist style.  Have business do what politicians want them to do.  That is the goal of the political left.  So much for the rule of law.  So much for free markets.

Inequality will only get worse if the the left has its way.  (Note that the Clinton fortune will not be taxed under her estate tax plan because it is carefully sequestered into the Clinton Foundation, to be preserved for future generations of Clintons).  Pretty clever on the part of the Clintons.  Let others pay, but provide an escape valve for yourself.

So, the beat goes on.