EC Some Thoughts On What Is Happening

The threat of protectionism and trade wars increased in saliency for investors throughout 2018, and yet most narratives of recent events leave out the December 3 self-reference by the US President as "Tariff Man."  In fact, on December 3, the S&P gapped higher to test the upper end of a month-and-a-half range, and that was it. Over the following 14 sessions, through Christmas Eve the S&P 500 fell 16%. 

The main narrative wants us to believe that Powell's mistake boosts the chances of a recession.  Former Treasury Secretary Summers suggested that before December's hike, the odds of a recession were a little less than 50% and now he puts them closer to 60%. At the same time, the equity market recovery over the past two sessions is supposed to be linked to the fact that the President won't (couldn't?) fire Powell. Surely the US economy is not so fragile, and our metrics not so precise as a 25 bp hike would push the US into a recession.  

The US economy appears to be tracking between 2.4%-2.7%, according to the GDP models of the NY and Atlanta Fed respectively, as of a week ago.  The news since has been mixed, but one thing that stands out is that the consumer seems unflappable.  According to Mastercard, holiday retail sales rose 5.1% year-over-year, the best in six years. The shutdown of parts of the Federal government is likely to shave growth. In the 1995-1996 shutdown (27 days in all), GDP was shaved by around 0.4%.In 2013, the partial government closure (16 days) may have cost 0.1% of GDP, according to estimates.  

Congress controls the purse strings. It is powerful. Some suggest, for example, that the Vietnam War had to end when Congress stopped funding it. The Republican Congress that had been critical of Obama's fiscal policy could not provide tax cuts and spending increases fast enough. This helped give the US economy, already in the latter parts of business expansion that was historically long-in-the-tooth, a bit of a goose that allowed the Trump Administration to pursue a highly disruptive agenda, including an aggressive trade stance.  

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Barry Hochhauser 1 year ago Member's comment

Good article and comments.

Carol W 1 year ago Contributor's comment

First they should STOP the press conferences..JP screwed up when he went off script..his autopilot remark was a real special kind of stupid. Plus the press does nothing but misinterpret adding kerosene to the fire. Less info is more when it comes to the Fed. Transparency has been way oversold.

Marc Chandler 1 year ago Author's comment

I do not think #Powell broke fresh ground indicating that the balance sheet reduction was on autopilot. The #Fed has intimated it before. It indicated that the balance sheet is not long a policy signal and that its reduction was technical in nature and would continue unless, the Fed approached the zero- bound again.

I also disagree about transparency being oversold. Given the immense power of the Fed and its relative insulation, transparency it seems to me, is integral to its accountability What is it doing and why? I get strategic ambiguity and can accept temporal inconsistencies, but I for one am happy that the purposeful obfuscation of the #Greenspan era is over--that "Secrets of the Temple" is a period piece. The system evolves.

Carol W 1 year ago Contributor's comment

Sir, you misinterpret me. #Powell can't be data dependent and on autopilot simultaneously. I'm all for the Fed blathering to the masses about what it's up to. Delivery your little speech and get the hell of the podium. The post press conferences are stupid.

I never referred to that Ayn Randster groupie's marble mouthed delivery but now that you brought him up, it was an insult to the public and he exposed himself as the fool he was. Worst Fed chief of all and that's saying a LOT.

Gary Anderson 1 year ago Contributor's comment

Greenspan created the New Normal with financialization, hoarding and derivatives, Carol. That is either a stroke of genius or absolutely diabolical. I don't like it, but in an advanced society, protecting collateral seems to be important, especially when that collateral is debt.

Carol W 1 year ago Contributor's comment

regarding your Greenspan comment I posit the latter. cheers

Gary Anderson 1 year ago Contributor's comment

So, basically, Powell said economic growth slowed but is on track to increase. What does Wall Street know that Powell doesn't know?

Moon Kil Woong 1 year ago Contributor's comment

This decline is heavily driven on politics, more on political destabilization caused by Trump than anything else. Because of this, as he addresses the uncertainty the market is bouncing back up rapidly. If the China trade war end and the uncertainty over the Fed ends the market may be set to rally strongly. However, this remains a big if, just like the potential for a deal to reopen government offices.

The other big reason for the market decline is the fall in oil which adversely affects many companies in the US and many economies. Trumps insistence that he wanted lower oil prices as low as $1 and pushed for Saudi Arabia to make it so may be a bad wish because if it came true it would collapse large portions of the US economy. We are dependent on oil these days as much as we ever were. It's just that we are now a large producer as well rather than a giant consumer.