Why go with the Ancient when you can go Mod and have it both ways? There still exists a place, or two, where Greek meets Latin, where you don’t have to choose which of the cultures bests the other, because you can indulge in both at the same time. The journey requires you venture to the tip and heel of Italy’s boot, to the regions of Bovesia and Grecìa Salentina. There, Griko is spoken as it was when the Greeks first crossed the Strait of Otranto in the 11th century BC, where the transcendental turquoise waters of the Adriatic and Ionian Seas meet as one. In that Griko and Standard Modern Greek are close cousins, you can partake of the delights of both Italy and Greece without moving an inch.
Friday marks the 10-year anniversary of the Federal Reserve Chairman Ben S. Bernanke’s groundbreaking “60 Minutes” interview. To listen to current Fed Chairman Jerome Powell on the same show a decade later, the central bank’s best laid plans since then would seem to have played out according to script with one glaring exception: the Fed’s balance sheet.
When “60 Minutes” reporter Scott Pelley asked Bernanke if the Fed was printing money, his reply was, “Well, effectively. And we need to do that, because our economy is very weak, and inflation is very low. When the economy begins to recover, that will be the time that we need to unwind those programs, raise interest rates, reduce the money supply, and make sure that we have a recovery that does not involve inflation.”
If the primary goal was recovery without inflation, the Fed delivered. Since the onset of recovery in June 2009, the core personal consumption expenditures index, which measures the prices paid by consumers for goods and services net of food and energy prices that tend to be more volatile, has been above 2 percent in in just five months in 2018, four in 2012 and one in 2011.
Critics of the central bank suggest that the massive surge in financial assets over the past decade starkly illustrates the need for the Fed to incorporate inflation gauges that take into account price gains of real estate and securities. One such gauge, the Underlying Inflation Gauge (UIG) created at the Federal Reserve Bank of New York, has hovered around the 3 percent level since last February. In other words, the UIG has been running north of the Fed’s 2 percent inflation target since November 2016. The justification for raising interest rates thus depends on the gauge used to guide policy.
As for Bernanke’s commitment to unwind unconventional monetary policy, it’s looking increasingly as if only a small portion of his promise can be fulfilled. Since last meeting in January, Fed officials have been publicly unified in their intention to present a road map to end quantitative tightening (QT) at next week’s Federal Open Market Committee meeting. The 16 percent to 17 percent of GDP estimate Powell offered Congress as the terminal size of the balance sheet implies QT will end with the Fed holding about $3.5 trillion in securities, compared with the peak of about $4.52 trillion in January 2015. (The Fed held less than $1 trillion of balance sheet assets before the financial crisis.)
Running monetary policy looser than need be for such a protracted period has benefited global asset prices. Even after the Fed began tapering its bond purchases, its central banking peers more than took up the slack. As of February, the collective balance-sheet assets of the Fed, European Central Bank, Bank of Japan and Bank of England stood at 36.3 percent of their countries’ total GDP, little changed over the past two years.
When Pelley asked Bernanke about banks that had paid perks and bonuses after taking bailout money, Bernanke replied: “The era of this high living, this is over now. And that they need to be responsible and use the money constructively. I’d say that their job right now is to find a way to make loans to creditworthy borrowers, to get their banks back on the path of making good loans, safe loans, and to have a reasonable sense of humility based on, you know, what’s happened in the last 18 months.”
But at the National Association for Business Economics recent annual conference, University of California-Berkeley economics professor Gabriel Zucman presented his findings on the widening divide between the “haves” and “have nots” in the U.S. His conclusion: “Both surveys and tax data show that wealth inequality has increased dramatically since the 1980s, with a top 1 percent wealth share around 40 percent in 2016 vs. 25 – 30 percent in the 1980s.” Zucman also noted that increased wealth concentration has become a global phenomenon, albeit one that is trickier to monitor given the globalization and increased opacity of the financial system.
That is not to say the most powerful players in finance haven’t had to adapt to a post-crisis world. The inability to undertake risky lending under tightened regulation has pushed business to an increasing degree out of the conventional banking system into the shadow banking industry. Private equity presides over more than $2.1 trillion in committed capital to be deployed outside the purview of regulators’ watchful eyes, according to research firm Preqin.
While, Powell acknowledged that risks had built up among highly leveraged companies, he said the scale is not “the kind of thing that we saw in the…subprime mortgage crisis. It doesn’t seem to be like that, generally. But at the same time, it could be an amplifier in a downturn.”
As for any notion that Fed policy has elevated asset prices and left behind those without the means to benefit, circumstances that have skewed both wealth and income inequality, Pelley asked, “Where are we headed in this country in terms of income disparity?” Echoing his predecessors, Powell replied, “Well, the Fed doesn’t have direct responsibility for these issues.” Except that the Fed does have direct responsibility. If the “wealth effect” used to justify a generation of quantitative easing hasn’t kicked in yet, trickling down to those who need it most, it’s past time the Fed acknowledged its failings and opened the door to a new policy framework.
Are we in good company? Were we at some point? It would seem we have a little bit more waiting to do. It isn’t until 2020 that we can get six feet under to ascertain if signs of life on Mars come from within its fertile (?) soils or if a whiff of an organic presence happened upon the Red Planet by way of its solar surroundings. The European Space Agency’s ExoMars spacecraft, scheduled to touch down in 2020, will be capable of drilling deeper that NASA’s Curiosity rover, characterized as an engineering marvel conveniently housed in an SUV body. Being restricted to 2-inch forays into a watery lake bed that once filled Mars’ Gale Crater revealed sulfur-spiked rocks containing organic molecules (LIFE!). Three Martian meteorite landings later, researchers at the Carnegie Institution for Science were able to probe deeper and confirm the 3.5-billion-year-old carbon footprint.
“The House of Representatives cannot only refuse, but they alone can propose, the supplies requisite for the support of government. They, in a word, hold the purse that powerful instrument by which we behold, in the history of the British Constitution, an infant and humble representation of the people gradually enlarging the sphere of its activity and importance, and finally reducing, as far as it seems to have wished, all the overgrown prerogatives of the other branches of the government.”
“Will any man who entertains a wish for the safety of his country trust the sword and the purse with a single Assembly, organized on principles so defective? Though we might give to such a government certain powers with safety, yet to give them the full and unlimited powers of taxation and the national forces would be to establish a despotism, the definition of which is, a government in which all power is concentrated in a single body.”
The remarkable rebound in the U.S. stock market from the lows in late December has resulted in gains that the analysts at Goldman Sachs rightly point out already constitute banner returns for an entire calendar year. History is replete with examples of major recoveries following big sell-offs, many of which turn out to be head fakes otherwise known as bear market rallies. At the end of the trading day, it’s still fundamentals that should drive investing decisions.
If the economy is, in fact, slowing and that is what has sidelined the Federal Reserve, then what we are witnessing at the moment is a bear market rally. AdMacro Ltd head of research Patrick Perret-Green recently warned the firm’s clients that though the January employment jobs report might have looked good on paper with 304,000 jobs created, it nevertheless flashed a bright recession signal as the unemployment rate ticked up to 4 percent, the highest since June.
According to historic payroll data and the National Bureau of Economic Research, every time the three-month average unemployment rate exceeded its six-month average at cycle peaks over the past 50 years — like it did in January — the U.S. economy has experienced a recession. In a 2016 speech to the International Monetary Fund, then Federal Reserve Bank of New York President — and current Bloomberg Opinion contributor — William Dudley corroborated the historic pattern citing research first conducted earlier in his career at Goldman Sachs:
“History shows it is very difficult to push the unemployment rate back up just a little bit in order to contain inflation pressures. Looking at the post-war period, whenever the unemployment rate has increased by more than 0.3 to 0.4 percentage points, the economy has always ended up in a full-blown recession with the unemployment rate rising by at least 1.9 percentage points. This is an outcome to avoid, especially given that in an economic downturn the last to be hired are often the first to be fired.”
To Dudley’s point, the odds that layoffs will continue rising are high. As per January data from Challenger, Gray & Christmas, layoffs have risen over the prior year for six straight months. Economists would characterize that as an established trend. Retail and more recently, energy, have been some of the weakest sectors. Media is another sore spot.
Backing out to the broader economy, one of the fastest growing reasons for increased layoffs last year was mergers and acquisitions. There’s likely to be no letup in 2019 after last year’s record M&A activity, which is just one of the more creative avenues companies have pursued to reduce costs in recent years. The looming earnings recession will compel firms to be more direct in their approach, as in outright headcount reduction to protect profit margins.
Auto dealers are struggling to shoulder the weight of the most crowded lots in almost two years. As a result, auto production contracted in January, promising to pressure Midwest manufacturing, a stand out area of the economy in recent months as other regions faltered. As is the case with the earnings sudden stop, motor vehicle and parts swung from 8.4 percent year-on-year growth in December to a 0.7 percent contraction in January, according to Industrial production data from the Fed.
Although autos were a sweet spot in the delayed December retail sales release, that strength appears to be wavering as cumulative tax refunds disappoint. In the first 18 days of the tax season through Feb. 21, cumulative refunds totaled $36.3 billion, down $61.7 billion, or 63 percent, from the same period last year. This portends poorly for the seasonal surge in auto buying and consumer spending tied to households’ propensity to spend the majority of their tax refund proceeds. If anything, Fed data show households are hunkering down, with checking and savings account balances rising dramatically, moves generally associated with spending pullbacks.
It is the combination of an earnings recession and an economic slowdown that derail parallels with the 2015-16 stock swoon and rebound. As breathtaking as the rally off the Christmas Eve lows has been, it is not at all unusual to see protracted and magnificent surges punctuate bear markets. In the five months through August 1989, the S&P 500 rallied 19.2 percent before backsliding.
What makes the current run historically remarkable is the magnitude of the 10.5 percent rally in such a short time span, which belies the bottoming of the unemployment rate in the face of accelerating layoffs.
Bear Market Rallies can be Protracted and Pronounced
It was a bit curious to read in his recent Bloomberg Opinion commentary that Dudley thought it was “hard to see how the normalization of the Fed’s balance sheet tightened financial conditions in a way that would have weighed significantly on stock prices.” The current bear market rally was, after all, catalyzed by Chairman Jerome Powell’s assurances that quantitative tightening might be suspended soon, a stance since corroborated by both hawkish and dovish Fed officials.
Skeptical investors have been badly bruised if they were emboldened to fight both the Fed and the C-Suite at the same time. There is one force, however, that trumps both of these faith-based investing approaches and that is economic fundamentals. This may be a bear market rally for the ages, but that shouldn’t imply investors should do anything other than rent it. Owning it promises to end in tears.
Sometimes the shoe fits. September 13, 2016 would have marked the 100-year anniversary of British children’s author Roald Dahl’s birth. In rejecting appeals to issue a commemorative coin celebrating his life, the Royal Mint noted the author was, “associated with antisemitism and not regarded as an author of the highest reputation.” Dahl did indeed make incendiary and hateful remarks stemming from Israel’s 1982 invasion of Lebanon which Israel felt justified in undertaking, and which did in truth result in 15,000-20,000 civilian deaths. Upon learning of his stained character by his own words, that even seemed to give Adolph Hitler a pass, I resolved to move on to a theme other than Dahl which had been my first intent, for this week’s missive. It would not be one caricatured by Jay Powell careening downhill in a giant peach that laid waste to his nemeses.
“And when they had all passed, they marched on in a scorching heat to the plain of Forgetfulness, which was a barren waste destitute of trees and verdure; and then towards evening they encamped by the River of Unmindfulness, whose water no vessel can hold; of this they were all obliged to drink a certain quantity, and those who were not saved by wisdom drank more than was necessary; and each one as he drank forgot all things.”
Being a visionary, Chief Engineer Alfred Noble knew that two tunnels could never carry the burden of traffic that would demand four. And so, beginning in 1904, as lead man representing S. Pearson & Son, Noble directed the doubling of the originally conceived plans and the simultaneous construction of four tunnels under the East River. On March 18, 1908, the engineering marvel, four tubes each measuring 23 feet in diameter were completed. These byways that remain in use to this day went into operation on September 8, 1910 coincident with the opening of New York’s Penn Station. This busiest travel hub in the Western Hemisphere welcomes 600,000 travelers every day.
Ancient Athenians used caution when handling figs. Any attempt to abscond with the fertile fruit and flee the city was a punishable offense. The Greeks, renowned for their epicurean fare, prized their produce and forbid its export save one notable exception, the king of the table, the olive. Why? Because never must rival orchardist be allowed to forget that Greek olives were the best Mother Nature could provide. As for those who succumbed to smuggling, they were branded sykophantes. In what can only be inferred as etymological gentrification, the original meaning of this label was cleansed. Breaking the word down to its nuts and bolts, the Greek word sykonmeans “fig” while phainein means to “show or reveal.” “Showing” figs illegally invokes the word’s modern-day use – that of deceit with the aim of benefitting in some way. “Revealing” your fig, however, conjures a more salacious derivation bringing to mind those with perverted predilections who craved the exhilaration of parting their togas in public.
To be truly faithful, one must commit to the seemingly impossible. Add acts of apparent random to the faith, and sometimes the impossible becomes the possible. So it was for two faithful researchers whose journey had them stumbling upon the Holy Grail of an ageless quest. In a 2014 book, “Los Reyes del Grial,” (“The Kings of the Grail), Margarita Torres and Jose Miguel Ortega del Rio maintain that the quest had ended. They had definitively identified the most sought after chalise from which Jesus Christ drank at the Last Supper, one in the same with that then used by Joseph of Arimathea to collect Jesus’ blood as it flowed from His side at the crucifixion.