August 2017 Economic Overview

The US economy entered the ninth consecutive year of expansion. GDP for the second quarter increased by 2.6% and there are no signs that this trend might change. Since mid-2009, GDP growth has averaged 2.1%, while earlier years averaged over 3.6%. The difference is that today’s economy is vastly larger than those of the 1980s and 1990s.

This slow but steady growth has produced a long stretch of job creation and the economy is on a sound footing. The stock market appears to be fully valued given this outlook, but corporate profits should continue to grow. Consumers are confident and notwithstanding the circus we are seeing in Washington DC our outlook is rosy. Trump’s claim to overhaul the tax code and to renegotiate trade deals, that he can get the economy moving in excess of 3%. No breakout is imminent. The economy is firmly entrenched at a little better than 2%.

Trump’s fatuous decision to spurn the Paris agreement was opposed by most of his advisers, most big American firms and two-thirds of the American voters. It will not give life to the US coal industry nor will it solve problems with American environmental policy. He has chosen to abuse the health of the planet, to test the patience of America’s allies and insult the intelligence of his supporters and he is actively diminishing the image and reputation of the US world-wide.

July 2017 Economic Overview


Reducing unemployment without sparking inflation is the Holy Grail of the Fed. Mid-June the Fed raised rates by a quarter point (range now 1-1.25%). With an inflation target of 2%. But unemployment is below the “Natural” rate and seems to be permanent at 4.3%. It is possible that inflation will take off when unemployment gets too low, such as happened in the late 1960s? With Trump promising tax cuts and his being able to replace Ms. Yellen early next year, history may yet repeat itself. All this calls into question the ability of the Fed to hit its inflation target.

But the Fed has an unforgiving pessimism about American productivity. If this bleak view is wrong, perhaps the Fed itself is part of the blame for slow growth. Productivity growth is cyclical: it depends on whether the economy is booming or busting. Economies have growth speed limits, determined by changes in population, innovation, and productivity. So long as inflation remains low and stable, it is possible that productivity boosting steps are still left on the table. When productivity rose during recessions, the US began to suffer a rash of jobless recoveries. This is because firms began responding to recessions by eliminating routine jobs through reorganization, outsourcing, and automation. The way to know if America can manage a repeat performance is to test the economy’s limits. Raising our 2% target would offer a chance for such an experiment.

Meanwhile, Trump seems to be bent on marginalizing The United States. The world will now turn to China for leadership. US leadership in the Singapore Shangri-La Dialogue exemplified America’s commitment to keeping the peace in Asia especially in the South China Sea, that leadership has now gone the way of the Dodo- Trump is allowing China to turn it into a Chinese Lake. The perception is heightened that His America First rhetoric except perhaps for North Korea’s nuclear threat, is at the expense of the rest of the world, wrecking the world order America itself is responsible for creating. Even a few other smaller Asian nations have proposed joining China (SCO) in its own patrols and that they join in joint navy patrols. Trump took us out of the Paris Climate accord, China’s Belt and road infrastructure program is a gilded instrument of globalization of a new Chinese order. China joined the Davos meeting presenting itself as a champion of globalism and open markets. China is on the move, even if it is reluctant to push hard on the outer boundaries and seems less keen to take on leadership responsibilities. It is more concerned with domestic perceptions. That Trump is allowing the Beacon of America to dim, seems indisputable.


June 2017 Economic Overview


The Fed is likely to raise rates yet again, but perhaps not this month. It is looking to trim its $4.5 trillion balance sheet which will influence it interest rates hikes. Housing starts have been puzzling in that costs are rising and sales are slow. Jack Welch ex GE Chairman observed that our great economy risks being eroded by the toxic political debate in our country.

The US has two geopolitical imperatives: dominating the world’s oceans and ensuring the disunity of Eurasia. Trump’s doctrine has no room for transatlantic alliances. He is pursuing a mercantilist and an isolationist foreign policy. This endangers our transatlantic and our American anchor in Eurasia. This will end American global hegemony. His isolationism will put paid to our alliances and commitments abroad. His mercantilism focuses on trade balances which brings China, Germany, Mexico, and Japan onto his radar screen. The immigration debate is about more than just economics. Research has consistently found that the economic benefits of immigration are huge for immigrants, themselves, but that the economy as a whole also benefits greatly.

One of the great achievements of free society in a stable democracy is that many people, for much of the time, need not think about politics at all. The president of a free country may dominate the news cycle many days – but he is not omnipresent – and because we live under the rule of law, we can afford to turn the news off at times. A free society means being free of those who rule over you – to do the things you care about, your passions, your pastimes, your loves – to exult in that blessed space where politics doesn’t intervene. In that sense, it seems to me, we already live in a country with markedly less freedom than we did a month ago. It’s less like living in a democracy than being a child trapped in a house where there is an abusive and unpredictable father, who will brook no reason, respect no counter-argument, admit no error, and always, always ups the ante.

Trump said in his inaugural address that “it is the right of all nations to put their own interests first and that America does not seek to impose its own values on anyone else. This is in stark contrast from the polices of both Bush and Obama. Trump’s foreign policy underpinnings are nationalism. So NATO and the EU which have nothing to do with immediate, domestic economic goals of the US, these two organizations are not worth supporting. NATO demands a US overseas commitment with little material gain in return. Obama complained, just as Trump did, about the failure of member states to meet their 2% of GDP on defense. But Obama tried cajoling the members, not a tactic Trump has in his playbook. No matter how hard the Europeans tried to explain the intricacies of the EU, Trump was not able to comprehend. The EU runs a large current account surplus with the US, for Trump then, The EU is a rival viewed through his mercantilist lens, not a foe. Both Obama and Trump see that it is a multipolar world and that the US is in relative decline and cannot act unilaterally. But Obama sought to enhance US power by relying on allies and supranational organizations. Trump’s solution is to retreat into Fortress America. The risk must be that this approach may push America’s traditional allies away from Washington. Angela Merkel said over the weekend that Europe could no longer completely rely on the US. “We Europeans must really take our own destiny into our own hands.” The US is no longer a trusted ally. “We are Six against one.” The one being Trump and “talks were very difficult and very unsatisfactory.”


May 2017 Economic Overview

Global growth is expected to be 3.4% this year. Janet Yellen says that we need fresh ideas and investments that can raise the output per worker, spend more on roads, bridges, and other infrastructure projects, change tax regulations, increase investment in infrastructure and in people. Avoid new trade barriers that hinder global competition. Above all, avoid seriously undermining trade, migration, capital flows, and the sharing of technologies across borders. Are you listening Trump?


In America, in Europe, in Asia, and in emerging markets- Broad based economic upswings are under-way. Rich world and developing world economies will put on a synchronized growth spurt. Despite this, a populist, economic nationalistic rebellion is also underway and sadly, is actively being underwritten by the White House. This dissonance is dangerous. Globalization is out of favor. If populists win credit for a more buoyant economy, their policies will gain credence, with devastating effects.

Globally, we have experienced many false starts and there are reasons to fret: China’s debt mountain; the flaws in the foundations of the euro; Trump’s protectionist tendencies, to name a few. In the last ten years. happily, America’s economy has continued to grow in-spite of it all. The Fed raised rates for a second time in three months, mainly because of the US economy being so strong. But also, because the fears about Chinese over-capacity and of a yuan devaluation have receded. Japan’s fourth quarter capital expenditures grew faster than it has in three years; The Euro area has been gathering steam since 2015; The European Commission’s economic-sentiments index is as high as it has been since 2011; South Korea notched up export growth by over 20%; Taiwanese manufacturers have expanded for 12 consecutive months; The Brazilian economy, with inflation expectations diminishing, interest rates are now falling; Both Russia and Brazil are likely to add to global GDP this year; Suppliers are restocking; Signals are strongest in manufacturing;. Demand for semiconductors has been picking up around the world; Business spending on machinery and equipment is picking up; American employers added 235,000, non-farm payroll jobs, in February; In fact, the economy in the US has been flashing green lights for seven months.

Entrenching this recovery calls for a delicate balancing act. As inflation expectation rises, so does complications to macro-economic policies. The biggest risk is the lessons politicians draw from this strength. Trump is not shy to sing his own praises at the merest positive sign, e.g. employment, or confidence numbers. He claims to have magically jump started job creation with sheer braggadocio. The US economy has added jobs for 77 months in a row! What is alarming is that Trump is so heavily tactical and seems disinterested in any kind of strategy.

In America, imports of both consumer goods and capital goods are up. Maybe it is true that Trump’s rhetoric has lifted ‘animal spirits’ of business people; however, and most importantly, the upswing has nothing to do with Trump’s America First’ economic nationalism. If anything, the global upswing vindicates the experts that today’s populists decry. Financial recoveries from crashes take a long time to be corrected. Experts agree that the best route to success is to clean up balance sheets, to keep monetary policy loose and to apply fiscal stimulus.

The breadth of the improvement- from Asia to Europe and America- makes for greater confidence that a pickup is underway. The tussle over who created the recovery is about more than bragging rights. Endorsement of populist policies would encourage insurgent political parties all over the world. Trump’s proposed tax cuts would pump up the US economy, an economy that is Least in need of stimulus. A fiscal splurge at home and a stronger dollar internationally, would widen our trade deficit. By giving populists credit where it is not due, sends all the wrong signals. Populists deserve NONE of the credit.

April 2017 Economic Overview

The Trump administration’s vision for disengagement from the world is a godsend for China. Look at Trump’s proposed budget, which would cut spending on “soft power” — diplomacy, foreign aid, international organizations -by 29 percent. Beijing, by contrast, has tripled the budget of its foreign Ministry in the past decade. And that doesn’t include its massive spending on aid and development across Asia and Africa. Just tallying some of Beijing’s key development commitments are estimated at $1.4 trillion.

The FOMC meeting produced several dovish surprises. First, the number of participants who expected four rate hikes or more did not increase. Second, the estimate for the structural unemployment was scaled down by a tenth of a percentage point to 4.7%. Third, the FOMC statement said that the Fed was looking for a “sustained” return to 2% inflation. Fourth, Minneapolis Fed President Kashkari dissented in favor of keeping rates unchanged, which few people had expected.

Having said all this, the market’s reaction still seems rather excessive. The key message from the March meeting was that the Fed now sees inflation reached its 2% target. Consistent with this, the FOMC raised its growth forecastfor 2018 from 2.0% to 2.1%. In addition, its inflation forecast for this is1.9%. Median projection for the funds rate went up to 3% for 2019.

All it means is that the Fed will not react too aggressively if core inflation were to drift somewhat above 2. The implication for investors is that the dollar is likely to rebound. Indeed, the longer-term risk to the dollar is not that the Fed turns out be too dovish, but that it turns out to be too hawkish – that it raises rates so much that the economy begins to roll over. However, with interest rates still low in absolute terms, this is more of a risk for late 2018 or 2019 than it is for the next 12 months. As such, investors should continue to cyclically overweight global equities, favoring stock markets such as those in Europe and Japan that have a “higher beta” to global growth than the U.S. A modest bearish tilt towards long-term government bonds is also warranted.

elephant in the room

Warning signs are flashing. Valuations are worryingly high. The cyclically adjusted price-earnings ratio is just under 30 times in the US market. Only twice has it been higher- during the dotcom era of the 1990s, and in 1929, just before the crash. There may be reasons for this. First, investors’ exuberance comes after a long period of restraint. Second, there are indications of a pickup in the global economy: Global trade is picking up; The volume of South Korea exports rose nearly 20% in the year. The fastest in five years. Commodity prices are ten per cent higher than a year ago; And European growth forecasts have been revised higher. Third, expectations of tax cuts, infrastructure spending and deregulation from Trump have invigorated the animal spirits in US. Small businessmen confidence is at a 40-year high. Profits for independent businesses are to rise by 12% for 2017. This is mainly because low oil price is just beginning to hit the energy market.

The caution is though- American economic data is mixed. After the eight years of strength, the recovery is looking long in the tooth. Consumer spending and industrial production fell in January. We think Trump’s stimulus package will take longer to get underway and even longer to take effect. And more importantly, his program of cutting immigration and throwing, people out of the country and threatening trade sanctions will harm growth. Also, the Fed policy is becoming less accommodating. Finally, China seems to be tightening its interest rate policy, too. A deeper problem lurks in a contradiction between politics and economics. European elections appear to set up chances of hammering established parties. Workers are backing insurgents candidates. But mathematics cannot square the surge in real wages with the market rally based on the hope of profits rising faster than GDP. Rejecting globalization, populism is a menace to the free movement of goods, labor and capital. It is impossible to keep both populist voters and the equity markets happy. Investors should keep their parachutes handy.

Alternative Facts

March 2017 Economic Overview

The dollar is the world’s principal anchor currency, and the dollar standard is one of the most vulnerable pillars of global stability. It has grown more important as the world has globalized. After The fracturing of this system under inflationary pressures in the 1970-80s, the dollar became more central than ever. As markets opened to international trade, markets sought stability and turned to the dollar. Global reserves now are more than $10 trn. Dollar denominated assets for much of those reserves. Despite their reserve holding, many economies have lost control of their domestic monetary policy because of US Fed policies on global appetite for risk. Many governments hold large amounts of safe but low-yielding dollar assets. This allows America to run persistent current-account deficits.


This is a privilege America has but Trump seems eager to discard. The current-account gap underlying financial flows, and taxing imports will simply cause the dollar to rise in an offsetting fashion. The dollar should share its role with other currencies. but the yuan, China’s currency, is inhibited by unreliable statistics and tight limits on Chinese financial markets. Increased dependence on China is not attractive. The euro is constrained by existential political risks and the scarcity of safe euro-denominated bonds. Should Trump’s efforts to ‘Make America Great Again’ through tax cuts and spending, the deficits will increase and inflation will rise, and American assets might lose their luster. Lookout for soaring prices and soaring interest rates. Alternatively, the dollar might go the way of the inter-war gold standard. Governments would put up tariffs and then withdraw from the system altogether through the erection of capital controls. Trump supporters, be careful what you wish for!

If you look at the great companies driving the US as an innovation hub, you will see that many companies were started by immigrants or the children of immigrants, like Apple and Google. Steve Jobs, whose father was a Syrian refugee and Sergey Brin who was born in Moscow, for example. Though immigrants make up about 13 percent of the US population, they contribute nearly 15 percent of the nation’s economic output. “It is an undeniable privilege for every man to prove himself right in the thesis that the world is his enemy,” wrote diplomat George Kennan. “For if he reiterates it frequently enough and makes it the background of his conduct, he is bound eventually to be right.” Few world leaders embody this ethos than Donald Trump and the Iranian Supreme Leader Ayatollah Ali Khamenei. Trump’s demonizing NAFTA helped him to the presidency, but in reality millions of jobs are supported by that pact.


Cummins Engine, an Indiana founded company, exports over three fourths of its US engine production, and has sales in 190 countries. America offers lower shipping costs and less red tape when exporting and most importantly, has lower and fewer custom duties when components are imported from cost-effective suppliers, and add on, access to American trained engineers. Cummins runs a vast supply chain to and from Mexico. Cummins representatives say, “Our jobs overwhelmingly exist because of trade. We are not in a regional economy, we are global.”
The flipside to selling to so many countries is that Cummins cannot simply manufacture in one place, they must know local markets and local conditions. “If you are good at exports but not with imports, generally speaking, most people will not strike the deal with you,” said a Cummins executive. Trade must be made to work and workers must be convinced that they have a place in today’s economy.

Recently, Trump brought two dozen manufacturing CEOS to the White House to encourage them to committing to restoring factory jobs lost to foreign competition. These CEOS suggested that there are plenty of openings for US factory jobs, but too few American candidates are sufficiently qualified to fill them. The men and women who show up on our shores and our doors are ready to study, work and participate to make us stronger, smarter, more competitive and more attuned to the rest of the globe. Trump has, thus far, failed to mention these facts.

February 2017 Economic Overview

Navigating a Fed tightening cycle, a divergence between economic and profit performance, and significant patience with respect to a rollout of fiscal stimulus, forgetting international relations for the moment, will be critical drivers to equity performance in the new year. We expect the dollar to remain firm based on the relentless widening in interest rate differential and policy divergence with the rest of the world.

alternative facts

President Trump’s ‘black’ inaugural speech highlighted that he has not tempered his “America First” policy prescription, and policy uncertainty has increased again. His agenda is still a moving target, but three key risks have emerged for financial markets.

  • First, a border tax could see a 10% rise in the US dollar. It would also be bearish for global bonds and emerging market stocks.
  • Second, Trump also has his sights set on China. And China has recently been publicly bearing its teeth, especially as regards the South China Sea. Investors seem to be under-appreciating the risk of a trade war, not to mention a possible real war.
  • Third, the plan to slash Federal government spending could completely offset the fiscal stimulus stemming from the proposed tax cuts and infrastructure spending.

The good news is that the major countries, including China appear to have entered a synchronized growth acceleration. There is more to the equity market rally to come. The global profit recession is over and the rebound has been even more impressive, than could have been expected. So long as the US protectionist policies do not derail the growth acceleration, corporate Earnings Per Share, world-wide will continue robust.


The Fed will raise rates three times this year. The Bank of Japan will continue to target 10 year JGB yield of 0%, but the ECB will begin hinting at another tapering in the fall. US policy is very fluid, but for now the new administration has boosted confidence and thereby reinforced a global cyclical upswing. As long as protectionist policies implemented this year do not unduly undermine US growth, then stocks will continue beat bonds by a wide margin.

However, one additional, cautionary, thought:
The Bulletin of Atomic Scientists moved the hands of its Doomsday Clock forward by 30 seconds to two and a half minutes to midnight, in response to Trump’s ‘unsettling and ill-considered’ comments about the use of nuclear weapons, growing concerns over North Korea and worries about relations with Russia. This is the closest the clock has been to midnight since 1953.

January 2017 Economic Overview

2017 not 1957

The US Dollar is 40% above its lows in 2011, its sharpest rise ever against a basket of rich-country peers. This latest surge is in prospect of a shift in economic policy mix in America. Trump will cut taxes, and spend more public funds on fixing our crumbling infrastructure. Such a big fiscal boost will lead the Fed to raise rates at a far faster rate to check inflation. Zippier growth in the US should be welcomed world-wide for its knock-on effect, but, recalling the Reagan era widening budget deficits and high interest rates, reminds us that, that episode caused trouble abroad. Today, the dollar has become more pivotal. That makes a stronger dollar more dangerous for the world and for America.

Bonding Cement

America’s clout as another country’s major trading partner is smaller, dropping from 44% in 1944 to about 32% twenty years later. But the dollar’s supremacy as a means of exchange remains unchallenged. An estimate of a de facto countries whose currencies move in line with the dollar, encompasses 60% of world’s population and 60% of its GDP. This kind of dollar denominated debt amounted to about $10 trn, a third of it in emerging markets.

When the dollar rises, so does the cost of servicing this debt. Cheap offshore borrowing during the good times, caused an increased supply of local credit. Capital inflows pushed up local asset prices, encouraging further borrowing (recall the US housing boom that crashed landed in 2008) Not every dollar got invested, some ended up in bank accounts for other uses.

A strengthening dollar sends this cycle in reverse. As the dollar rises, borrowers husband cash to service the increasing cost of their own debts. As capital flows out, assets prices fall. The upshot is that credit conditions are bound ever more tightly to the fortunes of the dollar. Watch out Brazil, Chile, and Turkey.

For America the trade balance will worsen as the strong dollar sucks in imports and its exports demand softens. A bigger deficit raises the chance that Trump acts on his threat to impose steep tariffs on imports from China and from Mexico. If Trump succumbs to his protectionist instincts, the consequences will be disastrous. The global economy is weak and the dollar’s strength will enfeeble it further.

If interest rates were to move higher, as they just did recently and are likely to do so over the next year, not only would this interfere with Trump’s policy agenda, but those increases would be passed on to consumers and businesses who borrow money at rates based on government bonds. Rising rates could cramp the whole economy and make a lot of people upset.

December 2016 Economic Overview


Go figure. President Trump!

President elect Trump promises to reduce regulations, increase infrastructure spending, and cut taxes, which lead many to conclude that growth in inflation and interest rates will result. He has sworn to ‘Put America First. Demanding respect from a freeloading world that takes leaders from Washington for fools’. He will ‘no longer surrender this country or its people to the false song of globalism’. Mr. Trump is angry. So, apparently, are those who elected him.

Welcome to the new nationalism. This is the first time in a century, great and rising powers are in the thrall to various siren songs of chauvinism; Along with Mr. Trump are Russia, China, Turkey and France embracing pessimistic views of foreign affairs.

Nationalism is a slippery concept, at its best it unites a country around common values. This ‘civic nationalism’ is conciliatory, leads to Peace Corps and universal values such as freedom and equality; in contrast to the second, ‘ethnic nationalism’ which is zero sum, aggressive and nostalgic. It draws on race or history to set nations apart. It leads to war.

We risk shifting from the universal, civic nationalism towards the blood and soil, ethnic sort. Mr. Trump’s populism is a blow to civic nationalism. The US has historically backed rules-based order. Trump threatens to weaken that commitment even as ethnic nationalism is strengthening elsewhere. Putin has shunned cosmopolitan liberal values for a distinctly Russian mix of Slavic tradition and Orthodox Christianity. In Turkey Erdogan has turned away from the EU, and from peace talks with the Kurds who make up over 30% of Turkey’s populace. He favors strident, Islamic nationalism that is quick to detect any slight. India’s Modi remains outward looking but has radical ethnic nationalist Hindu groups preaching chauvinism and intolerance. France has consistently pursued statist and protectionist drawbridge-up policies. France goes to the polls in the shadow of Marine le Pen, leader of the National Front, soon.

Meanwhile, Chinese nationalism has become angry and vengeful. Since 1990, Chinese children have been receiving a daily dose of ‘patriotic education’ centered around the Han people: everyone else is a second-class citizen.

The Eu, the world’s greatest experiment in ‘post-nationalism’ has foundered. The Eu was expected to transcend national rivalries. In large parts of the Eu this never happened. The last time America turned inward, was after WWI. The consequences were calamitous.

Mr Trump’s new nationalism tends to produce intolerance, and to feed doubts about the virtue and loyalties of minorities. Regional and global problems will become harder to solve. Even if Trump enacts even a fraction of his mercantilist rhetoric, he risks neutering the WTO. For smaller countries that are today protected by global rules- it will be a harsher and more unstable world.

Trump needs to realize that his policies will unfold in the context of other countries’ jealous nationalism. Disengaging will not cut America off from the world so much as leave it vulnerable to the turmoil and strife that the nationalism engenders. Trump needs help to reach reality.

October 2016 Economic Overview

Wake up American voters! ”I love the uneducated” Trump said recently. His policies are tweets long. He is incapable of producing ideas of depth and substance.’ Build a wall’, ‘reduce Moslem immigration’, ‘make NATO allies pay for their protection’. His ideas are easy to read, impossible to fathom and short on detail. How to achieve his economic boom is a mystery. His extra detail makes nothing clearer.

His economy is irreconcilable with facts. He says jobs are scarce, poverty is rising and incomes are stagnant. In reality, America’s economy is the strongest in the rich world. Unemployment is only 4.9%; the poverty rate has been falling since 2012 and median incomes have risen by 5% in real terms in the last two years.

His proposed treatments are no better than his diagnosis. He wants to scrape the wrong regulations. He promises to cut top rate income tax from 36.9% to 33%. He would cut corporate tax by half though he has given no plan for paying for all this bounty, other than to borrow. He only exacerbates his difficulty in coming up with the astronomical sums needed to pay for his ideas.

The worst part is his trade policies. His protectionism would wreck the economy (estimates are as high as by $5.3 trillion!); reduce wages and achieve little else. Manufacturing’s share of employment has fallen because of technology, not trade. His proposals would actually turn back productivity gains. His ideas would cause wages to fall. The few jobs that would return would cater only to domestic demand. High cost American goods would not be able to be sold to the world as they do now.

Protectionism threatens high value manufacturing jobs. It disrupts supply chains. Exports would fall. Export-supported jobs pay a wage premium of about 18%. Retaliatory tariffs on American exports would reduce overseas sales. Tariffs would eviscerate the purchasing power of American wages as imported goods would become more expensive. The poorest Americans would suffer the most. Trump has not explained what his ‘deals’ might look like- As big a mystery as his tax returns. His proposals threaten jobs and living standards of millions of Americans, the very same voters who are his strongest contingency, is the very same group that will suffer the most, if he were elected President.

Rarely has a candidate for president been less deserving.