Subject: Markets are Spooked - but will the Fed give us a Merry Christmas?
From: "Lyric Hughes Hale" <[email-masked]>
To: "R. Hunter Biden" <[email-masked]>
Date: Sun, 28 Oct 2018 17:30:51 -0700 (PDT)

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EconVue Spotlight

Dear R. Hunter,

As everyone knows, October has been a terrible month for equity markets. 
Some market participants feel that this did not just coincide with 
higher interest rates, but was caused by flawed Fed monetary policy and 
comments on overshooting. Like the humming chorus in Madama Butterfly, 
there has been a steady rise in the number of voices supporting a Fed 
pause in December. These include members of the Federal Reserve Open 
Market Committee itself, such as Neel Kashkari, and leading economists 
such as Jason Furman.

Could the markets be right, that tightening has happened too fast? After 
seven years of interest rates at 25 basis points, and a swift concurrent 
rise in debt levels, interest rates today are nine times what they were 
in 2008. Additional supporting arguments for a pause: scant evidence of 
above-trend inflation, China's slowing economy, instability in the 
Eurozone, trade sanctions, a job market with room to grow, a weak 
housing market, stronger dollar, rising treasury yields, and emerging 
market weakness reminiscent of the taper tantrum of 2013 when bond 
markets panicked. The list goes on. In fact, EconVue expert Robert 
Shapiro already sees signs of a recession as early as 12 months from 
now.

Add geopolitical risk, the Nov 5 th deadline for the Iran oil sanctions, 
and growing mid-term political turmoil within the US itself, and perhaps 
the Fed should reconsider its announced path. Over the last month, 
Bitcoin has been stable while the DJIA has lost almost 7% --equivalent 
to 25bps of monetary tightening. The claim that the real economy is 
separate from financial markets ignores the wealth effect on consumers, 
half of whom own stock. US markets in turn influence global markets: the 
Fed should no longer be naïve enough to think that it is making monetary 
policy for the US alone.

My take is that the Fed Chair Jay Powell is not primarily concerned with 
inflation, or global markets, but with resource utilization in the form 
of employment rates (key Fed research paper below) and interest rates 
that could lead to debt market distortions. Powell after all is not an 
economist, but a lawyer who dealt directly with the consequences of Too 
Big to Fail. At the same time, Vice-Chair Richard Clarida had some 
interesting things to say about employment having room to grow. So with 
both Fed mandates, inflation and employment in a state of post-crisis 
theoretical flux, markets are right to be confused.

Last week two former Fed chairs, 92-year-old Alan Greenspan and 91-year 
old Paul Volker jumped in and questioned the 2% inflation target. While 
some deride President Trump for jawboning Powell, they both revealed 
that they were subject to summons from the White House when interest 
rates rose. You'll find a link to the Greenspan talk below. Volker's 
book will be released this coming Tuesday.

Perhaps it is time to end forward guidance and pause to see which levers 
are actually working to regulate the economy. The broader implications 
could be that the story of US economic exceptionalism has run its 
course, and data used to make monetary policy is subject to 
overextrapolation and debate. If the Fed decides to err on the side of 
caution in December, a pause could be seen both positively and 
negatively. However, if they decide to go ahead with the rate hike as 
communicated, the Fed might be seen as guilty of overconfidence - and 
the Grinch who stole Christmas.

RESEARCH BY ECONVUE EXPERTS

Even at Full Employment, Expansion Has a Good Ways to Go

https://www.econvue.com/reports/michael-lewis/even-full-employment-expansion-has-good-ways-go

Michael Lewis

https://www.econvue.com/experts/michael-lewis

Why do we fear deflation? Japan has faced deflation for the past two 
decades, and its economy has not fallen apart.

Data Round-Up: Inventory, Consumption Led Upside 18Q3 GDP Surprise

https://econvue.com/reports/michael-lewis/data-round-inventory-consumption-led-upside-18q3-gdp-surprise

Michael Lewis

https://econvue.com/experts/michael-lewis

Real GDP rose +3.5% in 18Q3, slightly stronger than consensus and FMI 
estimates. The upside surprise was driven by inventories, consumption 
(especially services/health care) and government. Payback in inventories 
will likely subtract more than -0.5% from the 18Q4 topline. Still, FMI 
is looking for +2.5% real growth for 18Q4, which would make +3% for the 
year.

The Latest Outlook on the Economy: Another Canary Swoons

https://econvue.com/pulse/latest-outlook-economy-another-canary-swoons

Robert Shapiro

https://econvue.com/experts/robert-shapiro

For several months, I've written about growing signals of a possible 
recession perhaps 10 to 15 months from now. The yield curve has 
flattened dramatically, because global investors are nervous about our 
near-term prospects. Investment growth after depreciation has slowed, 
even with Trump's costly tax cuts. Inflation has picked up some steam, 
and interest rates have risen accordingly. Most important, productivity 
has been virtually flat for three years, and the inflation-adjusted 
earnings of a typical household have fallen now for more than a year.

No Time to Waste: Revolutionizing Healthcare Data Collection, Curation 
&amp; Application

https://econvue.com/pulse/no-time-waste-revolutionizing-healthcare-data-collection-curation-application

David W. Johnson

https://econvue.com/experts/david-w-johnson

Healthcare data wants to be free, but it is oppressed. Entrenched 
oligarchs trap information within closed, centralized systems that 
prioritize revenue collection, misuse resources and tolerate medical 
error. Data gasps for breath as it fights to break into curated systems 
that produce insight.

STORIES IN OUR SPOTLIGHT

Fed Policy & The U.S. Economy

Pause interest-rate hikes to help the labor force grow

http://content.davidhaleweb.com/acton/ct/3037/s-0202-1810/Bct/l-sf-cl-701C0000000UEmJIAW-0024/l-sf-cl-701C0000000UEmJIAW-0024:15c/ct9_1/1?sid=TV2%3APrnZPR0r6

Neel Kashkari 10/25/2018 Wall Street Journal

The president of the Minneapolis Fed adds to the growing chorus asking 
the Fed to pause in December. Kashkari however will not be a voting 
member until 2020.

Y

http://content.davidhaleweb.com/acton/ct/3037/s-0202-1810/Bct/l-sf-cl-701C0000000UEmJIAW-0024/l-sf-cl-701C0000000UEmJIAW-0024:15c/ct10_1/1?sid=TV2%3APrnZPR0r6

es and yes to a Fed pause

http://content.davidhaleweb.com/acton/ct/3037/s-0202-1810/Bct/l-sf-cl-701C0000000UEmJIAW-0024/l-sf-cl-701C0000000UEmJIAW-0024:15c/ct11_1/1?sid=TV2%3APrnZPR0r6

10/27/2018 Twitter thread with Jared Bernstein and Jason Furman:

I was comfortable with the Fed hiking again in Dec. But the market just 
did it for them: the 5% fall in the S&P and 10 bp rise in the 10 yr are 
roughly equivalent to a 25 bp increase in the FFR. Also the fact that 
inflation is surprising to the downside says hold off for now.

Outlook for the U.S. Economy and Monetary Policy

https://www.federalreserve.gov/newsevents/speech/clarida20181025a.htm

Vice Chairman Richard H. Clarida 10/25/2018 Board of Governors of the 
Federal Reserve System

This outlook for the labor market also reflects my view that the 
structural, or longer-run, rate of unemployment‑‑that is, the 
unemployment rate consistent with stable inflation over the longer 
run--may be somewhat lower than I would have thought several years ago. 
What this means is that, even with today's very low unemployment rate, 
the labor market might not be as tight‑‑and inflationary pressures not 
as strong‑‑as I once would have thought.

Some Implications of Uncertainty and Misperception for Monetary Policy

https://www.federalreserve.gov/econres/feds/files/2018059pap.pdf

Christopher Erceg, James Hebden, Michael Kiley, David L´opez-Salido, and 
Robert Tetlow 10/2018 Board of Governors of the Federal Reserve System

We find that a notable response to the unemployment gap is typically 
beneficial, even if that gap is mismeasured. Even when the dynamics of 
inflation are governed by a 1970s-style Phillips curve, meaningful 
response to resource utilization is likely to turn out to be worthwhile, 
particularly in environments where resource utilization is thought to be 
tight to begin with and inflation is close to its target level.

The Fed could be wrong about inflation and rate hikes

http://content.davidhaleweb.com/acton/ct/3037/s-0202-1810/Bct/l-sf-cl-701C0000000UEmJIAW-0024/l-sf-cl-701C0000000UEmJIAW-0024:15c/ct14_1/1?sid=TV2%3APrnZPR0r6

Ed Yardeni 10/24/2018 Marketwatch.com

The Fed could be wrong about inflation and rate hikes - "Could it be 
that Fed officials have too much free time on their hands, and that's 
why they concoct all sorts of cockamamie theories?"

No bad economic data or earnings disappointments or excessive valuations 
that would explain this market sell-off

http://content.davidhaleweb.com/acton/ct/3037/s-0202-1810/Bct/l-sf-cl-701C0000000UEmJIAW-0024/l-sf-cl-701C0000000UEmJIAW-0024:15c/ct15_1/1?sid=TV2%3APrnZPR0r6

Patrick Chovanec 10/24/2018 Twitter

I can see potential issues on the horizon, weak spots, vulnerabilities, 
but nothing that spells impending recession.

Comments on monetary policy at the effective lower bound

http://content.davidhaleweb.com/acton/ct/3037/s-0202-1810/Bct/l-sf-cl-701C0000000UEmJIAW-0024/l-sf-cl-701C0000000UEmJIAW-0024:15c/ct16_1/1?sid=TV2%3APrnZPR0r6

Janet Yellen 9/14/2018 Brookings Institute

By keeping interest rates unusually low after the zero lower bound no 
longer binds, the lower-for-longer approach promises, in effect, to 
allow the economy to boom following a zero lower bound episode .

Lessons for the future: A history of capitalism in America

http://content.davidhaleweb.com/acton/ct/3037/s-0202-1810/Bct/l-sf-cl-701C0000000UEmJIAW-0024/l-sf-cl-701C0000000UEmJIAW-0024:15c/ct17_1/1?sid=TV2%3APrnZPR0r6

Alan Greenspan & Adrian Wooldridge 10/18/2018 Video by Council on 
Foreign Relations

At about 40:00 Greenspan compares Bitcoin to the Continental dollar as a 
fiat currency, talks about gold, questions inflation targets, and 
reveals that more than one president yelled at him about raising 
interest rates.

Housing market is raising serious red flags

http://content.davidhaleweb.com/acton/ct/3037/s-0202-1810/Bct/l-sf-cl-701C0000000UEmJIAW-0024/l-sf-cl-701C0000000UEmJIAW-0024:15c/ct18_1/1?sid=TV2%3APrnZPR0r6

Lakshman Achuthan 10/15/2018 Bloomberg

The Fed has downplayed falling home prices nationwide and overestimated 
future inflation based on employment levels. Could something happen to 
stop a December rate hike? The Fed should be reactive rather than 
proactive, given so many uncertainties--stealth QE taper perhaps better.

FinTech

Fintech, inclusive growth and cyber risks: Focus on the MENAP and CCA 
regions

http://content.davidhaleweb.com/acton/ct/3037/s-0202-1810/Bct/l-sf-cl-701C0000000UEmJIAW-0024/l-sf-cl-701C0000000UEmJIAW-0024:15c/ct19_1/1?sid=TV2%3APrnZPR0r6

Inutu Lukonga 9/2018 IMF Working Paper

In the Middle East, North Africa, and Eurasia, places that would benefit 
most from Fintech, uptake is slow.

China

China's coming financial crisis and the national security connection

http://content.davidhaleweb.com/acton/ct/3037/s-0202-1810/Bct/l-sf-cl-701C0000000UEmJIAW-0024/l-sf-cl-701C0000000UEmJIAW-0024:15c/ct20_1/1?sid=TV2%3APrnZPR0r6

Stephen Joske 10/23/2018 War on the Rocks

Another (more sobering) view of China 2025.

nly 40 million people in China will pay income tax in 2019

http://content.davidhaleweb.com/acton/ct/3037/s-0202-1810/Bct/l-sf-cl-701C0000000UEmJIAW-0024/l-sf-cl-701C0000000UEmJIAW-0024:15c/ct21_1/1?sid=TV2%3APrnZPR0r6

Driehaus Capital 10/22/2018 Twitter

So income tax paying citizens will be less than 4% of China's total 
population—vs 43% in the US. Long term unsustainable, but will increased 
consumption become sticky behavior?

'Xi is killing China's private sector' narrative, this trend is worth 
watching

http://content.davidhaleweb.com/acton/ct/3037/s-0202-1810/Bct/l-sf-cl-701C0000000UEmJIAW-0024/l-sf-cl-701C0000000UEmJIAW-0024:15c/ct22_1/1?sid=TV2%3APrnZPR0r6

Simon Rabinovitch 10/18/2018 The Economist via Twitter

State-owned enterprises in China are lagging behind the private sector.

An impressive, unnecessary, multi-city bridge

http://content.davidhaleweb.com/acton/ct/3037/s-0202-1810/Bct/l-sf-cl-701C0000000UEmJIAW-0024/l-sf-cl-701C0000000UEmJIAW-0024:15c/ct23_1/1?sid=TV2%3APrnZPR0r6

Erin Hale 8/18/2018 CityLab

The 34-mile Hong Kong-Zhuhai Bridge officially opened by Xi Jinping on 
his southern tour (Yes, we are related.)

People's Daily's courageous attempt at using infographics to explain Xi 
Jinping Thought. What does this look like to you

http://content.davidhaleweb.com/acton/ct/3037/s-0202-1810/Bct/l-sf-cl-701C0000000UEmJIAW-0024/l-sf-cl-701C0000000UEmJIAW-0024:15c/ct24_1/1?sid=TV2%3APrnZPR0r6

?

Wang Xiangwei 10/17/2018 Twitter with link to original article in 
Chinese: 
https://app.peopleapp.com/Api/600/DetailApi/shareArticle?type=0&amp;article_id=2667723

https://app.peopleapp.com/Api/600/DetailApi/shareArticle?type=0&article_id=2667723

China may have $5.8 trillion in hidden debt with ‘titanic' risks

http://content.davidhaleweb.com/acton/ct/3037/s-0202-1810/Bct/l-sf-cl-701C0000000UEmJIAW-0024/l-sf-cl-701C0000000UEmJIAW-0024:15c/ct26_1/1?sid=TV2%3APrnZPR0r6

Eric Lam 10/16/2018 Bloomberg

China waited too long to institute local property taxes due to internal 
opposition from multiple property owners, many of whom are corrupt 
officials and currently have zero holding costs.

China must release the renminbi

http://content.davidhaleweb.com/acton/ct/3037/s-0202-1810/Bct/l-sf-cl-701C0000000UEmJIAW-0024/l-sf-cl-701C0000000UEmJIAW-0024:15c/ct27_1/1?sid=TV2%3APrnZPR0r6

Yu Yongding 10/16/2018 East Asia Forum

Fear of floating-is the Chinese exchange rate mechanism about to change? 
Rather than a managed devaluation, will the PBoC reembark on the 
untethering first attempted in August 2015? Leading Chinese economist Yu 
Yongding elucidates.

Trump, China, and Ah Q

http://content.davidhaleweb.com/acton/ct/3037/s-0202-1810/Bct/l-sf-cl-701C0000000UEmJIAW-0024/l-sf-cl-701C0000000UEmJIAW-0024:15c/ct28_1/1?sid=TV2%3APrnZPR0r6

Kerry Brown 10/12/2018 the Diplomat

Even the sinuous brilliance and calculating genius of Wang Qishan, 
brought back as vice president last October despite being over the 
customary retirement age, has seemingly, so far, not ratcheted tensions 
down .

Happy Halloween!

Lyric Hughes Hale

Editor-in-Chief

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