Patrick Oliver-Kelley

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Posts by pokelley:

    December 2018 Economic Overview

    November 29th, 2018

    A US market sell-off led by technology stocks wiped out gains for entire 2018 stoking fears that the US could face significant challenges. Though the economy appears strong, unemployment is low, corporations are producing large profits and wages are beginning to rise, slides in stocks are often the first sign of trouble. In this case the slump reflects concerns about privacy lapses and mismanagement at tech companies, as well as fears of slowing growth and the impact of Trump’s trade war with China. Our budget deficit of over $100 bn in October cannot be ignored indefinitely.

    America’s farmers are at the center of Trump’s trade war. More than 1/5th of agricultural exports face new tariffs. This all reminds us the 1980s when the US suspended grain sales to the Soviet Union, interest rates rose, incomes sank and many farmers left the business completely. Today, American farmers are titans of international commerce, due in part to government subsidies as well as productivity measures helping efficiencies and yields. These helped depress soybeans and corn prices, even as land and fertilizer remained relatively expensive. So, this trade war is particularly ill-timed. Trump and Xi Jinping are due to meet at the G20 summit, but neither seems anxious to concede much. When one export market shuts, it is very difficult to divert goods elsewhere. Soybean farmers are particularly concerned that trade flows will shift permanently. Economists expect the average farm loss of $70,000. In 2015, 51% of output came from farms with sales of less than $1 million compared to just 31% in 1991.

    The government may also become more involved in agriculture to muddled effect. Trump disrupted global trade flows by using $12 Bn of taxpayer money to offset farmer’s losses. The risk is that American farmers become less competitive and more distorted.

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    November 2018 Economic Overview

    October 31st, 2018

    Trump will have a glowing economy to brag about for at least a few more months, but signs of a slowdown ahead are gathering steam. Stocks have vacillated and are barely even since January and looks worse. Traders worry if the market is accurately pricing in the impact of Trump’s trade war with china and his insulting every US trading parent in the world. How much longer can this nine-and-half-year-old bull market last? The answer started last week.

    Retail sales slowed recently, prompting forecast be lowered from 5% to 4.7%. The housing market is slowing due to rising mortgage expense and all-time high prices for new homes and existing home sales have fallen to a two-year low. Wages grew 3.3% in the third quarter, beating the cost of inflation and proof that the super-hot jobs market is growing paychecks.

    A recession is not imminent, but one is increasingly likely, as the stimulus of tax cuts, federal spending hikes wear off, and soaring federal deficits take a toll on debt markets. Trump suggests the US can outlast China in a war of attrition, as his protectionist trade policies cut growth on both sides of the world, testing how much economic pain politicians can impose on their own people. But if his calculation truly favors the US.

    China and its leaders do not seem to have noticed. They have made no concessions to Trump and seem content to wait and see who blinks first. The biggest risk is that neither blinks.

    The world economy’s problem in 2018 is one of uneven momentum. Trump’s tax cuts have lifted quarterly growth, and unemployment is the lowest since 1969 in the US. Yet the IMF thinks growth will slow for all advanced economies. The dollar is strengthening making it harder for emerging markets to repay their dollar debts. The fear is that those problems will wash back onto our shores. The rich world is ill-prepared for even for a mild recession- the policy arsenal is depleted. Today the Fed’s tool of lowering rates is cut in half. The Euro-area even less and Japan has no room at all.

    Timely action could avert some of the danger. Raising inflation targets would be a good first move. But pre-emptive action calls for initiative from politicians which is conspicuously absent.

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    October 2018 Economic Overview

    September 26th, 2018

    The U.S. economy will expand at a robust pace in coming quarters but slow to 2% by the end of 2019. Contrary to Trump’s assertions: Trade wars are not ’easy to win’, can be much more complicated than anticipated, and always have unexpected consequences. Tariffs are bad policy. Trump kicked off the week by imposing 10% tariff on $200 billion worth of Chinese imports. China retaliated with $60 billion saying in affect that they are not going to be pushed around. A trade war could hasten the next US economic downturn.

    We looked at indicators: job gains, unemployment rate, GDP growth, wages, business investment, prime-age worker employment. They tell a typical story: Trump’s economy is a continuation of the trend set by the last years of the Obama economy. History books will award Bush and Obama for a historic turnaround. Trump can be credited with only staying out of the way. He has exceeded expectations only for job creation and for GDP growth. The real test will be whether these positive trends can be sustained.

    Since consumers pay the higher prices duties bring, for example after Trump put tariffs on washing machines, the price for laundry equipment shot up 16% over a three-month period. Overall, Trump’s tariffs threaten to disrupt businesses and depress their revenues.

    Tariffs risk triggering a more alarming response by investors. The evidence is that China is going to be more assertive in this Trump initiated confrontation, implying a more protracted solution. When you add issues such as theft of intellectual property by China and the widening trade gap, negotiations are likely to be protracted. We cannot rule out a ripple throughout the rest of the globe.

    Tariffs could translate into less trade, which could hinder growth in smaller nations. The U.S. dollar has already begun to rise in value as trade tensions have mounted. This has insulated the United States from higher prices.

    Republicans’ control of the House and the Senate is at stake in the midterm congressional races in November. Trump has portrayed the import taxes as a winning electoral issue because they are forcing other countries to compromise with the United States.

    But public opinion suggests that his tariffs could prove a vulnerability. A poll released Aug. 24 by The Associated Press-NORC Center for Public Affairs Research found that 61 percent of Americans disapproved of the president’s handling of trade negotiations. All of these trade fights, with Mexico, Canada, and China may be riling businesses and consumers, the ones who pay for the increased prices. In the long run, does the US behavior impair our image and world vitality? Countries are worried by our unilateralism. Threat to the dollar?

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    September 2018 Economic Overview

    September 4th, 2018

    Second quarters GDP growth was revised to 4.2%, making it the best in four years.

    Our current bull market, a period of rising stock prices is 3455 days driven by strong profits, low inflation and stable economic growth. The S&P is up fourfold.

    The 1990s boom generated a return of 417%, while the Obama/Trump rally has produced a return of 324%. Investors are sanguine and this market will possibly become the longest on record, yet just recently, we experienced an inverted yield curve which is highly predictive.

    In all three of our recent recessions, the yield curve for governments ‘inverted’. There are reasons to heed signs flashing across bond markets, now. First central bankers often overestimate the durability of a boom. Second, central bankers generally worry more about high inflation than about rising unemployment. Why be concerned? The unemployment rate is now unsustainably low. A slowing of growth sufficient to bring unemployment up to a rate the Fed deems natural, say 4.5% is needed.

    We have experienced four post-2008 themes:
    1.The immediate post-crisis response in which banks were rescued and the monetary and fiscal taps were opened;
    2.The Euro-zone crisis which hit Greece, Ireland, Portugal, Italy and Spain;
    3.Shift to the developed world with a more austere fiscal policy;
    4.The rise of populist politics in Europe and America.

    The immediate post-crisis response saved capitalism and was necessary, but the banking industry paid too low a price for its greed and hypocrisy. All in All, the backlash against bankers, the EU, governments and the impact of austerity led to the rise of populism and to its unlikely bandleader, Donald Trump.

    Initially, European politicians dismissed the crisis as an American phenomenon generated by Wall Street, though European Banks were filled to the gunnels with dodgy American real estate loans. Now the most significant failure has been the inability of the Banking Industry, Wall Street, or the US government to deal with problems which lie at the heart of the system and persist today. The financial sector looks incredibly unaltered. Bank have more capital but have recently have been allowed to return to the self-dealing tactics of that era. It is true that bonuses are tied to longer-term performance, but bonuses are still huge and stories of banks’ bad behavior continue to come to light.

    The biggest change has come in the public mood. Americans, even Republicans, have swallowed our free-market instincts and tolerate Trump’s protectionist, clap-trap measures and accept his threatening behavior! This change of mood raises fears about what will happen when another storm hits the world economy. The next attack could be even more severe and the remedial techniques that worked ten years ago may not be successful the second time around.

    we need to invest in a lot more public infrastructure and investment in underserved communities, job training, more jobs, more lateral thinking. And a lot of this needs to be focused on the transition to a greener economy.

    We also need to make sure that workers are empowered so that the benefits will flow to them rather than to corporate profits. Elizabeth Warren just came out with a whole set of policies to improve corporate responsibility. So, there’s a whole lot of things that we need to do to focus around public investment, increasing labor’s role at the bargaining table and raising taxes back up on the wealthiest so that we can fund public services for the rest of us.

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    August 2018 Economic Overview

    July 31st, 2018

    The US added 213,000 jobs in June, significantly more than the expected growth in the labor force, suggesting the country’s economy is continuing to boom, despite the prospect of a looming trade war. But the buoyant labor market, coupled with higher oil prices, may stoke fears of inflation. There is also a warning: Other recent peaks in merger activity have been followed by a recession. Potential trade wars, regulatory uncertainty and rising interest rates could mean this boom will end the same way.

    In the escalating global conflict over trade, a useful maxim is “be careful what you wish for.” Measures designed to punish an adversary over unfair practices could come back to bite workers in your own country, or those in some other place that’s not directly targeted. When the United States slaps penalties on imports from China, Taiwan faces collateral damage because of its role as a parts supplier. And if China’s retaliation hits US car shipments, German automaker BMW would be pummeled, along with US workers, since that company exports heavily from a South Carolina plant. President Trump hopes that a reset in global trade will bring jobs back to the US. Some of that may happen, but the process could take years. And it is very possible that a trade war would cost more jobs than it creates. It is a sign of how reliant the world has become on cross-border global supply chains.

    Mainstream economic theory states that governments should tighten fiscal policy as the economy begins to overheat in order to accumulate a war chest for the next inevitable downturn. The Trump administration is doing the exact opposite. The budget deficit is set to widen to 4.6% of GDP next year on the back of massive tax cuts and big increases in government spending.

    Meanwhile, the threat of escalation in Donald Trump’s trade war with China looms. More tariffs would push up prices even if the economy slows. Despite all this, a sudden surge in inflation is unlikely. The effect of pricier petrol should eventually drop out of the figures, too. The Fed has been gradually raising interest rates to cool the economy. But fiscal policy is pushing in the other direction, owing to tax cuts and spending increases under Trump. Such a truth is that there may be little that China can do to fend off a trade war. Protectionism is popular among American voters, especially among Trump’s base. He ran on a protectionist platform, and he is now trying to deliver on his promise of a smaller trade deficit.

    Whether he succeeds is another story. Trump’s macroeconomic policies are completely at odds with his trade agenda. Fiscal stimulus will boost aggregate demand, which will suck in imports. An overheated economy will prompt the Fed to raise rates more aggressively than it otherwise would, leading to a stronger dollar. All of this will result in a wider trade deficit.

    What will Trump tell voters two years from now when he is campaigning in Michigan and Ohio about why the trade deficit has widened under his watch? Will he blame himself or America’s trading partners? No trophy for getting that answer right.

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    July 2018 Economic Overview

    June 29th, 2018

    The Fed raised interest rates to a range of 1.75 to 2.00 percent and implied there would be two more raises this year. The task now is to balance US growth and falling unemployment without encouraging inflation. By 2020, the economy will be overheating. With lunatics running the asylum, who knows what is next.

    If any country can bully the world, the US can, it’s power is unmatched and is there, to be exploited which is why every president, including Mr. Obama, has used it to get his way abroad. But it is hard to think of a president who bullies as gleefully as Trump. He routinely treats America’s partners shoddily and obviously avoids the idea of alliances. No president failed to clothe the application of coercive power claiming to be acting for the global good. Trump may also succeed in the short term, yet in the long run his approach will not work. He starts on false premises.

    He is wrong to think that every winner creates a loser or that trade deficits signifies a ‘bad deal’. He is wrong to think America loses by taking on the costs of global leadership and submitting itself to rules. Rules help deter aggressors, shape countries behavior, safeguard American interests. Rules help create mechanisms to solve problems from trade to climate change. Order is vital for American security.

    Trump’s antics spreads anarchy and hostility. His assaults are relentless. The trading system will not be able to enforce old rules or forge new ones. America’s allies will be less inclined to follow our lead. A tit-for-tat trade war will unleash destructive mercantilisms. Asian countries may begin to hedge against America’s unreliability by cozying up to China. Countries will be able to act with impunity. Freer trade will unravel.

    Worst of all Trump’s impulses mean that China’s rise is more likely to end in confrontation. His dark, zero-sum outlook is destined to lead to antagonism and rivalry. He values neither world trading systems nor allies, so he will wreck it for smaller bilateral deficits. This could lead to retaliation. His deal with North Korea leaves Asian allies vulnerable to the North’s nukes. Trump falls back on the old saw that ‘Might makes right’. His impulses will not serve America or the world for long. Kissinger said ‘order must be accepted as just’. It is better to try to deter Trump now, while the dispute is small. Countries should act in unison and within the spirit of a rules-based system. They should complain to the WTO. The idea that Trump’s tariffs have anything to do with national security is laughable. Retaliation should be carefully calibrated to target symbolically important goods. Tax imports from swing states, aim to weaken protectionism.

    Barriers to trade distort economies and harm consumers. A show of strength in the face of Trumps aggression offers the best hope for keeping markets open. Trump is Actively undermining the rules-based international order. It is now time for America’s enemies and allies to fear it. Trump is up to his ears in foreign policy controversy and is showing no sign of being constrained. Our allies look on aghast!

    Trump’s disruptive trade disputes are only going to get worse, a full-fledged trade war will drag our GDP by 0.3 to 0.4% relative to base line in the first year then an additional 0.5 to 0.6% in the second year. But an overview of the economy is that populism, xenophobia and protectionism seem weirdly good for business.

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    June 2018 Economic Overview

    June 1st, 2018

    The economy has been growing for almost 10 straight years. The unemployment is 3.9 percent for the first time since 2000. And yet wage growth remains stubbornly mediocre. How come?

    There is no single answer. But the power of American companies, relative to the power of workers, seems to be a big part of the story. Companies are bigger than they used to be, sometimes dominant in their particular industry. — and labor unions are far weaker. If workers don’t like their paychecks, they often do not have an effective way to demand higher wages or find a higher-paying job.

    This power mismatch between companies and workers is a long-running story. Corporate profits have surged since the 1980s. but not so for workers’ pay and benefits. The shortfall is equal to about 4 percentage points of G.D.P. — which works out as $6,000 per household every year. We are talking about real money.

    One of the more important ways companies have gained the upper hand over workers has been legal changes that have made it harder for workers (and consumers) to band together and exercise power. A very business-friendly Supreme Court is likely to continue the trend as it ruled 5-4 that makes it much more difficult for workers to fight back against companies they believe are engaging in wage theft, discriminatory pay practices or some such.

    While Mr. Trump’s foreign policies have not, yet, caused serious losses in the stock market, investors’ stoicism could face greater tests soon. Earnings growth for corporate America this year probably peaked in the first quarter. And since neither the E.U. nor China looks close to caving to Mr. Trump’s threats, global trade tensions look set to escalate.

    The big question: How hard will the U.S. crack down on allies who do not go along with sanctions — is this another trade fight?

    The value of the dollar has further to fall and that fall may come in concert with the global economic recovery we have been discussing over the past eighteen months. Trump’s tariffs risk igniting a global trade war that could scuttle the market’s sanguine mood and hurt growth globally. And nowhere is that fear of an undermined rally more evident than in the dollar’s value against the Japanese yen.

    The dollar has fallen nearly 7% against the yen since its 2018 high on Jan. 8. That’s a nearly 34% annualized loss.

    When the global economy is just starting to come out of crisis, the one thing that will absolutely disrupt the cycle is a trade war and this is Trump’s first salvo in the trade war. The yen is reflecting this faster, stronger and more intensely than any other instrument.

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    May 2018 Economic Overview

    April 30th, 2018

    U.S. economic growth cooled last quarter. Consumers pulled back following outsize spending in the prior period, though solid business investment cushioned some of the weakness and employee-compensation costs accelerated amid a tight job market. These results underline the difficulty of achieving Trump’s goal of 3 percent sustained growth, despite corporate and individual tax cuts that went into effect in January. Other figures on Friday cast a shadow over the strong, synchronized global upswing: Europe’s economy lost momentum in the first quarter as expansions slowed from the U.K. to France, partly because winter storms.

    Consumer spending, the biggest part of the economy, rose 1.1 percent, matching estimates and marking the smallest gain since 2013. Business-equipment spending and residential investment also slowed. The tax cuts, focused on corporations and the wealthy, kicked in on Jan. 1, and employers adjusted worker paychecks to reflect the lower tax rates in February. But two recent polls have shown a slim majority of Americans said they haven’t notice an increase in take-home pay. The White House has estimated average annual household income would increase $4,000, factoring in economic growth and companies using their tax savings to increase wages. But the nonpartisan Tax Policy Center estimated that the figure would be $1,600 this year — and just $930 for middle-income households. Trump strongly criticized former President Obama for not having a single calendar year in which economic growth hit 3%. In fact, Obama presided over growth of 2.9% in 2015 and three 12-monthly periods during his administration in which growth exceeded 3%.

    Trump‘s antediluvian trade policy seems bent on our destruction. He makes threats, strike deals and declares victory. Unfortunately, His mercantilism seems to be gaining steam. Foreigners have duly queued up to sue for peace. Vindication? Far from it. No deal has yet been done with China. The danger of a trans-pacific escalation remains real, partly because of his character. If he wins one fight, he is likelier to start another. His policy seems to be founded on wretched economics and dangerous politics. He is obsessed with our trade deficit which is bilateral. His bluster cannot change basic economic logic: Tariffs bring trade into balance only if they somehow encourage national savings or reduce investment. If America slaps taxes on Chinese goods, China will buy less of them and the deficit will shrink. But, unless Americans change their total spending and saving, China will just buy more from elsewhere.

    The president’s fundamental error is to see trade as a zero-sum game. To him, exporting is winning and importing is losing. Gains from trade come from the specialization permitted by the free exchange of goods, capital and know-how. This partially explains why his politics are so irresponsible. Rather than work within the rules-based system of trade, much of which was America’s creation, he bypasses at will. Managed trade is a mistake, not a victory. It substitutes power of political lobbies for market forces, favoring well-organized producers over silent, disparate consumers. His approach threatens to leave everyone much worse off. Yet, global trade has proven itself to be remarkedly resilient.

    China has signaled that they are not about to back off. Its steel and aluminum exports to us amounts to less than 0.03% of its GDP, is not even a rounding error. Trump’s request that they cut their trade surplus by $100 B is risible. An investigation of their Intellectual-property practices is almost completed and Xi Ping surely wants to show that he is no pushover. Worryingly, each side thinks that in a trade war of attrition, it would have the advantage. This has all the makings of a lose-lose battle.
    Most presidents, after their honeymoon, something happens because all of the things that they are planning to do politically, do not happen overnight.

    Consequently, when the honeymoon period is over these presidents have a bear market. The biggest question mark is the impact on markets when investors realize that the federal government’s annual budget deficit is set to rise to more than $1 trillion in 2020, as estimated by the Congressional Budget Office. In a decade, the public debt will almost match the size of the US economy, bigger than at any point since after WW II and well past the level that worries economists.

    Trump believes that his new tax law will push economic growth above 3% a year, generating more revenue than the tax cuts cost. But the Budget Office estimates the economy to grow at an average rate of 1.9% over the next ten years.

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    April 2018 Economic Overview

    April 2nd, 2018

    The current Republican regime will run a deficit in 2019-2020 as large as Obama’s. America is wandering into uncharted territory. “The economic outlook has strengthened in recent months,” The Fed said, Recently, and raised its rate by a quarter point to a range of 1.5-1.75%, a neutral range, a range that neither boosts nor slows the economy. Implication is that the cycle could go on longer than previously thought. There are two ways things can go wrong: the government outbidding the private sector, thus crowds out business. Lenders make the government pay higher rates to compensate for the risk of a default. This could tip government into a fiscal crisis. The government must then adopt draconian austerity measures.

    There is reason that this orthodoxy may not apply. Our fiscal expansion occurring when the global financial system has had an insatiable appetite for safe government debt. Our government is nonetheless among the safer ways to meet the world’s need for safe assets.
    This clearly can lead to more trouble in future, by deepening the world’s dependence on treasuries. Today’s rising debt seems likely to be used to justify future austerity, say, when control of the government swings back to the Democrats. America may regret its abandonment of budget principles. An overheating economy stems from an expansive fiscal policy at a time of full employment. An overheated economy would trigger monetary policy discipline and plant seeds of recession. Whatever turns the Fed unfriendly would likely be sufficient to derail the US equity market. But for now, we continue to expect the Federal Reserve to remain friendly to risk markets for a while longer.

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    March 2018 Economic Overview

    March 1st, 2018

    Volatility is back. With a vengeance. The stock market rose steadily without a sell off until it abruptly ended in the second week of February, when the bottom fell out. Then resumed its progress from a lower level. Wage growth accelerated; the VIX, an investor expectation barometer, spiked from 14 to 37- an alarm bell high. The world nerves frayed. Implying that a transition is underway where growth causes inflation to replace stagnation as investors’ biggest fear. This shift is being complicated by an extraordinary gamble in the US. The enacted tax cuts are adding a hefty fiscal boost to juice up an expansion which is already mature. Public borrowing will double to $1 trillion, or 5% of GDP. The team steering this experiment is the least experienced in recent memory: Trump and his new Fed Chairman. Boom or Bust it is going to be a wild ride.

    The world economy continues in fine fettle, buoyed by a synchronized acceleration in America, Europe, and Asia. Collateral damage to other markets was limited. Yet this episode of correction does signal what may lie ahead. The loose money policy is being dismantled. Stock markets are in a tug of war between strong profits, which warrant higher prices and higher bond yields which depress the present value of earnings. Tension is the return of monetary policy to normal conditions. What is not inevitable is the scale of the US’ impending fiscal bet. Economists reckon that Trump’s tax reform will jolt growth at most 0.3%. And Congress is about to boost government spending. The mood of fiscal insouciance in Washington DC is troubling. We are being more profligate than at any time since 1945.

    This cocktail of expensive stock market, maturing business cycle and fiscal largesse would test the mettle of any experienced policymaker. Instead the policy is being bought by people who claim deficits do not matter. And the Fed has a brand-new boss who has no formal experience in monetary policy.

    We must get to grips with our fiscal deficit otherwise, interest rates will soar. Mr. Powell must steer between two opposite dangers: Dovish where he hesitates to gradually tighten rates to avoid creating a bubble; the other is to tighten too tight, too fast which would be a mistake. First, it is far from clear if the economy is at full employment; second, the risk of a sudden burst of inflation is limited; Third, there are sizeable benefits to letting the labor market tighten further.

    The fiscal stimulation of the scale that Trump is putting in place is poorly designed and recklessly large. Financial market Volatility will be the new normal. Hopefully the Fed will not lose its head.

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