Tuesday, May 21, 2019

China's Currency

We have been having so much fun lately talking about trade wars and Trump's taxes, I thought we might get back to data graphs and mundane topics like exchange rates. Some of you have been getting less than required sleep lately so I hope this helps.

Below is a graph my friend Fred (at the St. Louis Fed, https://fred.stlouisfed.org/ ) helped me create. It has data on two key exchange rates -- the dollar/yuan and the dollar/euro rates. The data goes from January 2005 to March 2019. The data are monthly so you see 14 years of monthly data points.

Why do we bother with exchange rates in a macro blog? Was it because someone had a little too much JD? Perhaps. But we love to talk about exchange rates for several reasons. First, whenever the dollar appreciates against another currency, that means the currency of the other country gets weaker and foreigners would want to buy fewer US goods (assuming prices didn't change in the meantime). It also means that Americans or people holding dollars will find the goods and services we buy from other countries are less expensive. This improves the inflation rate in the US and tilts spending away from America. Knowing whether the dollar value is going up or down, therefore, helps us know more about changes in the inflation and growth rate in the USA.

I could write a book on exchange rates but I see some of you have already fallen asleep. The good news is that Davidson, Von Hagen, and Hauskrecht (Macro for Business: The Manager's Way of Understanding the Global Economy, Cambridge University Press) will be out in the bookstores in January 2020. So you will have lots of pages you can read soon.

Let's dispense with why exchange rates are important and look at what the graph might be telling us.The first thing to know about the chart is that each data point shows the percentage change in the exchange rate changed over the past year in each month. The second point is that a movement upward on the graph implies an appreciation in the value of the Chinese yuan or the euro (and therefore a depreciation of the dollar.)

We can see some years that showed significant dollar depreciation -- 2007-08, 2011, 2013,  and 2017.

Of course, you also see that the values of these currencies are highly variable. Lots of peaks and valleys. That disputes a widely held notion that the Chinese peg their currency against the dollar -- always keeping it depreciated against the dollar. The common hills and valleys shared by the euro and yuan (against the dollar) dispute any special activity by the Chinese on their currency since 2005. If anything, the yuan has the greater variance of the two.

We can see a distinct period of dollar appreciation from the end of 2013 through early 2017. Since then, the dollar has been highly volatile falling and then rising again.

Of course, you could take a longer view and note that since its trough in 2008, the dollar has been on an upward climb at least through 2017. The hump in 2018 interrupts the trend toward a higher dollar but one wonders if the trend will soon reappear.

Clearly, this little picture helps us to see why inflation has been so tame in the US economy.  And it might show why, if it continues, the US could be in for a period of slower economic growth.

I checked with other exchange rates and the truth is, the dollar has generally risen against most currencies. So much for the China story. The US dollar has been rising for global reasons, and China has had very little to do with that. Perhaps it is a testament to the strength of the US economy relative to other countries after we all escaped the worst economic cycle since the Great Depression.

Tuesday, May 14, 2019


I got into a discussion about Bernie Sanders with a dear friend of mine. He thought I should look more closely at Sanders' positions. I went to Bernie's web site, did several other searches, and finally did one on democratic socialism. 

What follows below is what I said in an email back to my friend (I did edit it a bit more here). 

Letter starts here....

Sanders definitely says he does not want Leninism but he also calls capitalism a lot of bad names.

Then he says the following.

“Democratic socialism means that we must create an economy that works for all, not just the very wealthy” 

That sounds nice but it has the following problems when not followed by more specifics…

First, it is plain wrong. It implies that the current system works only for the very wealthy. That is plain silly. The current system has plenty of problems as it relates to income distribution and poverty – but capitalism has been good for a lot of people for a long time. Fix it yes. Say it is all for the wealthy is silly.

Second, note that the statement says nothing about what the new system would look like or its philosophical principles. What guides this democratic socialism a la Sanders?

Third, reading his other materials one can infer that the new system will tackle every social problem we know and offers a government solution. He is very clear about all the ways government will tell companies what to do – and what rich people can do with their wealth and income. He is not very clear about how far the government can or should go with respect to the balance between private markets and government. Is there a rule or principle guiding this balance? 

Fourth, while he lists all those helpful programs he offers nothing that I can see as to how we get from point A to point B. It’s like a religious plea for salvation but never once offering a realistic guide as to the negative externalities that get generated when you try to change all that stuff. Besides transferring income and wealth what can really be done to seriously improve the lives of families? Do we really know how to solve all these problems? Any of these problems?

Fifth there is no reassuring analysis about how one actually creates a more equal society when we know that government can be as corrupt as the private sector. Will we really help all those people when rich people are not exactly going to sit around and thank Bernie for redistributing their incomes?

One more point. Saying all this about Bernie does not mean that there are not any ways to make changes that improve people’s lives. Maybe Bernie is the opening bid? Maybe Bernie will help us find a better middle ground? 

In that case, let him dream all he wants but we would hope the government and the people will see that marginal change is both necessary and possible. We would hope that people can separate the dreams from the realities.

That’s all I've got for the time being. Thanks for telling me more about Bernie. I plan to spend some time in the next year trying to figure out who might be a decent leader for our country.

letter ends here.....

The above is what I sent to my friend. I look forward to more conversations in the future. 

Tuesday, May 7, 2019

Real GDP Q1 2019

The annualized percentage change in real GDP was announced by the US government recently. Real GDP rose by an annualized 3.2% in the first quarter of 2019. Like all the similar announcements, this one will be revised several times before we settle on how much real GDP rose in Q1 2019.

In the meantime we are stuck with interpreting the 3.2%. Mostly we want to know if it represents a change from the past. Many people were quite happy with a number like 3.2%. It sounds good and it tastes nice like a nice JD old fashioned. If the number had been 1.2% we would have scowled and worried that something might be seriously wrong with the US economy.

So I decided to take a look at quarterly real GDP over the past 10 years. The data I present begins in Q1 of 2010 and stretches through Q1 2019. Thus we have 109 data points in those 9 plus years.

The data are presented graphically for you below. At the far right is the 3.2% of Q1 2019. Looking back across all the points you quickly notice that the 3.2% is neither the highest nor the lowest number  on the chart. In 2014 there were clearly some better results. Looking across you can count 13 quarters when real GDP grew by more than 3.2%. So one point to make is that the 3.2% is strong but not any sort of peak.

What else jumps out at you from the chart?

One thing is the volatility. The average one-quarter change was about 2.3%. So the 3.2% was well above the average. But does it mean next quarter or future quarters will be above the mean? Notice all the ups and downs in the chart. There are at least 10 episodes in which the real GDP change increased only to be followed by one or more decreases. Notice the two peaks in 2014. Following those peaks were about two years in which the rate generally declined.

Two points so far. The 3.2% is well above the mean quarterly change but it is not especially strong. Second, a rise in real GDP growth is not necessarily followed by more growth.

Third, since early 2016, the graph does start to look different. There is less volatility and there does seem to be a general upward trend in quarterly growth rates. This might give the expectation that this trend will continue with quarterly increases of at least 3% or more.

Some of you are fidgeting because you know that thinking about the future of the economy ought to bring in real cause and effect. If post 2015 is different, then why is it different? I am sure Trump's people will disagree with Obama's. Is the post 2015 performance the result of Obama's policies finally maturing after a long adjustment from a major economic recession? Or does the post 2015 growth register changes brought in by Trump's administration?

Politics aside, it is not easy to answer these questions. Maybe the dots have nothing to do with Obama or Trump? And of course, it is also possible that the post 2015 apparent upward trend will begin to vanish in July when we get the Q2 2019 numbers.

I stick with my love of persistence. Without one of the risk factors turning the world on its head, I like the idea that employment growth causes spending which causes output which causes more employment, spending, output, and employment.

I can't be sure of exactly why post 2015 real GDP growth is rising but I do think momentum could carry us for a while.

Tuesday, April 30, 2019

Another Oldie Goldie: Out of the Economic Wilderness

A friend suggested that I recycle some of my older gems from the blog. Today I rehash and remind about the needs for much better policies if we are going to keep the US economy growing. We all want that, right? Whether you are Ds or Rs you want to find a way to have our robots and our jobs too.

I published Out of the Economic Wilderness in January 2018. http://larrydavidsonspoutsoff.blogspot.com/2018/01/out-of-economic-wilderness.html

If anything the process of delivering macroeconomic policies in Washington has gotten worse. There seems to be no party strongly advocating fiscal responsibility. And neither party has anything to say about what to do about the replacement of jobs with technology. Why do we put up with all that crap?

Out of the Economic Wilderness offers no specific solutions but surely the remedies for our current problems are not impossible. Rocky came back several times against heavy odds and he did it without magic. He did it by training smart and training hard. There is no bucket of JD Old Fashions out there that will fix our problems. We need to hunker down and do the tough things it takes to be the most globally competitive country in the world. We need to have the most educated, best trained, and highly motivated employees in the world. It's sad that we don't even think that way.

After the Sputnik challenge this country reacted with energy and focus. The global economic threats today are no less threatening. I hope we get off the dime before its too late.

I hope you enjoy re-reading Out of the Economic Wilderness.

Tuesday, April 23, 2019

Da Market Today

I wrote this yesterday, April 22, 2019. The usual financial market experts are lamenting that we might be near another stock market peak and subsequent decline. Apparently the market today does not believe these forecasts as so far the S&P 500 is holding its own.

We all know why these experts are predicting a peak. If they get this prediction right at least once in their lives they will become rich and famous and get to dine with other rich and famous persons. Unfortunately predicting da market is a lot like predicting when Nolan will pull down his trousers and pee on an unsuspecting bush.

This topic wouldn’t be so much fun if it weren’t for the obvious and erroneous misrepresentations made by these prognosticators. For example, they point out that when the S&P hit 2905 on April 19 of this year, that it was nearing a previous high. Simple, right? Da market was approaching a new high. On Saturday night when you have that last glass of Pinot and are approaching a new all-time high – it’s important that you order an Uber to take you home. Just as your evening is about to end, these snake charmers are worrying that the market is about to retire as well. You should sell your stocks so those folks will make a nice commission on the sale.

While it is true that the market went up a lot between Christmas Eve 2018 and April 19, 2019 – it is also true that the market barely edged up an inch between October 1, 2018 and April 19, 2019. Actually, it fell a bit during that almost seven month time period.  So was the market high on April 19? 

Or compare it to January 26, 2018 and you get a wild and crazy 1.1% increase in that 16 month interval between January 2018 and April 2019. No cigar for that performance.

Some of you want to wring my neck because I have not admitted a key point – if you compare the S&P value today to two years ago and before two years ago – yes the market has risen. Yes, it has even risen at a pretty good clip. But come on dudes – has it risen enough to call off the S&P party? Has it risen enough to cause a major and significant downturn? Has it risen enough for you to sell all of Grandmas’ stocks?

I doubt it. Keep in mind what the market does. Unless the world has fallen totally apart – the S&P goes up. That means the previous peaks are historical points. We go from one peak to the next peak. Going from one peak to the next is normal!

Like Nolan and the unfortunate plants he waters, we don’t know when and where the stock market will take a breather. Of course it will. But let’s face it, companies are doing pretty well these days. If the S&P value is at least approximately impacted by the ups and downs of these companies, then it is not easy to see why we would soon have a sustained stock market collapse. The economy is growing. Wages and incomes are growing and jobs are being created every month. Everyone knows a recession is due by looking at the calendar but very few serious people are predicting when and where it will arrive.

Sell your stocks or don’t. But surely don’t put much stock into these stock market forecasts. Okay, sell a few shares and buy some JD. That sounds good to me. 

Tuesday, April 16, 2019

MMT: It's the Rave Now

Modern Monetary Theory (MMT). Really, it isn’t so modern. I can remember learning MMT at Georgia Tech from Bill Schaffer in the 1960s. It was a special case of the Keynesian Model. Without going through all the history of who John M. Keynes was, let’s just say he was the father of macroeconomic theory. He was also married to a ballerina. Pretty cool guy.

Professor John Hicks penetrated Keynes’ impenetrable writings, especially what he wrote in the General Theory. Whew, the hardest reading I have ever done. But Hicks figured it out and created something called the IS-LM model. This had nothing to do with religion. The IS curve modeled the goods and services market (Investment equals Saving). The LM curve was all about money (demand [L] and supply [M]). Putting IS and LM together was almost as cool as Joe Biden touching Madonna’s hair.

The IS-LM model was the way we explained the economy and discussed monetary and fiscal policy. One very special and weird case of the model was when the IS curve was vertical and the LM curve was as flat as the tires on my 1956 Mercury in 1964.

These extreme assumptions led to a policy conclusion that fiscal policy was all powerful and monetary policy had no impact on the real economy. And this is exactly what these modern-day MMTers are saying. They say, forget about monetary policy. 

What we need to do to keep the economy humming, according to MMT, is to have the government create stimulus with its fiscal policy. That is, raise government spending and reduce taxes so spending grows. If there is a role for monetary policy, it is to not get in the way. As the economy expands, the Fed should create as much money as is needed.

So here’s the cool thing. Back when Hicks and Dick Froyen were explaining all this stuff to us young'ns, they explained that the assumptions for that variant of the model were an infinite demand for money and a zero elasticity of aggregate demand with respect to interest rates. Viola – with those assumptions all money gets gobbled up to be held and never gets spent. With those assumptions, even if bigger government deficits caused interest rates to rise, they would not harm interest sensitive spending like autos and capital goods. Sweet. Let government deficits soar and pump as much money as needed.

Why did Hicks invent this special case? What was he smoking? Basically, this was supposed to be the Great Depression Case of the model. Hicks mimicked Keynes by saying that in very extreme times like a Great Depression, people acted really weird. And thus he and Keynes believed that money would not rescue us in the 1940s but they thought fiscal deficits would.

My question: Why are we assuming the same assumptions hold in 2019? If MMT is based on behaviors that are typical in a Great Depression, why would we want to make those assumptions now when the unemployment rate is low and output is growing? Seems kinda weird to me. Who moved my JD?

Tuesday, April 9, 2019

Don’t Underestimate Free-Market Capitalism by Guest Blogger John Manzella

John Manzella, founder of the ManzellaReport.com, is an author, speaker, and nationally syndicated columnist on global business, emerging risks, and economic trends. To contact him, visit www.JohnManzella.com.

This article was nationally syndicated by Tribune News Service/Tribune Content Agency and appeared in newspapers across the United States.

American free-market capitalism has generated the greatest economic growth the world has ever seen. At the core of its brilliance is its ability to create incentives to produce solutions to problems and to distribute those solutions worldwide. In doing so, it has paved the way for tremendous gains in efficiency and productivity while lifting millions of people out of poverty.

When discussing its benefits, the late author and philosopher Michael Novak said: “No other system so rapidly raises up the living standards of the poor, so thoroughly improves the conditions of life, or generates greater social wealth and distributes it more broadly. In the long competition of the last 100 years, neither socialist nor third-world experiments have performed as well in improving the lot of common people.”

For centuries, the American experiment has embraced free-market capitalism along with the rule of law, separation of church and state, entrepreneurialism, balance of power, the welcoming of immigrants, and a brilliant Constitution. This “secret sauce” has created a stable environment encouraging entrepreneurs to take risks and empowering people to unleash their creativity to achieve their dreams.

After dozens of speaking engagements in Mexico in the early 1990s, I found that many in the audience either had an American passport or badly wanted one. When I crossed through Checkpoint Charlie into East Berlin as the Berlin Wall was coming down, I was told by countless East Germans of their wish to move to the United States to seek a better life. And when visiting China, young Chinese often tell me of their desire to study in America or permanently move here.

What draws so many people to the United States? America’s “secret sauce” continues to provide tremendous advantages that few other countries can.

However, due to flaws revealed during the Great Recession that began in 2008 and throughout its slow and uneven recovery, many Americans began to question the credibility of our economic model.

In efforts to help those struggling to get ahead and create greater economic opportunities for all, some elected officials are advocating left-leaning (some would say “socialist”) policies that give the state too much decision-making authority. And herein lies the problem.

Stated by author John Steele Gordon, “Politicians can only make political decisions, not economic ones. They are, after all, first and foremost in the re-election business. Because of the need to be re-elected, politicians are always likely to have a short-term bias.”

Additionally, government service providers lack competition, a primary factor that makes capitalism so successful, and have less incentive to become more efficient, productive, innovative, and accountable. If left unchecked, economic decisions made by the market today could become decisions made by policymakers tomorrow who assume they know better.

Michael Novak also stressed that checks and balances are to the political order what competition is to capitalism. China, for example, does not have a system of checks and balances, nor one that promotes competition. As a result, its brand of one-party capitalism is undergoing difficulties that are likely to become more severe in the years ahead.

Other examples where the state substituted its decision-making ability for that of the market include the former Soviet Union, North Korea, and Venezuela — all failed states.

On the other hand, the American system of capitalism is far from perfect.

Some argue that our system is in a constant struggle to achieve a balance between the wealthiest and the rest, but in recent years has shifted too much power to the top, creating greater inequality. Others assert that crony capitalism, which exists when competition is unfairly limited, is too pervasive. And still others claim that their ability to reach the middle class has become nearly impossible.

In an effort to improve economic outcomes for all Americans, it’s essential to continually improve our system of free-market capitalism — not move toward a more socialist-like model that empowers politicians to make decisions that should be made by the market.

Free-market capitalism is responsible for improving the living standards of millions or even billions of people around the world. It’s also responsible for creating the wealth that, through taxation, supports essential government services, social programs, and safety nets.

Seeking the right balance between the market and the state is critical. But in the process let’s be sure to improve America’s “secret sauce,” not poison it.

Thursday, April 4, 2019

Cow Jokes

You have 2 cows.
The State takes one and gives it to your neighbour who doesn’t have a field to put it in.
You have 2 cows.
The State takes both and gives you some milk. Then the cows die due to neglect.
You have 2 cows.
The State takes both and sells you some milk. Then the cows die in the war.
You have 2 cows.
The State takes both and shoots you. Then the cows are killed in the war.
You have two giraffes.
The government requires you to take harmonica lessons. (((Kinda jumped the shark with this one, but never mind, forge on…)))
You have two cows.
You sell one and buy a bull.
Your herd multiplies, and the economy grows.You sell them and retire on the income.
You have 2 cows.
The EU takes both, shoots one, milks the other, and then throws the milk away because the quota has been exceeded.
(((We’ll know that the EU has come into its own when a tiresome term like “European Union Bureaucratism” is collapsed into simple “Eurocratism.”)))
There are a lot more of these if you go to the below web site.............

Tuesday, April 2, 2019

The Socialism Red Herring: Are we all Sociacaps now?

I love how we are debating socialism. The Ds love to taunt the Rs with this stuff. Capitalism is bad. Socialism is good. No, it isn’t. Your mother wears combat boots. No, she wears Sketchers. Blah blah.

As usual, we get all pumped up by these pols and we start fist-pumping and breast-bumping. It’s almost better than Perry Como reruns.

Let’s start with some definitions I found in Wikipedia:
Socialism is a range of economic and social systems characterised by social ownership of the means of production and workers' self-management, as well as the political theories and movements associated with them. Social ownership can be public, collective or cooperative ownership, or citizen ownership of equity.  
Capitalism is an economic and political system in which a country's trade and industry are controlled by private owners for profit, rather than by the state.

The main distinction--and an important one--is that capitalism is run by private owners for profit and socialism is run by social ownership.

So what does that mean in theory and practice?

In theory, the distinction arises out of what roles we play as citizens when it comes to who makes the donuts. Notice it is the same people in either system – the citizens. In socialism, we all come together and decide how many donuts to make and at what price to sell them. We then create a sharing scheme to distribute the revenues. In capitalism, we let people self-select so that some people make and sell the donuts while the rest of us make steel or farm the land. Those who farm the land don’t share their profits with those who make the donuts and vice versa.

That’s the theory. What about the practice? I doubt there has ever been either of these systems working any place at any time. It is impossible for all of us much less the people in Bloomington to make the donuts together. What happens in reality is that some folks get selected to do the work. Then the political process decides who gets what. 

Capitalism is never tried either. Notice that countries have governments and governments never let capitalists run willy nilly. Governments scoop off their share of the revenues with something called taxes. And of course they cannot resist regulating these companies in the name of the people.

So if we never see socialism or capitalism, what’s the big debate about? The reality is that most modern countries are somewhere on the socialism/capitalism scale. In some countries the ratio of government to private is higher; in other countries it is lower. The best most countries can do is to move the needle at little one way in one year, a little the other way in another year.

So we are all Sociacaps now. And what we are doing in the political arena today is to move the needle. The Ds want to move it left. But in reality it isn’t as theoretical as you might think. Arthur Okun wrote a book a long time ago called Equality and Efficiency: The Big Tradeoff.  In that book he wrote that if you want more equality (free schools, free healthcare, etc.), then efficiency and economic growth will suffer.
That is what the coming election is about. Will the Ds come up with something that effectively improves equality without throwing the baby (the economy) out with the dirty bathwater?

I suspect we will hear a lot about that this year. Thus the need for plenty of JD... and donuts. 

Sunday, March 24, 2019


The R-word has been bandied about a lot lately. Like a bus that gets behind schedule on its appointed route, a recession will eventually arrive. It might not come on time but it will surely come. And when it comes the nation will suffer. Not everyone suffers and not everyone suffers the same, but no one wants that bus to arrive. So the longer the interval from the last "bus", the more pronounced the wondering gets about the next recession's arrival.

This wondering translates into all sorts of behaviors. One of them is pressure on those who command macroeconomic policy. We want the Fed to reduce interest rates, and we want the government to tax less and spend more.

So today is a good day to provide some background about recessions. I went to Wikipedia and found some interesting data to start the conversation. None of this predicts when the bus will arrive. None of this guarantees that you won't have to stand on the bus. It is mostly just JD for thought.

We always thought of recess as a nice time. We could get out of our rigid school desks and run to the playground. A recess meant an interruption in the normal process of reading, writing, and arithmetic.

A recession is an economic term that means the normal progress of economic growth gets interrupted in a noticeable way. A recession refers to those times that are less desirable for the economy. In the United States, we let the Bureau of Economic Analysis decide when recessions begin and end. They use a lot of information. For example, when JD sales go up, there is probably a recession. Just kidding. The BEA looks at many economic indicators including real GDP growth, spending on consumer and industrial goods, capacity utilization, unemployment, and more.

Since the press is not good with complicated things, the media proclaim a recession if real GDP falls for two quarters. If half of a year is yucky, they proclaim a recession. 

So what do we know about recessions? (Some data is found in the table below.)

  • Since I was a prickly lad of 14, we have had eight recessions in the USA. In almost 60 years, we had eight recessions. That means we have a recession just about every 7.5 years. Since the last recession ended in 2009 and today is 2019, we have not had a recession in about 10 years. The bus is late.
  • The table shows the average time between recessions is 65 months. The 2000-01 recession was a very slow bus – it took 120 months to arrive. The 81-82 recession came only 12 months after the 1980 recession. So there is a lot of variability in when the next recession is coming.
  • The average recession lasted 12 months. The one in 1980 was half of the average, and we had two occasions when a recession lasted for 16 months. The last recession took 18 months.
  • During a recession, real GDP falls. The table shows the decline from the previous peak of real GDP to the lowest quarterly amount. The average decline in real GDP was about 2%. In the 2000-01, real GDP barely fell. In the Great Recession of 2007-09, real GDP fell by more than 5 percent.
  • Naturally, the unemployment rate rises in recessions. In the Great Recession and in the 81-82 recession, it rose to almost 11 percent. The average peak unemployment rate across all eight recessions was 8 percent.
Predicting recessions is a lot like predicting when the next hurricane is going to hit Sanibel Island – and then trying to guess where and how long it will hover and how much damage it will do. The next recession or hurricane will likely not be the average one and knowing if it will be short and sweet like 90-91 or long and deep like 2007-09 is not easy.

It is too bad that our economic models don’t do a better job of predicting recessions. But like hurricanes, it is a lot more complicated than it looks. I guess we will continue to muddle through and hope for the best. Over-preparation is no better than under-preparation. We should be careful not to throw out the baby with the bath water. 

Name Duration Time Since Peak Peak to 
Last  Un Trough
60/61 10 24 7.1 -1.6
69/70 11 106 6.1 -0.6
73/75 16 36 9 -3.2
1980 6 58 7.8 -2.2
81/82 16 12 10.8 -2.7
90/91 8 92 7.8 -1.4
2000/2001 8 120 6.3 -0.3
2007/2009 18 73 10.8 -5.1

Tuesday, March 19, 2019

Monetary Insanity

On Thursday March 14, Stephen Moore and Louis Woodhill wrote a piece in the Wall Street Journal called “The Fed is a Threat to Growth”.  I think Moore and Woodhill (M&W) are a threat to growth!

Here’s their story in a nutshell.
President Trump has restored growth to the US economy. Along with the growth, the inflation rate has been pretty much subdued. The Fed worried about inflation nevertheless, and this caused financial chaos as the Fed raised in interest rates. There was a collision of foreigners wanting more dollars while the Fed was removing them. Even though the Fed announced a halt to future interest rate increases, the damage to growth has been done and growth has not resumed. The Fed should lower interest rates now to get growth back on track.

Yikes…and Goldilocks lived happily ever after.

It all sounds pretty good but  does not pass scrutiny. JD always brings clarity to such things.

First, let's remember that the Fed’s mission was to restore some normalcy to interest rates. As a doddering old fool, I am among many Baby Boomers who live off interest. I guess M&W have their money invested in gold or bitcoin or something exotic, or they might have noticed how the spending power of all these people has been damaged through all these years of low rates. Just like Goldilocks wanted her porridge just right, the Fed needs to make interest rates just right. That means raising them. 

Second, the conclusion that the economy has been harmed and that the announcement to stop raising rates has not produced growth is silly. Do these guys think that growth just pops around every time the Fed talks about a policy? The markets might get hysterical for a day or two but come on. Growth hasn’t come back yet? Give it time. The world has not ended.

Third, why give so much blame to monetary policy for the lack of response of growth. Do these guys read the newspapers? The whole world is growing slower and it doesn’t have squat to do with our Fed. Clearly, China is slowing down and what is going on in Europe has little to do with Fed policy. It mostly has to do with expectations regarding a tariff war or economic problems in those parts of the world.

Fourth, is there no amount of money that will satisfy these guys? I’d like to remind them that banks are sitting on mounds of money in their excess reserves. Despite the moaning about high interest rates, interest rates are low. Interest rates are low because money is quite ample.

Finally, the markets don’t expect inflation now? Fine. Did they expect it 1961 when the inflation rate was less than 1%? Did they expect it in 1971 or in 1976? I don’t think so. Inflation has a very cunning way of jumping out at you like a black cat in the night. And it usually does that not long after "important economists" tell everyone that we need to flood the economy with lots of money.

Reducing interest rates right now is insanity, especially if insanity is defined as doing the wrong thing over and over despite the negative results.

Tuesday, March 12, 2019

Employment Hysteria

Employment rose by 20,000 jobs last February. You would have thought that JD had run out of corn. Without quoting any of the articles, the general tone of many of them was basically that this was a sure sign of a weakening economy.  The wise folks who predict monthly employment changes were devastated. They thought jobs would increase by hundreds of thousands. How could they be so wrong?

The answer is that predicting monthly employment much less monthly anything is like predicting how many pounds you will gain after one large juicy rib-eye at Malibu. I don't  know if a recession is coming or when but this last data point for employment tells me nothing. Nada. Zip. Zero.

To prove my point -- look at the two graphs I downloaded from my friend FRED at the St. Louis Fed. The first graph plots monthly employment for each month between January 2000 and February 2019. I did not do this with my Etch-a-Sketch. It is the real thing. Do you see a recession coming in that graph? Do you see a major employment problem? Do you see a Tuna with a miniskirt?

How about the graph below it? In that one I asked my buddy FRED to plot the annual growth rate of employment for each month since January of 2000. The point on the graph for February 2019 is the percentage change in employment from February 2018 to February 2019. Do you  see anything crazy in that graph? Basically the year over year changes for about the last five years have been pretty stable. Recession signal there? I don't see it.

What's with the press then? You already know the answer. They don't give a hoot about informing or educating you. They just want to sell you cars and trucks and a host of other doobers. They can't sell all that stuff unless they get your blood boiling. So sad.

Tuesday, March 5, 2019

A little Ditty about Jack and the S&P 500

I live in Bloomington where we often have sightings of John Mellencamp in the grocery store. Jack and Diane is one of his hits. Pardon me for messing with Jack and Diane to make some points about the stock market valuation today using the S&P 500.

As you know, I love looking at data as much as gazing upon a curvy bottle of Jack (Daniels). Stock market values have been quite volatile lately and have gotten a lot of attention. At the center of that attention was the previous very high value of the famous P/E ratio followed by recent stock values that are lower than the scum on a Tuna’s belly. While there is nothing wrong with P/Es and looking at today’s values of stocks, that focus misses a lot.

Suppose you heard that Nathan gained a bunch of weight. You might say, poor Nathan. He gained all that weight. He must be on the famous Brad diet featuring large Ribeye steaks and extra-large Guaymas shrimp. But then I tell you the rest of the story – Nathan previously lost 50 pounds when he mistakenly tried exercise for several weeks. My point is that large changes today are often preceded by opposite large changes of yesterday.

That caused me to search around on the Internet for historical values of the S&P 500. There I learned that the S&P on January 1, 2000 had a value of 1426.* I also learned that on January 1, 2018, it was 2790. In those 18 years, the S&P 500 value had almost doubled. Groovy. I took out my Casio fx-300ES and learned that the increase over those 18 years was about 4% per year. If you thought the stock market at the beginning of 2018 was over-valued, then I would say, yeah, but it only produced a 4% annual rate of growth over all those years.

Then I looked at more of the data. I found that after hitting 1426 in 2000, the S&P 500 never exceeded 1426 until 2013 (I was looking at monthly values of the S&P on the first day of each month). It came close to 1426 on January 1, 2007, but then the world fell apart. Wow. Basically zero growth in the S&P for 13 years!

I wondered what normal growth would have produced over those 13 years. Starting at 1426 in January 2000, if the market grew at an annual compounded rate of 4%, it would have hit 2375 by 2013. If it had grown at an annual compounded rate of 6%, it would have reached 3042 by January 1, 2013. In 2013, it was neither 2375 nor 3042 – it was stuck at the level reached in 2000!

Key point: With such horrible past performance, it does not seem crazy that the S&P 500 would recover after 2013. It does not seem weird that it would make up for more than a decade of lost growth. From a value of 1480 in 2013, it rose to 2790 in the next five years. Yes, that is a big increase. Yes, that is almost a doubling of the market. But if you consider the annual compounded rate between 2000 and 2018, it is less than 4% per year. If it had risen over those 18 years by a respectable 6% compounded annually, it would have reached 4070 by January 2018.

As I write today the market is closing in on 2800. Is that too high or too low? I don’t know. But I do know that markets go up and down. Surely today’s values are very high compared to the very low point after the last global recession. But they do not seem out of line when you take a longer view of 18 years.

* The data I used are monthly values on the first day of each month. If the S&P 500 had higher or lower values than on the first day during the month, then some of my comparisons might not be valid. I think the overall trends and conclusions are fine. The data came from http://www.multpl.com/s-p-500-historical-prices/table/by-year  

Tuesday, February 26, 2019

Happy Birthday and Déjà Vu All Over Again

I am trying something new this week. To be honest, it is mostly because I am lazy and there wasn’t that much to write about this week. Second, I wanted a chance to underscore my brilliance with respect to my past thinking. Third, I am approaching a blog birthday of nine years. Some of you have been reading my stuff for 9 years. Wow – you are true gluttons for punishment. Finally, I have a very wise friend who suggested this to me. And no, that friend is not Jack Daniels.

Below is the link to a piece I wrote in March of 2010. The full title of that post is The Whack-a-Mole Recovery or Good News is Bad New Until the Good News Really is Good News. I do have a way with words, don’t I?

The reason I chose that post for this little experiment is because that’s where the dart hit the board. No, not really, I am not allowed to have pointed objects anymore.  I chose it because it shows how the same themes show up over and over. Nine years is, apparently,  not enough time for us to move on to something new. Its like no time has elapsed. We are saying the same things over and over!

Back then we were worried that the Fed would drive up interest rates and hurt the economy. Back then we were worried that the economy would not sustain a recovery. Back then we were very worried about dis-functional government and a large government debt. 

And so on. But I don’t want to steal the whole show here.

Just take out your bottle of JD and slowly pour it over a huge ice cube into your favorite whisky glass. Enjoy.

Tuesday, February 19, 2019

The Macro 10 in the Era of Trump

I thought it might be an interesting exercise to look at some key US data stretching back to early 2017. When I use the word "early", I am communicating the idea that the exact date of comparisons might differ a bit for each of the 10 measures of the economy. Some are daily data from the second week of February. The others are mostly monthly data -- sometimes January to January sometimes February to February The main idea is that I am trying to compare early 2017 to early 2019.

Maybe you will be surprised. I don't know. There's no real story here. As always, the economy's strength is measured in many ways, and sometimes these measures conflict with each other. Let's try it anyway. Maybe I should have added more items than the 10 I chose. For example, I have not included the government debt or government spending or any measures tied to Gross Domestic Product. These are generally quarterly data and we won't have that information until April.
  • The top of the table presents two key exchange rates. Over this two-year time period the dollar rose against both currencies -- the yen by 3.1% and the euro by 6.2%. 
  • Interest rates on government bonds have oscillated but been pretty stable. The rate on a 10-year government bond was unchanged. The 30-year rate rose from 2.4% to 2.6%.
  • Both the inflation rate and the unemployment rate declined. The decline in the unemployment rate from 4.7% to 4% was probably more meaningful than the small decline in the inflation rate. 
  • Employment rose by 3.4% ending up at 150.5 million persons. 
  • The price of a barrel of crude oil fell to a little less than $53, declining about 5%.
  • Stock markets did quite well. The Dow Jones Average was up almost 22%; the S&P 500 by 17%.
Seems like a yawner to me. What do you think? Is our economy falling apart? Do you see red flags on the horizon? True, I didn't put everything in the table. But you have to admit that these 10 indicators cover a lot of territory. Do you have a better top 10?

2017 2019 Change
Yen per dollar 113.2 109.7 -3.1
Dollars per euro 106.4 113 6.2
10 Year Treasury 2.4 2.6 0.2
30 Year Treasury 3 3 0.0
Inflation Rate*# 2.1 1.9 -1.2
Unemployment Rate* 4.7 4 -0.7
Employment 145.7 150.6 3.4
Crude Oil 55.68 52.71 -5.3
S&P 500 2316 2708 16.9
Dow Jones 20,620 25,106 21.8
*Change in the percent
The remaining changes are percentage changes
#The inflation rate is the rate over the past 12 months in February

Tuesday, February 12, 2019

Are US Financial Assets Getting Riskier?

A critical yet almost secret set of global macro statistics has to do with global financial flows. When is the last time you heard the Five debating global financial flows? The truth is these financial flows are cooler than a large chocolate-covered Dairy Queen at midnight after a night at the Grill.

So let’s start at the beginning. God created heaven and the earth. No, not that far back. We are used to getting international statistics. Even President Trump talks about the trade deficit. We import goods and services from other countries. You might buy an extra cool BMW in Indianapolis but the car was probably made in Germany. That’s called a US import. The US sells goods and services to people all over the world. Goods and services produced here and sold abroad are called US exports. If a person in Riga is sipping a cool JD on the rocks, then the US exported that glorious drink to Latvia.

If US imports are greater than US exports we call that a trade deficit. Even Nolan knows about trade deficits, and he is only 5.9 years old. We read about trade deficits all the time. Every paper reports monthly changes in trade deficits, and I've even seen trade deficit written on a bathroom wall.

Trade deficits are the beginning but not the end of trade. We also trade financial things like bonds, stocks, real estate, and parts of companies. Already, I see you napping, Tuna. But please stay awake. Remember the Dairy Queen reference above. This stuff is going to blow your shorts off. Okay – Tunas don’t wear shorts.

Nowadays, the financial surplus and the change in the financial surplus are the big sharks in town. Note the following:

  • A trade deficit means money flows out of the US.
  • A financial surplus means that money flows back into the US.
  • What goes up must come down – and what goes out must come back in.
It's pretty simple. If we buy a bunch of BMWs we have to send dollars abroad to buy them. When we sell J&D to Latvians, dollars come back to the US. But if we buy more BMWs than we sell JD, then some of the money stays abroad.

Aside from using those dollars as wallpaper in German bratwurst stands, those extra dollars find their way back to the US when foreigners buy US stocks, bonds, etc. And when it comes back like that it creates a international financial account surplus.

We don’t yet have fourth quarter data but I can tell you these changes happened from the third quarter of 2017 to the third quarter of 2018:

  • Financial outflows from the US declined from $374b to $132b.
  • Financial inflows into the US declined from $504b to $152b.
  • Net financial inflows went from a net inflow of $130b to a net inflow of $20b.

What do we learn from this? First during that year, both financial inflows and outflows declined. One could say there was less international financial trade in 2018 than in 2019. Second, the decline in inflows was much larger than the decline in outflows and thus the net amount of money coming back into American financial accounts fell by more than $100b. The majority of this decline came in what is labelled Portfolio Investment in funds shares and debt securities. Another significant decline came from ta reduction in Bank Loans to foreigners.

There are two reasons for this decline in financial trading. First, the US trade deficit in September of 2018 was only about $20 billion larger than in 2017. Thus, we needed less financial inflow to cover the dollar outflow caused by the trade deficit. Second, it might be a warning that foreigners are becoming less interested in US financial assets. Maybe US assets are getting riskier, and foreigners would rather buy financial investments elsewhere.

Now you are experts on international trade. Please send money or JD to me ASAP.

Tuesday, February 5, 2019

War on Poverty

I want to tread very lightly today. Writing about poverty is a lot like writing about legalizing pot – people can get very heated up about it, and the topic has more angles than an I.M. Pei building.

More than likely we can’t even agree on a proper definition of poverty. Below I paste a standard government definition of poverty now apparently used by both the Census and the Office of Management and Budget. I want to start our conversation today with some data and some simple points. You can, if you so desire, add and subtract as you see fit.

I will begin with some points about wars and then move on to some data. You can take it from there.  

The simple point about war is that you usually want to win it. When I played the card game War with my brother, I never won but I definitely wanted to win. Of course, countries sometimes get into real wars and lose. But I doubt that was the purpose. And so it goes with the war on poverty. One would think that Lyndon B. Johnson had in mind reducing the number of poor people in America. Even if he couldn’t reduce the number of poor people, I suspect he would have said he wanted the poverty rate to fall over time. The poverty rate is the percentage of people in a population who are poor.

And so we turn to the data. It is from the US Bureau of the Census and the full citation is below. The most remarkable numbers are the number of poor people from 1959 to 2017. The number of poor people in 1959 were 39,490. In 2017 the number was 39,698. War on poverty? Hmmm. More poor people in 2017 than in 1959.

But, you say, the population has grown enormously since 1959. We need to look at the poverty rate. So, let’s do that. In 1959, the rate was 22.4% of the population. That was very high but by 1969 it was down to 12.1% of the population. One might have proclaimed victory over poverty insofar as the years from 1959 to 1969 go.

But guess what? The rate in 2017 was 12.3%. In the almost half a century since 1969, the rate did not fall again. Despite all the programs we have put in place in those 48 years, we still have the same percentage of our population in poverty.

One might argue that 12% means success. We can’t really do much better than that. But judging from the cries for increasing poverty programs, many people must think that 12% is not a good number. People want it lower than that. The war on poverty has not, apparently, been won in the last 48 years.

The poverty rate did not stay at 12.3% in all those years. The poverty rate was generally lower in expansion years. It was as low as 11.1%, for example, in 1973. During recessions the rate increased. In 2010, it hit 15.1% of the population. So since around 1969, we have a poverty rate that has been anchored at about 12% but rises and falls cyclically.

I went to an Organization for Economic Cooperation and Development (OECD) website and found a comparison of poverty rates across 40 countries for 2017. The USA had the third highest poverty rate, only better than Costa Rica and S.Africa. Apparently other countries have found ways to do better.  (https://data.oecd.org/inequality/poverty-rate.htm )

So what? My conservative friends would say many things. The threshold definition of poverty is pretty high – around $30,000 today -- and that doesn’t even include support from some welfare programs. They might say that the poor today are much better off than the poor yesterday. They would argue against taxing the rich more to continue or expand the war on poverty. My liberal buddies would argue otherwise. They would point out that people are really hurting, and our definition of poverty does not include people who might be a smidge over the line, yet suffering similar consequences.

My question is this. Is it not possible to do better with the money we use now to help people in poverty? Is it not possible to better understand the real and structural factors that move people into poverty temporarily and those that “sentence” them to unending poverty? Is there a difference between programs that make poverty tolerable and those that end it? I have a feeling that if we quit shouting at each other we might actually be able to understand the enemy in the war and do a better job of actually winning the war. A stalemate seems so wrong.

Poverty Definition: Following the Office of Management and Budget's (OMB) Statistical Policy Directive 14, the Census Bureau uses a set of money income thresholds that vary by family size and composition to determine who is in poverty. If a family's total income is less than the family's threshold, then that family and every individual in it is considered in poverty. The official poverty thresholds do not vary geographically, but they are updated for inflation using the Consumer Price Index (CPI-U). The official poverty definition uses money income before taxes and does not include capital gains or noncash benefits (such as public housing, Medicaid, and food stamps).