Monthly Macro Monitor – January 2019

A Return To Normalcy

In the first two years after a newly elected President takes office he enacts a major tax cut that primarily benefits the wealthy and significantly raises tariffs on imports. His foreign policy is erratic but generally pulls the country back from foreign commitments. He also works to reduce immigration and roll back regulations enacted by his predecessor. This President is widely rumored to have had numerous adulterous affairs and his administration is wracked by repeated scandals. He often seems overwhelmed by the job of President and confides to friends that he wasn’t prepared for the job.

President Trump? No, that describes the Presidency of Warren G. Harding. It only got worse after he died of a heart attack in the third year of his term and the Tea Pot Dome scandal came to light. He never faced impeachment himself but his attorney general survived several impeachment votes and two indictments before being forced to resign during the Coolidge administration. Harding is regularly rated as one of our worst presidents. His successor, Calvin Coolidge, is widely held to be the most boring president of all time, earning him the nickname Silent Cal. I would be remiss if I didn’t also point out that Coolidge bears more than a passing resemblance to Mike Pence, another man in no danger of being accused of verbosity.

Given the recent turmoil, I think we’d all be thankful for a little boring out of our government right now. But President Trump shows no sign of giving in on his border wall and the Democratic leadership appears to be following Napoleon’s maxim to never interfere with your opponent when he is in the process of destroying himself. But eventually, we will achieve Harding’s campaign slogan and return to normal or at least what passes for that in the Trump era.

I often see comments about how something happening today is “unprecedented” but I rarely find that statement to be true. It is usually a case of the speaker (or writer) not knowing history which is replete with examples of just about any situation you can imagine. The examples may not be exact or as eerie as the Harding/Trump analog but to paraphrase Mark Twain, one can usually find examples that rhyme with the present.

And so, unlike most others in this business, I don’t see today’s economic environment as being all that special. Yes, we had a number of years of extraordinary monetary policy but that is hardly the first time and surely won’t be the last. The US used QE during and after WWII until the Fed/Treasury accord of 1951 and the Bank of Japan used it in 2001. Forward guidance? I think Paul Volcker was the first Fed Chairman to signal policy in advance but I bet there are earlier examples. Recent monetary policies may be ones rarely used but they are hardly unprecedented. We recovered from them in the past and we’ll recover this time too.

The Fed has raised rates steadily over the last two years and has now reached a level that many believe threatens to push the economy into recession. That is of course always possible but right now the market-based indicators we monitor do not support the recession scenario. It appears to me, based on the available information, that what we’ve just witnessed is markets pricing in a return to normalcy – or at least the “new normal” that has prevailed in recent years. The spurt of growth we got from tax cuts and the anticipation of tariffs was not sustainable.

After a couple of quarters of above-trend growth, the US economy is falling back to the previous trend. Will that slowing proceed to recession? I don’t know the answer to that but an economy growing around a 2% average is always going to be more vulnerable to a negative shock of some kind than one growing at 3% or 3.5%. If we get such a shock we could easily fall into recession. But that has been true for most of the period since 2009 and the economy keeps chugging along. We came close in 2015/16 when growth fell to nearly zero but the shale bust wasn’t enough to tip the scales.

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