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 one 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.

Thursday, September 22, 2016

Rethinking Central Banking Policy

Textbook analyses of inflation make some assumptions that may be untenable.  Recent central bank policy in Europe, Japan and the US seems to be exposing problems with the way economists have been thinking about inflation.

Since the beginning of the 20th century, inflation in the US has not been much of a problem.  The brief spike in inflation in 1949 and the long upward swing in inflation in the 1970s stand out as exceptions to a broader, moderate, underlying inflation rate for nearly 120 years that has caused very little stir. 

The 1949 episode in the US seems easily explained as a reaction to the elimination of war-time price controls and the 1970s episode was likely a product of a combination of slow real GDP growth combined with a dramatic increase in money supply growth.  These episodes seem to have been exceptions.

Thus, the idea that a central bank can target inflation with minor tweaks in its own lending rates may be misguided.  If there are multiple equilibrium inflation rates, governed in the short run by expectations, then tinkering with central bank tools may not matter much.

For the real economy, central bank policy can do much mischief.  Loading up central bank balance sheets, as has been the pattern since 2008 clearly creates distortions, as did the horrendous, though probably inadvertent, Fed tightening policy of the 1929-1933 period.  But, it isn't clear, except in extremes, that central banks can do much about inflation in the short to medium term.

It took a while for Paul Volcker to wring inflation out of the American economy during his tenure as Fed Chairman from 1979-1987, but, once that was accomplished, inflation has been a very minor story in the grand scheme of macro-economic issues since.

If we could get central banks out of the news and put reins on their ability to dramatically alter their balance sheets, maybe we would all be better off.

Janet Yellen's press conference yesterday was muddled and incomprehensible.  News reports suggest Yellen's strange conference reflected wide differences of opinion among Fed governors.  Maybe this is much ado about nothing and the Fed should embark on unloading its absurdly large balance sheet gradually over time and quit pretending that it has much of a role to play in determining inflation rates and real GDP growth.

Wednesday, September 21, 2016

Medical Research Won't Survive the Epipen Hearings

The Mylan hearings before Congress today show why the US is losing its pre-eminence as a medical research leader.  The chilling effect of the bi-partisan grilling of the Mylan CEO by ignorant Republicans and Democrats will have an effect.

If you knew that you could discover the cure for cancer, but that it would be costly in time and money, why bother?  If you made any effort to price your cure to cover your costs, you might find yourself sitting in front of a bunch of Congressional nincompoops, who have no understanding of how R&D works, how expensive it is, and how the costs can only be recaptured by charging a relatively high price.

If you make the pricing of an outstanding drug, that cures serious illnesses, a political football, then fewer of these drugs will be produced.  If the choice is between an expensive cure and no cure at all, these Congressional ignoramuses would choose no cure at all.  And, that is the likely result of the political circus that took place today in Congress on the Epipen issue.

True, the FDA is the main impediment to competition, but that doesn't mean that Mylan should lower the price of Epipen.  Congress should rein in the FDA and limit the FDA's ability to prevent competitive products from entering the market place.  They should leave Mylan alone.

Jim Cramer on Clawbacks

This morning Jim Cramer said: "why don't they just clawback the money.  These are rich people.  They should just clawback $ 100 million.  They can afford it."

Cramer was referring to the swirling media attention to Wells Fargo's woes.  The argument is that senior executives should give back some of their compensation, since things have gone awry.

Perhaps Cramer should apply the "clawback" theory to himself.  He's certainly rich.  How have his predictions and recommendations worked out?  It is well documented that Cramer's predictions and recommendations are essentially worthless.  Cramer famously argued that long term investors should sell everything in late 2008.  That advice would have cost investors billions of dollars.  Why doesn't Cramer return his own compensation as a soothsayer on CNBC?

This entire media frenzy is an example of meddling in matters that don't concern you.  To the extent shareholders of Wells Fargo have been injured, the shareholders and the board should take whatever action they deem appropriate.  Cramer should butt out.

What goes on at Wells Fargo, unless criminality is involved, is nobody's business but Wells Fargo shareholders.  It is none of Cramer's business.  At the very least, Cramer should use the stick that he wields on himself first, Wells Fargo later.

This kind of media nonsense makes businesses look inward, hire fewer people, take fewer risks.  Economies stagnate when companies spend all their time contemplating their navel, which is what Cramer is advocating.

We need companies to take more risk, not less risk.  Hopefully, bad things will be fairly rare, but they will happen and do not need Congress or the media to fan the flames.  Wells Fargo and its shareholders should be free to pursue their economic interests as they see them.  If shareholders want to remove Stumpf...fine.  But, they don't need Congress's or Cramer's advice.  Congress and Cramer have a far worse track record than Wells Fargo.

Bi-Partisan Embarrassment

Congress made a fool of itself yesterday grilling John Stumpf, CEO of Wells Fargo.  It was a bi-partisan circus.  As if Congress has any idea of how banks work and the problems they face in the post Dodd-Frank world.

Having outlawed many of the legitimate bank businesses, Congress has forced banks to look elsewhere for profits.  Some will overreach.  Were there no government over-reach, this likely never would have happened.

Congress should look in the mirror.  Congress has reduced US commercial banking to a shell of its former self.  Congress should be condemning itself, not the Wells Fargo CEO.  Leave Wells Fargo business up to the shareholders of Wells Fargo.  Keep big government out of this.

The US government should leave the private sector alone.  Now, the banks will have to spend another fortune trying to avoid the slings and arrows of politicians instead of focusing on what is left of their core businesses.

Tuesday, September 20, 2016

Elizabeth Warren for CEO of Wells Fargo

Why is the US Senate holding hearings on Wells Fargo?  Business mistakes, failures, and so forth come and go.  Heaven knows, politicians make far, far more mistakes.  Elizabeth Warren knows little or nothing about banking from a first hand perspective.  Why is she weighing in on this?

Imagine that a football team was struggling.  Would we ask a banker what he thinks?

That politicians get involved in business, even when alleged criminality is involved, is absurd.  Politicians should butt out.  They have no useful experience or knowledge about business.  What actions they have taken -- Dodd-Frank comes to mind -- have served mainly to cripple the US economy.  Nothing good comes from politicians.

If there is criminality involved, let the appropriate authorities deal with it.  If bad business decisions have been made, let shareholders take action.

But, politicians should shut up. 

Saturday, September 17, 2016

Summers Says Big Banks Now Riskier Than Ever

Larry Summers is the poster child for what has happened to the economics profession. He is a celebrity first, an economist second.  To Summers, truth takes a back seat to preserving your fame and fortune.  Summers spends far more time sipping wine with wealthy celebrities and Democratic politicians than in the halls of academe.  And it shows.

Summers, one of the key architects of the current, oppressive financial service regulatory regime is now saying that it hasn't worked.  No, Larry, you're wrong.  It has worked.  It has reduced the once, most powerful economic engine on the planet to a pitiful, hand-wringing European look-alike.  You succeeded Larry.  The US is no longer a pre-eminent economy with a powerful financial service industry.  Congratulations!

But, Larry wants more, it seems.  Using stock price variance measures, intellectually discredited as a risk measure for the past half century, Summers charts his course.  His intended landing spot.  Of course.  More regulation!  That is the cure for what ails us.

Why doesn't Summers just cut to the chase?  How about outlawing banks?  Maybe that would eliminate the risk of banking.

Here's a different path:  get the government out of banking entirely.  Abolish the FDIC guarantee. Does middle America need a $ 250,000 guarantee of their checking accounts?  Let banks fail like any other business.  As long as the government guarantees bank liabilities, it is axiomatic that banks must take on much larger risks.  Wouldn't you?

The argument for bank regulation is predicated on the myth that bank depositors need government's help.  No they don't. Money markets loaded with US treasury bills can provide all the protection depositors need without the heavy hand of government.

The price paid for the Summers agenda is no economic growth.  That's too big a price, Larry.  You're right, you're plan creates too much risk.  Get the government out of the way.  Let markets work.  Let economic growth return and not be stifled by folks like you.

Friday, September 16, 2016

Another GDP Balloon Deflated

After pitifully low levels of economic growth for the first half of 2106, economists and the Fed were predicting a bounce in the second half -- as they do every year.  Once again, the bounce will not materialize.

Already business forecasters and economists are trimming their estimates for the second half of 2016, including beginning to warn of a decline in overall economic activity.  The retail sector seems to be coming apart at the seams.

So, the beat goes on.  The American economy, struggling under the hammer blows of the most anti-business administration in American history, continues to limp along, as it has since the financial collapse of 2008.  If you outlaw economic activity, economies slide into the mud.  That's what has happened in the US.

No economic growth creates enormous social ills.  Look for more political division as the fight to divide a static pie accelerates.

Monday, September 12, 2016

Central Bank Handwringing

The Fed wonders, outloud these days, what should we do to get the economy going?  The European Central Bank wonders the same thing.

These central bankers are as clueless as the financial commentators that follow them.

Economic growth has been all but outlawed in the major western economies.  Not much the central banks can do if free enterprise is hamstrung by regulations.  Easy money, zero interest rates!  None of this matters in a world focused on raising minimum wage rates, outlawing trade, destroying the fossil fuel industry, regulating CEO (and other) pay, outlawing market-making by Wall Street, restricting commercial and residential loans by bank regulators, encouraging employees to spend more time with their lawyers than with their employer.

There has been a concerted war on free markets since the Fall of 2008.  That war has been largely successful in slowing down the traditional economic recovery that normally could have been expected from the financial collapse of 2008.  There has never been a recovery this slow in either Europe of the US.

Yet, never have central bankers and regulators been more active.

So, now central bankers are wondering.  What policies can we pursue to get economic growth going?  The answer: none.

The central banks can only affect the supply of government high powered money -- nothing else, really.  But, central banks sure get a lot of newsprint.  Maybe they like getting lots of newsprint.  Who knows?

But, for real economic growth, central banks are irrelevant, powerless and clueless.

Tuesday, September 6, 2016

The Well Runs Dry for the G20

Calling for higher levels of economic growth, the various ministers assembled in Hangzhou this week were whistling in the dark.  Other than China and a handful of non-Western countries, there is no economic growth anywhere in the world.  The various government policies in the G20 countries have assured that outcome.

But, now, the G20 countries are looking for more money to spend on their pet projects.  Good luck on that.  Once economic growth grinds to a halt, as it has in the US and in Europe, the pie no longer grows and slicing a constant pie creates political frictions -- frictions felt in every western country these days.  Most recently, Angela Merkel's electoral prowess collapsed this week, even in her home state.  It won't be long before Merkel disappears from the political scene.  Others will follow.

Economic growth is the lifeblood of the left, but their policies are designed to kill economic growth and have been largely successful.  Now what.  Increasing debt eventually has its limits and we are probably at those limits now.  So, the G20 ministers fret, struggling in their own self-created stew.

Sunday, September 4, 2016

Defending the Indefensible

Imagine that a conservative on campus felt offended by left wing utterances by their professors.   Would they get "trigger warnings" or "safe spaces?"   You guessed it.  The answer is no.

Trigger warnings and safe spaces are reserved for those with the proper political viewpoint.  If you don't hold the viewpoints that are officially approved at your university, you could be subject to disciplinary action.

There isn't much difference between this and the rules in the old Soviet Union.   In both cases, speech is monitored and controlled.  The only difference is in the severity of the punishment dished out on those who don't tow the official party line.

Check out the NY Times today for numerous attacks on the position taken last week by a Dean at the University of Chicago who had the temerity to stand up for free speech.   Most bizarrely, these attacks are coming from tenure-protected faculty actively engaged in silencing those with whom they disagree.

Why are taxpayers paying for this nonsense?

Saturday, September 3, 2016

Stifling Dissent in American Universities

Three cheers for the University of Chicago!  The UC Dean welcomed incoming students this Fall by letter, refusing to endorse the current trends on university campuses across the country stifling free thought and expression.  Meanwhile the Dean of the University of Nebraska went the other direction, declaring arbitrary limits on free speech,   These limits were imposed on anyone whose political opinions differed from his own.

At Nebraska, if you question the political orthodoxy of the school or the Dean, you are subject to penalty.  You have to support the political views of the Administration or you will be subject to disciplinary action.  You can imagine what kind of education, need I say indoctrination, takes place at Nebraska.

Sadly, most universities are following the dictate of Nebraska, making every effort to enforce political thought control in both their curricula and in extra-curricula activities.

The First Amendment has taken a back seat to enforcing political orthodoxy on almost all American university campuses, but especially at the so-called "elite" universities.  This trend probably won't matter much to engineering and science students, but it makes traditional "liberal arts" and traditional "humanities" little more than enforcers of ideological purity.

Long run, this probably doesn't matter.  True education costs almost nothing today, as the internet provides, free of charge, education in almost every subject. 

Universities, especially the elite universities, are increasingly little more than Club-Med experiences for the wealthy and the handful of favored recipients of their largesse.  One wonders how much real education takes place in environments like that.