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

Monday, October 16, 2017

Gary Shilling will not invest in Bitcoin

Gary Shilling talks to BusinessInsider on why is not investing in Bitcoin.

It's a black box and I'm not a believer in black boxes. I recently met with a friend of mine, a West Coast venture capitalist. He was very early on this. He's made a lot of money on this and so on. I cornered him at a cocktail party and I said:
"Now listen, I want you to explain to me what this really is." 
"Well you know, ok it's a controlled deal and these miners. There's only so many of them."
And I said: "How about the guys behind this?" 
"Well you know nobody ... well we think we know who he is." 
Actually back in the ... Back in the South Sea Bubble, which is one of the great speculations. And there's a book by a guy named MacKay. It's a classic book. But he describes in there the South Sea Bubble, which was one of the great speculations. And this one guy comes out, puts an Ad on the paper, he said:
"Great discovery, wonderful investment, but I won't tell you the details." And a lot of suckers in London invested in this. And the last line was: The guy collected all the money, closed up, left for the continent that evening never to be heard of again." 
Similarities of South Sea Bubble and Bitcoin ?

I'm just very suspicious of things that are not transparent. If I can't understand it, I don't want to invest in it. 

Thursday, October 12, 2017

Lessons learnt in investing - US Housing bubble

Gary Shilling explains on BusinessInsider what he has learnt of the economy, on investing and what it takes to beat the market.

If you look at the economy, it grows over time. Not at a steady rate, but it grows over time. And markets, particularly the stock market, reflects that. In other words, if you have the economy growing at, let's say the nominal economy, nominal GDP growing at 4%. Long-term, corporate profits are going to grow about the same rate. 
Obviously, they can't continually expand faster than the economy or decline relative to the economy. So, that's where you start.
So, in terms of stocks, the only real difference between how the nominal economy is going, and how the stock market is going, is price-to-earnings ratios, and they move in long cycles. 10, 15 years, they move up, then they'll tend to move down. And that's pretty much it. 
Now, that's the overall economy and that's the overall investment.
Of course, everybody thinks they're going to beat this, there's that great gambling instinct in all of us. That's why people watch financial news programs. That's why they're watching us. Everybody's trying to get a leg up here. 
Well, of course everybody can't win at this game, I mean, on average, it's going to average out. There is that hope that springs eternal within the human breast, as somebody once said, that you're going to be ahead of the game. 
Now, what that means is, if you are trying to beat the game, you've got to be against the consensus. It doesn't mean that you simply are a contrarian in a sense of, "whatever the consensus is, I'm going to take the opposite side." No, no. 'Cause there's times the consensus can be right, and often is. 
But, what it means is that, when you come up with an idea, and it is counter to the consensus, and you think it's got a good chance of happening, and it's a trend that's working, well, then that's where you want to really jump on it with all force. 
That's what we did in the early 2000s. We saw as early as 2002, what looked like a developing housing bubble. And, so we said, "This isn't ready to crack yet, but it looks like it's getting there." You had people who were putting nothing down on houses, they assumed that the appreciation would be such they'd never even have to make one monthly payment, because they could refinance, you had the no-doc loans, all this nonsense. 
It really was clear. Now obviously that bubble would not have been developed and not broken 'til really the end of 2007, unless everybody, or most people, were convinced it was going to last forever. 
So, there's a case of where you had an extreme situation, it was against all reality in terms of how long it could last, and it was one of these rare opportunities where going against the trend with a major bubble having developed, where you could make some serious money.

Monday, September 11, 2017

Income Growth may have given rise to Populism

If you're wondering what gave rise to populism, look no further than the lack of real income growth. With purchasing power for most either flat or declining for more than a decade, voters rejected mainstream politicians in Western Europe and North America and turned to the fringes on the far right and far left.
Now, though, there is evidence that it is waning, or at least has peaked for the time being. Donald Trump’s popularity has plummeted in the early months of his presidency. In the U.K., after the initial post-Brexit euphoria, the cold, hard reality of separation from the European Union is setting in. Fringe parties in Western Europe have seen their popularity wane.

Why is populism fading? A number of reasons are apparent; some involve economics.

-Mainstream parties regroup and adapt. Most were oblivious to the rise of populism, but Trump’s surprise election and equally surprising Brexit got their attention. U.K. Prime Minister Theresa May and German Chancellor Angela Merkel have both responded to anti-EU, nationalist sentiments.

-Populism has failed to deliver instant results. It was unrealistic to believe Trump’s plans for speedy fiscal stimuli, tax reforms and replacement for Obamacare would be realized. Also, his personal attacks on both Democratic and Republican leaders mean there will be less cooperation in Congress to get his proposals enacted. Also, huge government spending, which all but the most ardent anti-deficit hawks desire, will take two to three years to be effective, even after the needed legislation is enacted. In the U.K., it’s evident that a clean, rapid Brexit is not possible. As with many major events, the devil is in the details.

-Populism’s approach has been flawed. It’s now obvious to most everyone that populists concentrate on what they’re against, not what they’re for. Sure, Trump emphasizes “America First,” but he concentrates on restricting immigration, reducing imports from Mexico, forcing China to abandon its mercantile policies, and compelling U.S. companies to hire Americans. His interest in positive changes such as improving education and training, opening America’s doors to skilled immigrants, and encouraging exports is much less apparent. In Europe, the emphasis is on containing the fallout from Brexit and keeping the extremists at bay. French President Emmanuel Macron’s plans for labor-market reform are viewed by workers as taking away their cherished 35-hour work week and essentially lifetime employment, not as creating conditions that will enlarge the economic pie so everyone gets a bigger slice.

-Economic conditions have improved, especially in the euro zone. Economic growth covers a multitude of sins. It is what reduced the federal government debt-to-GDP ratio from 106 percent in 1947 to 23 percent in 1975. For the first time in a decade, all 45 of the world’s major economies tracked by the Organization for Economic Cooperation and Development are growing, and in 33, the rate of advance is likely to be higher in 2017 than last year. The International Monetary Fund projects global economic growth at 3.5 percent this year, up from 3.2 percent in 2016, with a rise to 3.6 percent in 2018. Of more importance to the waning appeal of populism, the unemployment rate continues to fall in the euro zone as well as the U.S. and the U.K. It’s interesting to note that these developments abroad are occurring even with a weaker dollar, which aids U.S. exports but retards those of American trading partners, especially in the euro zone as the euro rises.

-Real wages are rising. Real, or inflation-adjusted, wages have been rising in G-7 countries. But that’s because of slower inflation, not an acceleration of nominal wages. That is not the way the Fed and other central banks want real wages to gain, since inflation is chronically undershooting the 2 percent target at which the Fed, the European Central Bank, the Bank of England, the Bank of Japan and other major credit authorities aim.

Despite recent events, though, populism is unlikely to disappear because the fundamental driving force -- the lack of real wage growth -- will likely persist. In my columns on July 31 and Aug. 1, I outlined reasons why sluggish wage growth is likely to continue -- including globalization, ample labor supply, cost-cutting by businesses that will affect labor, the bulk of new jobs being in low-paying sectors, the loss of high-paid union jobs, and poor productivity growth.
Populism may be down, but it isn’t out. If weak household purchasing power lingers, as it likely will for at least several years, populism will persist.