President Trump is barking up the wrong tree in calling for the Fed to lower rates a full 1%. This morning, therefore, a short discussion of how and why he’s wrong and what it means on what could be a “Turnaround Tuesday” to the downside, if animal spirits of markets should turn today.
In the early going, we already see that Gold is rebounding a bit on the future’s markets and the problems elsewhere in the world are far from resolved, particularly in Germany where recession looms and Deutsche Bank may be needing a major bailout this fall. We’re in a time, as described in the Monday column, when an analog to the Four Horsemen are riding.
Concept #1: M.E.D. Yes, thanks for the well-wishing and all, and yes, my 2-week post-op surgery check for the hernia mesh implant on 8/2 went splendidly. I previously shared part of the “Ure quick-healing protocol” on the Peoplenomics site and the good news is, it doesn’t seem to have hurt and as 70.5 year old semi-sedentary males go, recovery is doing very well.
While I was researching on my quest for “super-healing” I was careful to be mindful of a medical phenomenon called minimal effective dose, or M.E.D. (MED) for short.
Applied to one of my Complimentary and Alternative Medical (CAM’s) approaches (LLLLT/PBM – low level laser light therary/photobiomodulation), you need a certain amount of light to promote healing, and yet – if you apply too much – the healing effects roll off. Even more important is that extrapolated wildly by someone not versed in the science, too much light therapy can roll into cooking and that’s not the goal!
The “magic number” is in the 4.2 to 4.6 Joules per square centimeter range. Too much is bad and too little does nothing.
“What the Hell is Ure Point about Trump???”
There are people whose thought-pattern is “If a little is helpful, more is better, then really heaping it on must be great!” Unfortunately, that gets us into the “cooking range” which phototherapy. And it gets us into Depression-Inducing when dealing with interest rate decreases at the end of an 11-year economic expansion since the market lows in 2009 which all arose from the peaking of the irresponsible, Greenspan-induced. No-Doc Real Estate Loan bubble. That peaked in 2006-2007 at which point it collapsed (aided by the implosion of collateralized mortage obligations. The collapse was most articulately spelled-out in my friend Howard Hill’s book “Finance Monsters: How Massive Unregulated Betting by a Small Group of Financiers Propelled the Mortgage Market Collapse Into a Global Financial Crisis.”
Trump’s Thought Error?
The misdeeds in finance that led to the Bubble collapsing in 2008-2010 were actually sowed ahead of the peak. Which means that when the peak passed, the wreckage strewn in the aftermath revealed the many misdeeds of financial engineers.
It was not so much an engineering failure, however, as a policy-environment misunderstanding.
The financial engineers did either math exactly right. But, what changed was the public confidence and outlook.
A useful thought-exercise would be to roll-your thinking back to 2006 and ask “What would have been the eventual ripple-effect had the Federal Reserve taken pre-emptive steps to extend the blow-off top in housing? I, for one, think the answer is pretty clear: It would have resulted in an even larger crash effect.
Specifically, in the lead-in to the crash in Housing, we only saw a limited number of market players taken down. As Wikipedia reminds:
“A financial crisis had developed throughout 2007 and 2008 partly due to a subprime mortgage crisis, causing the failure or near-failure of major financial institutions like Lehman Brothers and American International Group. Seeking to prevent the collapse of the financial system, Secretary of the Treasury Paulson called for the U.S. government to purchase about several hundred billion dollars in distressed assets from financial institutions. Paulson’s proposal was initially rejected by Congress, but the ongoing financial crisis and the lobbying of President Bush ultimately convinced Congress to enact Paulson’s proposal as part of Public Law 110-343. “
Our thought experiment (stand back, your head may explode from thinking this much) would have president Bush arguing to substantially cut rates in 2006-2007 has resulted in?
Seems to me reasonable that competitors in sub-prime in addition to Lehman and AIG would have seen the “profits” from the sale of CMO’s and would likely have increased their exposures. And given a cooperating Fed, that MIGHT have led to additional failures when things began to hit the fan. More people would have been playing at larger stakes in CMO’s.
It’s easiest for a numbskull like me to generalize such equation-rich thinking as an analog to maximum effective dose calculations. Like in chemo…a little bit is good, a little more though and the patient is poisoned and dies. The “hair falling out” is about all the further you can dose, you following?
Trump’s Missing M.E.D. Calculation
I have known and interviewed perhaps a half-dozen billionaires back in “news life” and they all have one thing in common: The “More is Good, Most is Best” mentality.
What they generally don’t quite understand is that the same commitment to future and Going Big that eventually makes them several billions of dollars also will likely drive three to six personal bankruptcies along the way.
There are some who struck me as particularly mindful of this tendency and they were extremely prescient in their business expansion planning. People like Edward DeBartolo, Senior come to mind (from that era).
That era past, however, the modern trend in leveraged asset expansion seems to include diversification into multiple legal entities in order to “firewall risk.” But, this also has the side effect of making the management (and tax compilations) of so many entities mind-bogglingly complex. Which is what the Trump Organization seems to be a poster-child for.
Let’s Generalize the Problem
While there has been an evolution is how billionaires are “spawned” in America, there has also been a concurrent rise in the number of bankruptcies that have occurred because of the excessive risk-taking employed to “rise to the top.”
The problem for a national leader mindset, as differentiated from the go-go developer mindset, is that these United States can not be thought of in the same context as hotel, business complex, or golf property. Instead, it’s a country and as such, while sure, it has customers, many of which are supportive of the Trump positions, there is also the “rest of world.”
Therefore, I sense the “under-appreciated risk” that Trump may be under-estimating in his calls for immediately lower rates from the Fed might be distilled down into two categories.
- Runaway financial expansion. This is the case where even at the top in 1929 (and 2006-2007) there were still additional (excess) new partnerships and ventures being formed which could, when the tide turned, become national liabilities. In other words, if you attempt to control the economy, it’s like trying to control a runaway horse…no telling where it will land you.
- Lack of Remediation Maneuvering Capability. When the Crisis Arrives. Recessions, Panics, and Depressions are all a natural and recurring part of Business Cycles in a free-market (or semi-regulated) economy. If we lower rates now toward the “ZLB” (zero lower bound),. that just ensures that when Crisis arrives negative rates will be deeper and longer.
There is another major factor Trump’s (I believe misguided) calls will produce.
What we are seeing (broadly) in the news flow today is the politizatioin of economics. Trump may have a business degree, but he’s got nowhere near the future financial modeling capacity of the Federal Reserve. He’s likely looking at the election in 2020 and realizing that odds are growing that we could be seriously sliding toward recession by next spring.
What’s worse, and should be seen as pollicization are the growing number of democrats who are chanting “Here comes the recession!!!”
I give Trump credit for getting the assessment right. It’s just his medicine is like sending a patient to chemo for a hangnail. Recessions are the normal flip side of expansions. Diddle with ’em too much and Depressions can arise, especially in global trade wars like the 1930’s. Hoover is the template for Trump Errors.
As the Congressional Budget Office pointed out in their annual assessment back in January (we covered this recently on the Peoplenomics side), the growth in the economy was due to begin slowing as the stimulative results of the corporate tax cuts tapered off, along with the end of onshore capital flows.
Trump’s real problem is he’s not put forth either a Grand National Goal (as Kennedy did with the Man on the Moon withing a decade…) NOR has he articulated a meaningful tax-strategy to preferentially tax American companies that are soley manufacturing in the US versus multi-nationals, except as provided for in the corporate tax bill which is old news.
I’m pretty sure he’s hoping that if there’s enough “free money” laying around that some companies (like Apple) will go for the bait and will move large portioins of manufacturing back to America. Notice, though, it ain’t happening?
Unfortunately, it’s not that simple. That’s because states and municipalities then become key to placement of new manufacturing assets and that sets off a nuclear chain-reaction (exchange) of competing tax bonuses and that, in turn, reduces local revenue (per capita) which then drives up the tax rate that must be laid on the “victims”.
Oilman 2 was by a week, or so back, and was pointing out all the growth down in his home town (The Woodlands, TX) and guess what? With several hospitals and what is it… four major corporate HQ’s going in (Shell, for example), what’s happening? Local property taxes are through the roof. In other words, who’s underwirting the expansion?
Ditto the case of the “on fire” real estate markets like Seattle. Daughter 2 called as I was wirting this and said 5-years ago she could get a dandy apartment for $600-bucks. Today, the same place is in the $1,800-$2,000 per month range. Lay that, too, at the feet of expansion.
What Trump’s pressing for – taken as purely economics – is a rate drop that would continue the maldistribution at leastg into the 2020 election. He’s got to do it from a political perspective, but did you see this morning’s CNN headlines about a coming larger trade war with China? This is viralizing…
“Trump Is Losing the Trade War With China ” declares the Wall St. Journal.
So, while an hour before the open, the Dow futures were still +28, we won’t be surprised should this turn into a “Turnaround Tuesday” and when the direction of the economy is being politicized, there’s no happy ending we can see.
Trump getting lower rates might get him re-elected but only to preside over an imploding economy. OR he can let events run but risk losing 2020 depending on how hard and far we fall.
A little hemlock in your coffee?
Unless, like me, you enjoy considering the short side of markets.
Head over to ex-Fed Boss Ben Bernake’s site and re-read his February post “Evaluating lower-for-longer policies: Temporary price-level targeting.”
The president needs to pay particular attention to the risks of extending lower rates especially preemptively in advcance of a crisis: As Depression scholar Bernanke writes:
“So what could go wrong? A potential issue with lower-for-longer policies, including TPLT, relates to their credibility with the public. To an important extent, these policies work by affecting the public’s expectations about the future course of policy and the economy. For example, in theory, committing to keeping rates lower for longer should encourage extra spending today both by reducing expectations of future short-term interest rates (which in turn should lead to lower current longer-term rates) and by raising expected future inflation. But in practice, people may not understand or believe the Fed’s promises about its future behavior, that is, its promises may not be credible. That lack of credibility could cause lower-for-longer policies to work less effectively than advertised.”
Lower rates will drive people to holding back on consumption of things like home purchases at some level. “Rates are coming down…” They’ll cite Trump.
The view from East Texas is that all that really happens under Lower for Longer (L4L) as Bernanke and colleagues have described it, when applied preemptively, is a change in the “sink rate” on a glide path approach to global calamity.
Even Housing economics dynamo “Robert Shiller says the Fed’s rate cut had the opposite intended effect, sparked recession alarm.” What obvious to some, ain’t obvious to all.
Trump’s maneuvering controls of the economic airplane, hoping for no crash-landing until after 2020 polls have closed, is foolish. A steady-state against this backdrop, dear reader, is becoming an economic long-shot if there ever was one.
Meanwhile, in Other News
Soviet-style thinking is back as “Rocket Explosion Not Your Business, Russia Tells Nuclear Test Ban Monitor.”
Kidnaping and Hostage-taking as a growth model:. Our big historical rhyme with the 1930’s should see a Lindberg-like kidnapping in 2-4 years. Kidnapping likely to grow ahead of that.
Govt. Vs. Govt. We don’t think TSA will be happy with unscannable metal containers, so prepare the popcorn for fallout from San Francisco airport rolls out ban on plastic water bottles. Gosh, have you had your daily dose of parting compound ingested?
Wall St. on drugs? “Do people trade shares of that, or roll them?
Shades of Digital Terror to come: Ransomware Attack Hits 23 Texas Towns, Authorities Say. Related? Our Anderson County 9-11 service was down over the weekend..
Off to work on Peoplenomics for tomorrow…Futures at click time up only 21 on the Dow…
Write when you get rich,