Facebook has come under fire over the last few days, over a situation that has little to do with Facebook. It seems that a third party that harvests personal data from Facebook violated its agreement with Facebook, and sold that data to a company that used the data to send targeted political ads to Facebook users.
Well first, let's consider the fact that the third party violated its agreement with Facebook. Facebook did nothing wrong; it has agreements in place to safeguard against that sort of thing, and this company violated that agreement. So that company is in the wrong, not Facebook.
Second, all they did was send targeted political ads. They didn't try to steal your identity or defraud you financially.
Third, you knowingly gave Facebook your data in the first place! What did you expect? That Facebook wasn't going to use that data for marketing purposes? Hello - have you not noticed those ads on Facebook that seem to know you're thinking about buying a new mattress, or that you like dogs, or that you tend to lean liberal or conservative?
You put that crap out there for Facebook to mine in the first place - to determine your buying preferences, your likes and dislikes, your political leanings- and sell it to advertisers. Every time you click on a Facebook ad for a dog-friendly site, or a site that posts political memes like Drudge or Occupy Democrats, you set yourself up for this stuff. What did you expect?
The company that shared the data in violation of Facebook's agreement obtained that data through development of a personality quiz. In order for the developer to access your data, you or one of your friend's had to click on the quiz and complete it. That's how it got its digital hands on your data.
So what's the solution? Don't take all those ridiculous personality and other quizzes that pop up on Facebook. Do you really think they're going to tell you what your personality type is? Do you need to take a quiz to know "What state am I from?" or "How Southern am I?" Those quizzes may seem like harmless fun, but that's how developers get your data.
I recently watched a news show that asked the question, "Who knows more about us - the NSA or Facebook?" The answer - from a tech guru - was that the NSA knows what you're up to, but Facebook knows what you just bought, what you're thinking about buying, and who you're thinking about buying it from. That's Facebook's end-game: to sell that data to marketers of goods and services, or to political parties or candidates seeking your vote, not to steal your identity.
That tells us four things:
1. You don't seem to care what the NSA knows about you. (You should.)
2. You don't care what Facebook knows about your buying habits. (You should, unless you want to be bombarded with ads and emails trying to get you to buy crap you may not want or need.)
3. You don't care where you buy stuff from. (You should - see #2 above.)
4. You don't care what political party targets you. (You should.)
Look, I've bought stuff that I didn't know I wanted based on Facebook ads that happened to trip a trigger. The personalized pillow I bought for my wife for our anniversary that memorialized where and when we got married. The coffee mug I bought her that commemorated the dog we rescued last summer.
Those things popped up on my newsfeed based on the date we got married, or the fact that we love dogs, all things that we freely shared as part of the information we share with Facebook. I'm glad those things popped up, because otherwise I'd have never thought of them, yet they were thoughtful gift ideas. Who knew what I should get my wife for our 22nd anniversary, when we already have everything we need? Yet here was this pillow that seemed like the perfect gift. Thank you, Facebook, for helping me figure out what to get her for our anniversary.
I've also gotten a lot of notifications for stuff I had no interest in. Guess what? You can turn those notifications off! It's easy, and it keeps crap you don't want to see from showing up on your newsfeed. You're in control.
See, we join Facebook of our own free will and accord. We set our privacy settings as we choose. I consulted an expert on this stuff - my daughter - and confirmed that the only data that's at risk on Facebook is the data that we freely and willingly put at risk ourselves.
Your data is much more at risk when you buy stuff at Target or Home Depot using your credit card, as has been proven from the merchant card breaches at those companies (and others, including Chipotle, T.J. Maxx, etc. ...) Facebook doesn't have your credit card data, or your SSN. The worst that can happen is that you get some targeted ads you don't want.
Don't get me started on the conspiracy theorists that postulate that these third parties can somehow influence our elections. Nobody holds a gun to your head when you step into that ballot box. If you choose to believe the political memes and blogs, that's on you and you alone. Don't cry that they fed you misleading information. What did you expect? They're opinion pieces, and they're trying to sway yours. Go to the source documents, think for yourself about what the truth in them is, and get that silly-looking colander off your head.
So what of this fear that the government will over-regulate Facebook? Well, for one thing, this is a government that is less prone to over-regulation than, say, the last administration, so that should calm our fears. Second, what can they do? Protect us from ourselves? Again, this is information we freely shared, and Facebook had protocols in place, and third parties violated those protocols. So if anything, let's go after the third parties, not Facebook. (And no, those third parties did not change the outcome of the presidential election, for those out there wearing colanders on their heads.)
Facebook has, and will continue to, safeguard your data to the extent you choose. So blame no one but yourself if Facebook has your data. Your data is no more or less secure than it was two weeks ago, and all of that is on you.
What was my reaction to the hit Facebook stock took in the aftermath of this news sound bite?
I was a Facebook shareholder before the announcement of this "breach." And after the announcement, I increased my position by about a third, because the stock was suddenly on sale, and for no good reason. Facebook will be fine, and so will you. Just be careful with whom you share your personally identifiable information (PII), and understand that the banks, merchants and other financially sensitive entities with whom you share it are a lot more important than Facebook.
Tuesday, March 20, 2018
Hawks, Doves, Bulls and Bears - Oh My!
There's a lot I'd like to post about tonight, as I find myself in yet another hotel room, in yet another city (my fourth week on the road in the last five, and my fifth hotel room in the fifth city during that span, during which I also experienced the loss of my Mom, and all that went with that sad but beautiful experience - however, that's another topic for another day). It's easier for me to post when I'm on the road, because when I'm home, I like to just cherish the simple joy of holding my pups on my lap, being with my wife, or seeing my daughter, son-in-law and grandson.
But here I am in another hotel room, so here goes. I'm leading with this post because the Federal Open Market Committee (FOMC), the body of the Federal Reserve (Fed) that sets monetary policy, began its regular two-day meeting today, and the new Chairman will speak tomorrow at that meeting's conclusion. So to wait until tomorrow for this post would be anti-climactic.
First, a primer. The FOMC has a dual policy mandate: maintain "full employment" and "stable prices."
"Full employment" is a moving target. The last Fed Chair, Janet Yellen, defined it as 5% unemployment. I'd say that's a tad below an historical definition of the term, as the unemployment rate has only been at or below 5% about a third of the time throughout the history of the measure, dating back to 1948.
(By the way, for what it's worth, since Paul Volcker was Fed Chairman in the 1970s - what we call the "Monetarist Era" of the Fed - every time the jobless rate has hit or fallen below 5%, then increased, a recession has ensued within seven to 18 months of when the rate first hit 5%. The cause behind this effect is that when unemployment falls below 5%, a level that is historically very low, the economy heats up too much, bubbles are inflated, the Fed ultimately has to begin slowing things down, and inevitably they get behind the curve and the economy suffers a downturn. There's a penalty to be paid for pegging the target "full employment" rate too low, in other words. So with unemployment at 4.1% currently, when it starts back up, get ready to pull your retirement money out of stocks within a year or so.)
"Stable prices" means that the inflation rate doesn't get out of hand. Again, the Yellen Fed defined it as a 2% year-over-year increase in the core PCE deflator. The deflator is a price measure based on Personal Consumption Expenditures, and is a bit more reliable than the more familiar Consumer Price Index (CPI), which is used as a benchmark for cost-of-living increases in everything from government and private-sector salary increases to certain pension payments.
When we refer to a "core" inflation measure, we mean excluding food and energy prices. Why do we exclude those price measures, when the reality is, as one well-known economist has noted, inflation excluding food and energy only matters to people who don't eat or drive?
It's simple: food and energy prices tend to be more volatile than other components of the price measures. So in search of a more stable measure for its target, the Fed focuses on core inflation measures.
Currently, the core PCE deflator is up 1.5% year-over-year, well below the Fed's 2% target. It's been below that target since 2012. Yet, the Fed is raising interest rates already, a move it would normally make only when the economy reached both its full employment and stable price targets. Why?
Well, first, let's take a look at why the Fed raises and lowers interest rates. The rate it uses is the Fed funds rate, the rate at which banks borrow and lend excess funds to each other (a bank with lots of excess money lends to a bank with less excess reserves at that rate).
When the Fed raises rates (tightens), it makes it more expensive for banks to borrow. Banks pass those borrowing costs along to businesses and individuals. So it gets more expensive for companies to borrow funds to expand and invest and hire, and it makes it more expensive for you and me to borrow money to buy houses and cars.
Here's why this is important: when everyone is buying lots of cars and houses and other stuff, we have a situation in which "too much money is chasing too few goods," the classic definition of inflation in layman's terms. In other words, there's so much demand for "stuff" that the price of "stuff" goes up, and those increasing prices introduce inflation.
So the Fed tightens (raises rates) to slow down that purchasing and lending activity, hoping to engineer a "soft landing" in which demand slows enough to curb inflation, but doesn't produce a recession.
They rarely succeed at that.
On the flip side, when the economy is weakening, or a recession has ensued, the Fed cuts rates (eases) to make borrowing cheaper, so that businesses expand and invest and hire, and that creates jobs, and that job creation makes us all more confident to borrow money at now-cheaper rates to buy more "stuff," which creates further business expansion and investment and hiring, and on and on it goes until inflation rears its ugly head.
Okay. So what does this all have to do with this post, and the FOMC meeting that will close tomorrow?
FOMCs - and Fed Chairs - are characterized as either "hawkish" or "dovish." The hawks are more aggressive in raising rates to curb inflation; the doves are more aggressive in cutting rates to stimulate demand and promote uber-low unemployment. (There's always a problem when we try to influence a mean-reverting data series to a level below its mean - see the homeownership rate and the housing crisis of 2008.)
Ben Bernanke, Fed Chair from 2006-14, was a dove. Janet Yellen, Chair from 2014-18, was a dove.
Jay Powell, the current Fed Chair since Yellen's term expired in February, is a hawk. And we haven't seen a hawk at the helm of the Fed since Alan Greenspan was appointed in 1987. (Greenspan morphed into a dove over the term of his chairmanship, largely due to political reasons that had to do with him wanting to appease more liberal Presidents who would likely re-appoint him.)
Hawks like Powell are more likely to raise rates more aggressively. Doves tend to keep rates low, longer.
So why is this important now? The markets want to keep rates low. They're scared to death that rates might increase, even modestly, even if it's necessary to keep a bubble from inflating, even if it's overall good for sustained growth without a spike in inflation.
Why?
The markets are like a crack addict. When the economy tanked in 2008, the Fed cut rates to zero. 0%. Zilch. Nada. Never happened before.
That made money essentially free. Banks could borrow at no cost, and lend at not much more, and make scads of money. You and I could buy a house with a 3% mortgage, deduct a third of the interest on our taxes, and thus pay an after-tax rate of 2%. We could buy a car with a 2.5% loan. Heck, we could do a cash-out refi on our home of 3% for 30 years, and at some point, arbitrage the cash equity we took out into an overnight savings account that will likely earn well north of that, if history is any indication.
That's what sustained the stock market from 2009 until 2013 at least, when the Fed began slowing its monetary easing. (It deployed another means of easing during that period, but we won't get into the nuances of that here - suffice it to say that monetary policy was easier than it's ever been in history, and likely easier than it will ever be again.) The economy became addicted to the crack that is free money, and it feared that it couldn't sustain itself without that ongoing fix.
So now that the Fed is returning to the "old normal," as we discussed in my last post, the addict is afraid its fix will be taken away. "Oh no, what if we don't have free money any more? However will the economy survive if rates aren't zero?"
Folks, rates have been well above zero for most of the history of our economy, and most of that time, it's done just fine. Just as crack addicts have come off cold turkey and survived - and thrived. Such is the nature of addiction and recovery: the addict becomes dependent on the drug, but is healthier when it's withdrawn.
So that's why the market is on pins and needles the day before Chairman Powell's first FOMC announcement. Yes, they're likely to raise rates as expected. What has the market skittish is what he'll say. Will he be hawkish?
I sure hope so. See, the Fed only raises rates (i.e., the hawks only rule the roost) when the economy is strong. A strong economy is good - good for the markets, good for consumers, good for business, good for the country.
In other words, hawks are associated with a bull market, and if the hawks are in charge, the market should be bullish.
The doves, on the other hand, associate with the bears. They jump at any hint of weakness and give away money to try and stave it off. But in so doing, they create the bubbles that wreak havoc on the economy. Greenspan did it with the dot-com and housing bubbles, and Bernanke/Yellen threatened to do it in a number of asset classes, until Powell was appointed. Hopefully he can avert another bubble. The Fed seems unable to foresee them. Yet somehow the Curmudgeon has been able to, as have many others.
It could be that the markets will force the Fed's hand, by creating weakness through the panic of a sell-off and thus slowing the Fed's progress in tightening. That may not be a terrible thing, but there is some risk in the Fed following the markets in executing monetary policy, instead of leading the markets.
Stay tuned. The next year or so will be interesting. But in the interim, don't get too fearful over market anxiety related to the Fed doing its job: raising rates to maintain "full employment" (which is probably more like 6% than 5%) while avoiding an inflationary spiral (which is far more damaging, and harder to reverse, than high unemployment).
In other words, remember that 4% unemployment, 1.5% inflation and zero interest rates are the exception, not the rule. Invest on strength. Sell on weakness.
But here I am in another hotel room, so here goes. I'm leading with this post because the Federal Open Market Committee (FOMC), the body of the Federal Reserve (Fed) that sets monetary policy, began its regular two-day meeting today, and the new Chairman will speak tomorrow at that meeting's conclusion. So to wait until tomorrow for this post would be anti-climactic.
First, a primer. The FOMC has a dual policy mandate: maintain "full employment" and "stable prices."
"Full employment" is a moving target. The last Fed Chair, Janet Yellen, defined it as 5% unemployment. I'd say that's a tad below an historical definition of the term, as the unemployment rate has only been at or below 5% about a third of the time throughout the history of the measure, dating back to 1948.
(By the way, for what it's worth, since Paul Volcker was Fed Chairman in the 1970s - what we call the "Monetarist Era" of the Fed - every time the jobless rate has hit or fallen below 5%, then increased, a recession has ensued within seven to 18 months of when the rate first hit 5%. The cause behind this effect is that when unemployment falls below 5%, a level that is historically very low, the economy heats up too much, bubbles are inflated, the Fed ultimately has to begin slowing things down, and inevitably they get behind the curve and the economy suffers a downturn. There's a penalty to be paid for pegging the target "full employment" rate too low, in other words. So with unemployment at 4.1% currently, when it starts back up, get ready to pull your retirement money out of stocks within a year or so.)
"Stable prices" means that the inflation rate doesn't get out of hand. Again, the Yellen Fed defined it as a 2% year-over-year increase in the core PCE deflator. The deflator is a price measure based on Personal Consumption Expenditures, and is a bit more reliable than the more familiar Consumer Price Index (CPI), which is used as a benchmark for cost-of-living increases in everything from government and private-sector salary increases to certain pension payments.
When we refer to a "core" inflation measure, we mean excluding food and energy prices. Why do we exclude those price measures, when the reality is, as one well-known economist has noted, inflation excluding food and energy only matters to people who don't eat or drive?
It's simple: food and energy prices tend to be more volatile than other components of the price measures. So in search of a more stable measure for its target, the Fed focuses on core inflation measures.
Currently, the core PCE deflator is up 1.5% year-over-year, well below the Fed's 2% target. It's been below that target since 2012. Yet, the Fed is raising interest rates already, a move it would normally make only when the economy reached both its full employment and stable price targets. Why?
Well, first, let's take a look at why the Fed raises and lowers interest rates. The rate it uses is the Fed funds rate, the rate at which banks borrow and lend excess funds to each other (a bank with lots of excess money lends to a bank with less excess reserves at that rate).
When the Fed raises rates (tightens), it makes it more expensive for banks to borrow. Banks pass those borrowing costs along to businesses and individuals. So it gets more expensive for companies to borrow funds to expand and invest and hire, and it makes it more expensive for you and me to borrow money to buy houses and cars.
Here's why this is important: when everyone is buying lots of cars and houses and other stuff, we have a situation in which "too much money is chasing too few goods," the classic definition of inflation in layman's terms. In other words, there's so much demand for "stuff" that the price of "stuff" goes up, and those increasing prices introduce inflation.
So the Fed tightens (raises rates) to slow down that purchasing and lending activity, hoping to engineer a "soft landing" in which demand slows enough to curb inflation, but doesn't produce a recession.
They rarely succeed at that.
On the flip side, when the economy is weakening, or a recession has ensued, the Fed cuts rates (eases) to make borrowing cheaper, so that businesses expand and invest and hire, and that creates jobs, and that job creation makes us all more confident to borrow money at now-cheaper rates to buy more "stuff," which creates further business expansion and investment and hiring, and on and on it goes until inflation rears its ugly head.
Okay. So what does this all have to do with this post, and the FOMC meeting that will close tomorrow?
FOMCs - and Fed Chairs - are characterized as either "hawkish" or "dovish." The hawks are more aggressive in raising rates to curb inflation; the doves are more aggressive in cutting rates to stimulate demand and promote uber-low unemployment. (There's always a problem when we try to influence a mean-reverting data series to a level below its mean - see the homeownership rate and the housing crisis of 2008.)
Ben Bernanke, Fed Chair from 2006-14, was a dove. Janet Yellen, Chair from 2014-18, was a dove.
Jay Powell, the current Fed Chair since Yellen's term expired in February, is a hawk. And we haven't seen a hawk at the helm of the Fed since Alan Greenspan was appointed in 1987. (Greenspan morphed into a dove over the term of his chairmanship, largely due to political reasons that had to do with him wanting to appease more liberal Presidents who would likely re-appoint him.)
Hawks like Powell are more likely to raise rates more aggressively. Doves tend to keep rates low, longer.
So why is this important now? The markets want to keep rates low. They're scared to death that rates might increase, even modestly, even if it's necessary to keep a bubble from inflating, even if it's overall good for sustained growth without a spike in inflation.
Why?
The markets are like a crack addict. When the economy tanked in 2008, the Fed cut rates to zero. 0%. Zilch. Nada. Never happened before.
That made money essentially free. Banks could borrow at no cost, and lend at not much more, and make scads of money. You and I could buy a house with a 3% mortgage, deduct a third of the interest on our taxes, and thus pay an after-tax rate of 2%. We could buy a car with a 2.5% loan. Heck, we could do a cash-out refi on our home of 3% for 30 years, and at some point, arbitrage the cash equity we took out into an overnight savings account that will likely earn well north of that, if history is any indication.
That's what sustained the stock market from 2009 until 2013 at least, when the Fed began slowing its monetary easing. (It deployed another means of easing during that period, but we won't get into the nuances of that here - suffice it to say that monetary policy was easier than it's ever been in history, and likely easier than it will ever be again.) The economy became addicted to the crack that is free money, and it feared that it couldn't sustain itself without that ongoing fix.
So now that the Fed is returning to the "old normal," as we discussed in my last post, the addict is afraid its fix will be taken away. "Oh no, what if we don't have free money any more? However will the economy survive if rates aren't zero?"
Folks, rates have been well above zero for most of the history of our economy, and most of that time, it's done just fine. Just as crack addicts have come off cold turkey and survived - and thrived. Such is the nature of addiction and recovery: the addict becomes dependent on the drug, but is healthier when it's withdrawn.
So that's why the market is on pins and needles the day before Chairman Powell's first FOMC announcement. Yes, they're likely to raise rates as expected. What has the market skittish is what he'll say. Will he be hawkish?
I sure hope so. See, the Fed only raises rates (i.e., the hawks only rule the roost) when the economy is strong. A strong economy is good - good for the markets, good for consumers, good for business, good for the country.
In other words, hawks are associated with a bull market, and if the hawks are in charge, the market should be bullish.
The doves, on the other hand, associate with the bears. They jump at any hint of weakness and give away money to try and stave it off. But in so doing, they create the bubbles that wreak havoc on the economy. Greenspan did it with the dot-com and housing bubbles, and Bernanke/Yellen threatened to do it in a number of asset classes, until Powell was appointed. Hopefully he can avert another bubble. The Fed seems unable to foresee them. Yet somehow the Curmudgeon has been able to, as have many others.
It could be that the markets will force the Fed's hand, by creating weakness through the panic of a sell-off and thus slowing the Fed's progress in tightening. That may not be a terrible thing, but there is some risk in the Fed following the markets in executing monetary policy, instead of leading the markets.
Stay tuned. The next year or so will be interesting. But in the interim, don't get too fearful over market anxiety related to the Fed doing its job: raising rates to maintain "full employment" (which is probably more like 6% than 5%) while avoiding an inflationary spiral (which is far more damaging, and harder to reverse, than high unemployment).
In other words, remember that 4% unemployment, 1.5% inflation and zero interest rates are the exception, not the rule. Invest on strength. Sell on weakness.
Thursday, March 8, 2018
A Brave Old World
The financial markets appear to be looking for any reason for a correction. And maybe that's good, as the markets have been roaring since the 2016 presidential election, without much volatility until recently. Corrections happen, and are a good thing, as they let a hot market take a breather, and can present buying opportunities when valuations exceed normative levels.
There's been a good bit of what I'd call cognitive dissonance in the markets lately. According to Webster's, "cognitive dissonance" is defined as "anxiety that results from simultaneously holding contradictory or otherwise incompatible attitudes, beliefs, or the like." And that's definitely been evident in the markets of late.
It seems the markets have recently determined that a return to normalcy from the economic insanity that ensued from the 2008-09 financial crisis is somehow a threat. The markets lamented numerous threats that persisted during the long, slow, Fed-supported recovery. Now that the economy is standing on its own two feet - not dependent on Fed intervention like a crack addict surviving on the next stimulative fix - the markets are wringing their collective hands over the very recovery from those previous threats.
To wit:
There's been a good bit of what I'd call cognitive dissonance in the markets lately. According to Webster's, "cognitive dissonance" is defined as "anxiety that results from simultaneously holding contradictory or otherwise incompatible attitudes, beliefs, or the like." And that's definitely been evident in the markets of late.
It seems the markets have recently determined that a return to normalcy from the economic insanity that ensued from the 2008-09 financial crisis is somehow a threat. The markets lamented numerous threats that persisted during the long, slow, Fed-supported recovery. Now that the economy is standing on its own two feet - not dependent on Fed intervention like a crack addict surviving on the next stimulative fix - the markets are wringing their collective hands over the very recovery from those previous threats.
To wit:
- As I noted in a previous post, the markets have long lamented the stagnant wage growth we've experienced since the Great Recession. So when last month's jobs report revealed year-over-year growth in average hourly earnings of 2.8% (healthy, but not stellar), the markets reacted with a 1,175-point selloff in the Dow over fears of wage inflation that would drive interest rates higher. People, healthy wage growth is good, not bad.
- Also noted previously, the markets have been concerned that a flat yield curve (relatively small difference between long- and short-term yields) might be a concern, as flat yield curves tend to precede recessions (which I noted is true, but that correlation is coincidental, not causal). So when the 10-year Treasury yield increased due to the inflationary fears noted above, the markets sold off. Yet the markets should have been relieved that we were seeing a return to a more normal, steeper yield curve (greater difference between long- and short-term yields).
- Finally, last week we learned that inflation increased last month. The core (excluding the volatile food and energy price components) consumer price index (CPI) rose from 1.7% year-over-year to 1.8%. On that day, CNBC featured a banner on their screen asking, "Is the era of low inflation over?"
To that last point, understand that core CPI year-over-year has averaged nearly 3% since 1958. That includes the era of Paul Volcker as Fed Chairman (1979-1987), when inflation peaked at 13.6% year-over-year, but it also includes the most recent period of extreme low inflation since the housing bubble burst, during which time inflation averaged - guess what? - 1.8% year-over-year.
So no, the era of low inflation, low interest rates, and slow wage growth isn't necessarily over. But for those who only look at the last ten years, it might look that way.
Let's put this in perspective. The average 30-year mortgage rate is now about 5%. That may seem high to someone with a perspective that only goes back a decade or less. My first home was purchased with a mortgage at a rate of 10.5%, and I felt lucky to get that, since mortgage rates over the prior ten years had been as high as 18%. Historically speaking, a mortgage rate of 8% or less is pretty darn good.
For many years, companies pegged their annual salary increases at 3-5%, because that was the prevailing year-over-year inflation rate for many, many years. So an inflation rate of 1.8% isn't high by any means. (The Fed's own target for inflation is 2.0%; we're below that, yet they're already raising rates.)
And a ten-year Treasury yield of 2.94% - where we are today - is incredibly low by historical standards. The average since the early 1980s - after the era of extremely high rates during the time of Paul Volcker's Fed Chairmanship - is around 5-6%.
And then there's the recent tariff madness, which I addressed in my last post.
And then there's the recent tariff madness, which I addressed in my last post.
Here's my concern with all of this: there are a lot of millennials that are buying homes and beginning to invest for retirement. Their historical perspective is the last ten years. So they see the "norm" as historically low interest rates (the lowest in our nation's history), low inflation, and stagnant wage growth.
So as we recover from this unprecedented era - an era that is their "normal" - it looks like a brave new world to them. But it isn't a brave new world. It's a brave old world, recovering from a cowardly new world.
I say "cowardly" because the Fed's retreat to zero interest rates and quantitative easing was a cowardly approach to dealing with a difficult problem that demanded the courage of a Paul Volcker, in my view - a monetary policy approach that would have been willing to swallow the bitter pill of depression to avoid some of the adverse effects that will likely result from the Fed's extreme accommodation over the past decade.
It's cowardly to create moral hazard by bailing out banks and automakers for their own mistakes that lead to financial disruptions. It's cowardly to cut rates to such low levels that bubbles are inflated (and the Fed has a poor track record of foreseeing bubbles that some of us could easily foresee, from the dot-com bubble to the housing bubble).
The government ought not to be in the business of business. If the banks or the automakers screw up, let them fail. Yes, there will be severe disruptions in the short run. Is that any more risky than the long-term implications of huge deficits due to fiscal stimulus, bubbles inflated by extremely accommodative monetary policy, or the risks associated with unwinding a $4 trillion Fed balance sheet?
It's like the old Tootsie Roll Pop commercials featuring the wise old owl. When asked, "How many licks does it take to get to the center of a Tootsie Roll Pop?", the owl grabs one and starts licking and counting: "One, two, three ..." Then he bites it, going straight to the chocolate center, and says, "The world may never know."
So it is with the question of whether allowing major banks to fail would destroy global financial markets, absent extreme monetary and fiscal intervention. Would it destroy world economies? The world may never know, because governments cannot resist the temptation to bite - in the form of providing massive stimulus that might have even more drastic consequences than just allowing market forces to work as intended.
I say "cowardly" because the Fed's retreat to zero interest rates and quantitative easing was a cowardly approach to dealing with a difficult problem that demanded the courage of a Paul Volcker, in my view - a monetary policy approach that would have been willing to swallow the bitter pill of depression to avoid some of the adverse effects that will likely result from the Fed's extreme accommodation over the past decade.
It's cowardly to create moral hazard by bailing out banks and automakers for their own mistakes that lead to financial disruptions. It's cowardly to cut rates to such low levels that bubbles are inflated (and the Fed has a poor track record of foreseeing bubbles that some of us could easily foresee, from the dot-com bubble to the housing bubble).
The government ought not to be in the business of business. If the banks or the automakers screw up, let them fail. Yes, there will be severe disruptions in the short run. Is that any more risky than the long-term implications of huge deficits due to fiscal stimulus, bubbles inflated by extremely accommodative monetary policy, or the risks associated with unwinding a $4 trillion Fed balance sheet?
It's like the old Tootsie Roll Pop commercials featuring the wise old owl. When asked, "How many licks does it take to get to the center of a Tootsie Roll Pop?", the owl grabs one and starts licking and counting: "One, two, three ..." Then he bites it, going straight to the chocolate center, and says, "The world may never know."
So it is with the question of whether allowing major banks to fail would destroy global financial markets, absent extreme monetary and fiscal intervention. Would it destroy world economies? The world may never know, because governments cannot resist the temptation to bite - in the form of providing massive stimulus that might have even more drastic consequences than just allowing market forces to work as intended.
Back to those who see the past decade as "normal." If those people see the current trend as a departure from the "norm" they know, rather than a return to the real norm, they may hold off on making major expenditures.
They may withdraw their money from the stock market - at the worst possible time - thinking that a return to higher wages, higher (but not historically high) interest rates, and higher (but not historically high) inflation is a bad thing. And in so doing, they may miss out on a significant opportunity in the equity markets, because the fundamentals today are very strong, and support a continued bull market for at least another 12 months.
They may hold off on buying homes until conditions return to what they see as "normal," when in fact a return to normal may mean even higher mortgage rates. In other words, they may delay buying a home because the mortgage rate is at 7%, expecting a return to their "normal" of 3%. But we may never go back there; instead, mortgage rates may return to the true historical "normal" of around 8%.
They may withdraw their money from the stock market - at the worst possible time - thinking that a return to higher wages, higher (but not historically high) interest rates, and higher (but not historically high) inflation is a bad thing. And in so doing, they may miss out on a significant opportunity in the equity markets, because the fundamentals today are very strong, and support a continued bull market for at least another 12 months.
They may hold off on buying homes until conditions return to what they see as "normal," when in fact a return to normal may mean even higher mortgage rates. In other words, they may delay buying a home because the mortgage rate is at 7%, expecting a return to their "normal" of 3%. But we may never go back there; instead, mortgage rates may return to the true historical "normal" of around 8%.
And that could turn all of this market dissonance into a self-fulfilling prophecy. By not buying homes, they might trigger a decline in home prices that adversely impacts the current economic strength. As George H.W. Bush noted, "As housing goes, so goes the economy." By exiting the stock market, they might trigger a sell-off that results in something more than a 10% correction.
So my message to those who might have a short-term perspective is this: Fear not. We are simply seeing a return to a normal state after the most extraordinary period in most of our economic lifetimes, other than those who also lived through the Great Depression of the 1930s. This is not a brave new world. It's a return to the brave old world that persisted long before the housing bubble burst in 2007.
Wednesday, March 7, 2018
There's a New Tariff in Town
Let's get this out of the way right up front: I don't like tariffs. I'm a free-trade guy. However, I also understand this simple, fundamental truth:
Trade is not a unilateral endeavor. It's a two-way street. Takes two to tango.
And just as it's not fair for one team's batters to use pine tar all the way up the barrels of their bats (right, George Brett?), or for one team's quarterback to under-inflate his footballs (right, Tom Brady?), it's unfair in trade for one country to impose tariffs while their trading partners don't.
Other countries impose tariffs on U.S. exports, dump goods on the U.S. market at cheap prices, and otherwise engage in unfair trade practices to our disadvantage. So we can either a) persuade them to stop, which has proven unsuccessful, or b) give them a taste of their own medicine.
Now, that's not a statement in support of President Trump's recent announcement that the U.S. will impose tariffs on steel and aluminum imports. Again, I don't like tariffs. Instead, I will briefly address why fears of a trade war are overblown, and, by extension, why the market's reaction has been overdone. (There's a method to my madness: I'm teeing up my next post, which will focus on the recent gyrations in the financial markets.)
Most of the people who read the Facebook posts decrying the tariffs and warning of a trade war don't even understand what a trade war would look like. (Nor, apparently, so those who write those posts.)
It's simple: do China and Japan want to engage in a trade war with the U.S.? To take actions to limit our exports to those countries (more than they already do)?
No. The U.S. market is too important to China and Japan. The Chinese economy would not be where it is today without the U.S. market, nor would Japan's economic growth in the 1980s have been possible without the U.S. market.
Who are the four largest steel producers in the world? China, the EU, Japan and India. (We're fifth.)
Who is China's number one export market? The EU's? Japan's? India's?
You guessed it: the U.S. We account for approximately 18-20% of each of those nation's exports. That's a lot of yuan, euros, yen and rupees. You think those countries want to piss off that market? Guess again. They need us more than we need them.
Need proof? Okay. Who are the U.S.' top export markets? The EU, which is among the top four steel producers. Then Canada and Mexico, which are not. Then China, then Japan. Some of this is merely a function of the relative size of those nation's economies, but the appearance of Canada and Japan that high on the list is disproportionate on that basis.
Yes, tariffs are bad from a free-trade perspective. But there is no bilateral free trade with any of the countries mentioned above. (Yes, even the U.S. already imposes tariffs, on everything from asparagus to corsets to auto parts.)
Our tariff on auto parts hasn't made cars too expensive for Americans to afford. We still eat asparagus.
The bottom line is this: there will be no trade war. The cost of goods we consume will not skyrocket. And a 400-point sell-off on the Dow in the aftermath of the tariff announcement is simply a disconnect.
***Update
After yesterday's close, Gary Cohn, President Trump's top economic advisor, resigned over the tariff issue. Good for him. He proved he's a man of principle, which is as rare in Washington as a curling athlete in Saudi Arabia.
The market's reaction? The Dow was down more than 300 points mid-day, but ended the day down just 83 points, proving that a) the market is still irrational, but b) it comes to its senses eventually. The Trump administration will be fine in terms of its economic advisors. It's not like he's going to appoint some pro-tariff dove like Larry Lindsey to the post. Probably more likely that he appoints a hawk like Larry Kudlow who talks him off the ledge of tariffs.
Moreover, the tariffs are in part a response to China's theft of our intellectual property, and are still subject to negotiation if China toes the line (which they likely won't, any more than North Korea will drop its nuclear weapons program if we promise to talk to them, pursuing diplomatic channels like previous administrations would have done). And there is the possibility of carve-outs for some trading partners subject to successful re-negotiation of trade agreements such as NAFTA and TPP. Let's not put this cart before the horse. The market is overreacting, proactively.
Trade is not a unilateral endeavor. It's a two-way street. Takes two to tango.
And just as it's not fair for one team's batters to use pine tar all the way up the barrels of their bats (right, George Brett?), or for one team's quarterback to under-inflate his footballs (right, Tom Brady?), it's unfair in trade for one country to impose tariffs while their trading partners don't.
Other countries impose tariffs on U.S. exports, dump goods on the U.S. market at cheap prices, and otherwise engage in unfair trade practices to our disadvantage. So we can either a) persuade them to stop, which has proven unsuccessful, or b) give them a taste of their own medicine.
Now, that's not a statement in support of President Trump's recent announcement that the U.S. will impose tariffs on steel and aluminum imports. Again, I don't like tariffs. Instead, I will briefly address why fears of a trade war are overblown, and, by extension, why the market's reaction has been overdone. (There's a method to my madness: I'm teeing up my next post, which will focus on the recent gyrations in the financial markets.)
Most of the people who read the Facebook posts decrying the tariffs and warning of a trade war don't even understand what a trade war would look like. (Nor, apparently, so those who write those posts.)
It's simple: do China and Japan want to engage in a trade war with the U.S.? To take actions to limit our exports to those countries (more than they already do)?
No. The U.S. market is too important to China and Japan. The Chinese economy would not be where it is today without the U.S. market, nor would Japan's economic growth in the 1980s have been possible without the U.S. market.
Who are the four largest steel producers in the world? China, the EU, Japan and India. (We're fifth.)
Who is China's number one export market? The EU's? Japan's? India's?
You guessed it: the U.S. We account for approximately 18-20% of each of those nation's exports. That's a lot of yuan, euros, yen and rupees. You think those countries want to piss off that market? Guess again. They need us more than we need them.
Need proof? Okay. Who are the U.S.' top export markets? The EU, which is among the top four steel producers. Then Canada and Mexico, which are not. Then China, then Japan. Some of this is merely a function of the relative size of those nation's economies, but the appearance of Canada and Japan that high on the list is disproportionate on that basis.
Yes, tariffs are bad from a free-trade perspective. But there is no bilateral free trade with any of the countries mentioned above. (Yes, even the U.S. already imposes tariffs, on everything from asparagus to corsets to auto parts.)
Our tariff on auto parts hasn't made cars too expensive for Americans to afford. We still eat asparagus.
The bottom line is this: there will be no trade war. The cost of goods we consume will not skyrocket. And a 400-point sell-off on the Dow in the aftermath of the tariff announcement is simply a disconnect.
***Update
After yesterday's close, Gary Cohn, President Trump's top economic advisor, resigned over the tariff issue. Good for him. He proved he's a man of principle, which is as rare in Washington as a curling athlete in Saudi Arabia.
The market's reaction? The Dow was down more than 300 points mid-day, but ended the day down just 83 points, proving that a) the market is still irrational, but b) it comes to its senses eventually. The Trump administration will be fine in terms of its economic advisors. It's not like he's going to appoint some pro-tariff dove like Larry Lindsey to the post. Probably more likely that he appoints a hawk like Larry Kudlow who talks him off the ledge of tariffs.
Moreover, the tariffs are in part a response to China's theft of our intellectual property, and are still subject to negotiation if China toes the line (which they likely won't, any more than North Korea will drop its nuclear weapons program if we promise to talk to them, pursuing diplomatic channels like previous administrations would have done). And there is the possibility of carve-outs for some trading partners subject to successful re-negotiation of trade agreements such as NAFTA and TPP. Let's not put this cart before the horse. The market is overreacting, proactively.
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