Tuesday, December 12, 2017

Tax Cuts are not going to pay for itself

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Monday, December 4, 2017

Trump has helped reduce government regulations

"Reducing government regulation is tough. It’s resisted by all those who benefit, including government employees who administer the many programs. Every president since Jimmy Carter has attempted to lower the cost of regulation. At best, any cuts have been tiny and mostly centered on trimming paperwork. But less regulation is one campaign promise made by Donald Trump that is coming true. With tax and health-care reform problematic and given the president's protectionist leanings, deregulation is probably a major driver of the stock market rally.

The size and scope of the federal government give the president immense powers. In relation to gross domestic product, federal spending rose from 16 percent in 1946 to 22 percent in the 2017 fiscal year. Executive orders give the chief executive, in effect, legislative powers. President Barack Obama issued many in his waning days, especially affecting power plants and oil pipelines. The Competitive Enterprise Institute last year found regulation cost American businesses $1.9 trillion, dwarfing the $344 billion in corporate taxes. About 56 percent of CEOs see overregulation as a major threat to their organization, more than cybersecurity (50 percent), rising taxes (41 percent) or even protectionism (27 percent). 

Whenever a new regulation is made or changed, it must be chronicled in the Federal Register. In the last years of the Obama administration, regulatory activity went parabolic, hitting almost 97,000 pages in a year. The annualized pace under Trump through July 31 was 61,330 pages, the fewest since the 1970s. This year through June, the federal government had made 1,731 preliminary, proposed or final rules, the least since 2000 and down 40 percent from the 2011 peak under Obama. Many actions taken under Trump are reversals of earlier rules made under Obama. Of 66 completed actions at the Environmental Protection Agency, a third were rule withdrawals.

Shares of banks have benefited, as those with more than $50 billion in assets are now able to merge without increased scrutiny. Scaling back the Volcker Rule would allow big banks to resume proprietary lending. The delay and likely alterations of the fiduciary requirement would aid brokers and insurers. The House has already approved a widespread rewrite of Dodd-Frank. A bipartisan group of senators recently agreed to exempt banks with less than $250 billion in assets from the “systemically important financial institutions” group that is subject to much stricter oversight, including higher capital buffers. Previously, the threshold was $50 billion. Congress also shut down the Consumer Finance Protection Bureau rule that would allow consumer class-action suits against banks as opposed to arbitration

Drug producers are gaining from faster Food and Drug Administration approvals. Miners and other dangerous companies now have relaxed accident-reporting requirements. The Interior Department indicated it would rescind proposed rules on oil and gas fracking on federal land. The Federal Communications Commission is reversing the Obama-era decision to regulate internet service providers as utilities. In another reversal, the Equal Employment Opportunity Commission will stop the scheduled collection of data from employers on how much they pay workers of different genders, races and ethnic groups. Meanwhile, the Occupational Safety and Health Administration is reducing its reporting of workplace fatalities.

Within days of taking office, Trump signed two executive orders supporting the construction of two controversial oil pipelines -- Keystone XL and Dakota Access -- that Obama had refused to back, due mostly to environmental concerns. The Trump administration is also considering reducing the size of some national monuments to free the land for ranching, hunting and fishing, mining and other commercial uses. This, too, can be done without legislation.

Using the 1996 Congressional Review Act, Congress and the president have repealed 14 of Obama’s final regulations. About 29 of Trump’s executive orders and White House directives have reduced regulations, executive branch agencies have issued additional deregulation directives, and Congress is considering 50 more. 

In some cases, private sector companies wish regulations weren’t instituted in the first place, but they’ve spent so much time and money to comply with them that reversals wouldn’t be worth it. A case in point is the fiduciary standard. The Labor Department delayed its rule that investment advisers be held to the fiduciary standard of putting their clients’ interest above their own on retirement accounts. But many firms have already made the switch. Similarly, large banks that have spent huge amounts to comply with the 2010 Dodd-Frank financial regulation law don’t want it to be dismantled."

via bloomberg.com/view/articles/2017-11-28/trump-deserves-some-credit-for-the-rally-in-stocks

Monday, November 13, 2017

Here is what Gary Shilling would do to fix the Fed

"First thing I would do at the Fed is to get them out of the forecasting business. They’re lousy at it. The Fed did not forecast up until the early 90s. They didn’t even tell you what their federal funds target is. Their interest rates.

Guys would get this data every Wednesday night and they would massage the data the wee hours of the morning trying to figure out what is the target that the Fed has? Because they didn’t announce it.

More recently they’ve gotten bitten by the transparency bug and I think that was a product of the financial crisis. A lot of things were not transparent and these guys running the Fed are mere mortals and they saw ok transparency is the in thing to do so we’re going to be transparent. We’re going to tell the world what our plans are.

Well, the problem is that all their targets are data driven. And they admit this, but they’re very, very poor forecasters of the data. I mean they have perennially forecast more inflation than we’ve had. Perennially forecast sooner and more interest rate increases than they’ve put in. Perennially over forecast inflation. Economic growth.

I would just say, “You don’t have to forecast.” The Fed’s charter is that they’re supposed to promote full employment and price stability and they define as they want to. But it doesn't say anything that they have to forecast.

Matter of fact we did a study, we looked back in 1993, the Fed was not telling you what they were doing then. And quite out of the blue, starting in February they raised interest rates they raised them from 3% to 6% in a matter of seven months. Huge shock to the economy.

We looked at that relative to what they’ve done since December of 2015 when they started raising rates now. And they’ve only gone up 100 basis points, 1%. But they’ve told everybody what they’re going to do. The volatility back then with much greater interest rate increases compared to the volatility now was much less.

Now there are other things at work there but I think you can say that forward guidance has not been a success and it has strained the credibility of the Fed so I’d get out of the forward guidance, I’d get out of the forecasting business, publicly forecasting, sure they got to do it internally but I’d keep their mouth shut publicly."

via http://www.businessinsider.com/gary-shilling-fed-chair-stop-forecasting-transparency-data-rate-2017-10

Monday, October 23, 2017

Why there may not be much more Fed interest rate hikes

Gary Shilling explains why he thinks the Fed is flying blind

Despite the large and growing deflationary pressures, Federal Reserve Chair Janet Yellen stuck to the central bank’s party line in her speech to the National Association for Business Economists in Cleveland on Sept. 26. She argued that the weaker inflation is transitory. Yes, she admitted, the Fed’s 2 percent target for personal consumption expenditures inflation, the central bank’s favorite measure, has been continually undershot, but “the restraint imposed in recent years by a variety of special factors, including movements in the relative prices of food, energy and imports, will wane in coming quarters.”

There are two problems with that statement. First, she’s been saying this for some time, but those “special factors” -- items such as falling mobile-phone service costs, lower airfares, weak oil prices in 2014 through 2016, and declines in education and health care costs -- just keep coming. After a while, continual “special factors” become a deflationary trend, which is fundamentally the result of a world in which supplies of productive capacity and labor exceed demand in most areas.

Second, Yellen, like most forecasters, thinks conditions move to a nice, steady long-run equilibrium. In this case, the Fed sees that nirvana as 2 percent annual inflation, 1.8 percent real gross domestic product growth, a 4.6 percent unemployment rate and a 2.9 percent federal funds rate. But steady states don’t exist for long, and long-run equilibria are simply crossing points through which the economy and financial markets move on their way to high and low extremes. Forecasts of long-run steady states are no more than hyper-quantifications of ignorance.

Real GDP grew at an average annual rate of 3.6 percent from 1949 through 2007, and many look back longingly at those years as ones of consistent stable growth, punctuated by a few brief recessions. In reality, among the 237 four-quarter stretches during those years, only 12 had four consecutive quarters of growth in the 3.4 percent to 3.8 percent range. By that measure, stable growth existed only 5 percent of the time.

Despite all the turmoil of the Great Recession, after the business peak in the fourth quarter of 2007, and erratic economic developments since then, the slow real GDP growth from 2008 to the present has been just as stable. Two of the 38 four-quarter periods during those years had growth in the 1.2 percent to 1.6 percent range, again 0.2 percentage points on either side of the 1.4 percent average. This is also 5 percent of the time.

Yellen did, in her extraordinary speech, go to considerable lengths to admit the Fed’s forecasts have been wide of targets. “My colleagues and I may have misjudged the strength of the labor market, the degree to which longer-run inflation expectations are consistent with our inflation objectives, or even the fundamental forces during inflation.” Wow! She even admitted that “a persistent undershoot of our stated 2 percent goal [for inflation] could undermine [the FOMC's] credibility.”

I’ve said many times that the headline unemployment rate is a poor measure of labor market conditions and Yellen admitted as much when she said it is questionable “whether the unemployment rate alone is an adequate gauge of economic slack for the purpose of explaining inflation,” noting that the employed share of the “prime-age worker” population -- those 25 to 54 -- remains noticeably below the 2007 level.

Yellen also addressed globalization, and how “increased competition from the integration of China and other emerging-market countries into the world economy may have materially restrained price margins and labor compensation in the United States and other advanced countries.” She also gives a nod to the effect on inflation of “the growing importance of online shopping.”

Although she didn’t throw in the towel on the Fed’s chronic forecast that higher wages and faster inflation are just around the corner, Yellen did note that “FOMC participants -- like private forecasters -- have reduced their estimates of the sustainable unemployment rate, especially over the past few years.” She also said the neutral real interest rate -- that is, the inflation-adjusted level of the federal funds rate consistent with keeping the economy on an even keel -- has “declined considerably in recent years, and by some estimates” is “currently close to zero.” She added, “Its value at any point in time cannot be estimated or projected with much certainty.” Translation: The Fed is flying blind.

Yellen may well be paving the way for further delays in Fed tightening, which has been the case for years. So don’t count on another 25 basis-point rate hike in December and three more next year, as the Fed has forecast. And don’t assume big reductions in the central bank’s $4.5 trillion portfolio will occur soon.

Via BloombergQuint