Monday, December 3, 2018

Weakness in commodities likely to persist

Gary Shilling's talks about the slowdown in commodities on Bloomberg

Any way you measure it, the market for commodities is suffering. The Bloomberg Commodity Index of 22 key raw materials ranging from oil to copper to soybeans has dropped about 10 per cent since reaching an almost three-year high in May. I've identified 10 forces that explain the weakness and why it will persist.

1. Slowing economic growth globally and a possible recession in the next year. Commodity producers seldom moderate supply to match weakness in demand, and commodity prices drop in recessionary climates.

Harbingers of a recession: Universally falling stocks, tighter Federal Reserve monetary policy, the soon-to-invert yield curve, weakening housing activity as mortgage rates rise, unsustainable corporate profit growth and soaring consumer confidence combined with lower savings rates. Globally, the Organisation for Economic Cooperation and Development's index of leading indicators is falling. Copper is an excellent gauge of worldwide economic activity since it's used in almost all manufactured goods and has no price-constraining cartel on the supply side or legal restrictions on demand. Copper prices are down about 16 per cent since June.

2. The strengthening [US] dollar is increasing the local currency cost of commodity imports in developing as well as advanced economies, and I forecast the greenback, the world's primary reserve currency, will continue to appreciate. Of my broad list of 45 commodities, 42 trade in US dollars. High costs cut commodity demand and prices.

3. Chronic excess capacity exists among commodity producers. Fixed costs are high but variable costs low. A major new copper mine costs $US5 billion to $US10 billion to develop, but the variable costs of mining another ton of copper are small. So profits leap after demand and prices are high enough to cover fixed costs. This spurs investment and expansion since miners seem oblivious to the resulting excess capacity and falling prices it spawns.

4. Slowing growth in China is curbing commodity usage as GDP advances drop from double digits before 2007 to 5.8 per cent in the third quarter. China's planned shift from goods exports and infrastructure spending to domestic consumer spending is disruptive. Furthermore, 53 per cent of GDP last year came from low commodity-intensive services, up from 34 per cent in 1995.

China's growth will slow further since its unemployed labour force is nearing exhaustion and because its emulation of Western technology, enhanced by stealing American technology or requiring tech transfers as the price of doing business in China, is over. China, like South Korea before it, is entering the "middle income trap". Furthermore, China's labour pool will shrink in future years as a result of her earlier one child-per-couple policy. The 15-to-64 year-old age group is set to fall from 1 billion in 2015 to 717 million in 2060.

5. As economies grow, proportionally less is spent on commodity-intensive goods and more on services. You can drive only car one at a time, but spend almost unlimited funds on travel, recreation, education and other services. This is true for developed counties like the US where outlays on services climbed from 39 per cent in 1947 to 69 per cent in 2017. It's also true for emerging markets like China, where the services component of GDP rose from 34 per cent in 1995 to 52 per cent in 2017.

6. Globalisation disrupts economic growth in the West to the detriment of commodities. In the last three decades, US manufacturing employment plunged from 17 per cent of total payrolls to 8.5 per cent. Many of those displaced are flipping hamburgers, driving for Uber and employed in other low-paid jobs. The resulting stagnation of real wages has spawned disruptive populism as voters throw out centrist politicians in favour of the far right and extreme left. Furthermore, the deflationary climate sired by globalisation has trained consumers to resist price increases, forcing many sellers to eat rising labour costs and pressure commodity producers.

7. The escalating trade wars disrupt economic growth and commodity demand as uncertain business people postpone capital outlays. Supply chains are also disrupted. Many American companies don't export to China but depend on intermediate goods from that country. In President Donald Trump's initial $US50 billion round of tariffs, 53 per cent were on intermediate imports from China and 50 per cent of the impending $US200 billion second round.

8. Mounting inventories depress commodity prices. Producers can't be sure initially whether weakening demand is momentary or serious and don't want to disrupt production. So inventories climb. After Trump's tariffs curtailed exports of soybeans, stockpiles soared. Lack of pipelines to move oil has created a $US6.75 per barrel discount for oil in Texas' Permian Basin compared to West Texas Intermediate crude at $US52 per barrel and excess inventories. Similarly, Western Canada Select oil from oil sands in Alberta is discounted $US34 to WTI.

9. The realisation that a peak in oil demand, not supply, is in the cards as rising supplies of natural gas and LNG as well as renewables replace oil. Renewables such as hydro, wind and solar accounted for only 12.1 per cent of electricity generation last year, but the IEA forecasts them to account for 56 per cent of new generating capacity through 2025.

Due to conservation including more efficient vehicles, energy conservation per dollar of economic activity since 2017 declined by 43 per cent in Canada, 61 per cent in the US, 48 per cent in Japan and 70 per cent in the UK. Mushrooming electric vehicle sales will slash crude demand since transportation accounts for about half of oil use and autos are around half of that, or 25 per cent of the total.

10. Real commodity prices, or those after taking inflation into account, fall steadily in the long run as efficiency, substitute and human ingenuity consistently beat temporary shortages. Major wars cause only temporary spikes.

Tuesday, November 6, 2018

Will we see Emerging Markets contagion ?

Click here if the above video does not play

Gary Shilling outlines his reason using history on why Emerging Markets turmoil may not kill the global economy.

Monday, October 15, 2018

Oil prices may fall in the long term

Gary Shilling thinks oil prices may have peaked.

Crude oil prices, both Brent and West Texas Intermediate, are at four-year highs. Traders are talking about a return to $100 per barrel, and even higher. But if you’re a long-term investor, look for oil demand to peak and more subdued prices in the years ahead — not the supply shortages and soaring petroleum costs as some observers fear. Royal Dutch Shell Plc and Norway’s Statoil ASA expect the peak in demand as soon as the mid-2020s, while BP Plc sees it happening between 2035 and 2040 and the International Energy Agency is forecasting 2040.

What a switch from the days of M. King Hubbert, the geophysicist at Shell Oil in the late 1940s who believed that oil field production followed the classical bell curve or normal distribution. He predicted that production in the lower 48 U.S. states would top out in the early 1970s with dire economic consequences. Few agreed at the time, but Hubbert proved largely correct, and his adherents subsequently extended his concepts globally and believed that worldwide production would top out in 2010 or 2012 at the latest.

Nevertheless, oil supplies have proved plentiful in recent years as output surged from Russia, Canadian oil sands and, especially, U.S. frackers. This troubles OPEC, which, like any cartel, exists only to keep prices above equilibrium. That encourages producers in and outside the cartel to strive for more market share. So OPEC, led by Saudi Arabia, has tended to curb its own production to accommodate these “cheaters.”

In 2014, OPEC was frustrated that all the growth in global output in the previous decade was going to non-OPEC producers. To teach the “cheaters” a lesson, it hyped its output from 30 million barrels per day to 33.8 million barrels daily. Prices fell to $27 per barrel, but that didn’t chase out American’s increasingly efficient frackers that now dominate U.S. production. As of August, American shale output was 7.7 million barrels per day, versus 3.3 million barrels from conventional oil. America is now the largest producer of crude oil, topping Russia and Saudi Arabia, and production may only rise as temporary pipeline shortages are overcome, allowing U.S. exports to increase.

Elsewhere, Mexico privatized its deep-water oil reserves in 2015, and output should climb. Brazil has liberalized its oil market, opening its colossal deep-water potential to foreign oil companies. North Sea output is reviving. Fracking for oil is being developed in the Persian Gulf, Argentina, Canada, Russia and China.

Oil will be in surplus in future years not only due to increasing output potential, but also because of rising supplies of natural gas, which has also been made abundant by fracking. American gas, after being cooled and converted to liquefied natural gas, has huge export potential along with LNG from Oman, Australia and elsewhere. Then there’s renewable sources such as wind, solar and biofuel to consider. These accounted for only 12 percent of electricity generation last year but the IEA believes they will make up 56 percent of net generating added capacity through 2025.

The cost of renewables is declining. A U.S. residential solar energy installation now costs $2.93 per watt on average, down from $6.61 in 2010. For a large utility-scale system, the cost has dropped from $3.58 to $1.11 — a plunge of almost 70 percent. Costs are falling for batteries and other methods of storing solar energy at night and wind energy on calm days. Nevertheless, necessary government subsidies for renewables are still substantial.

Continuing energy conservation will also reduce crude oil demand. Since 1970, energy consumption per U.S. dollar of economic activity has dropped 61 percent in the U.S., 48 percent in Japan, 70 percent in the U.K. and 43 percent in Canada. California just enacted a mandate for carbon-free — fossil fuel-free — electricity by 2045.

While the Trump administration is capping fuel-efficiency standards for autos at 37 miles per gallon, down from the Obama administration’s 54.5 miles per gallon by 2025, electric vehicle sales are surging and will further curb gasoline demand. Transportation fuel accounts for half of crude oil use and autos consume half of that, or 25 percent of total oil demand.

Then there are the millennials who eschew driver’s licenses in favor of bikes. And aging postwar babies are being forced to give up driving. In addition, emerging-market economies that binged on borrowing in dollars after the financial crisis to finance growth and oil demand now find themselves strained as the robust dollar makes it much more expensive to service those debts in local currency terms. Since most commodities trade in dollars, their local currency costs of commodity imports, especially oil, are rising as well, and curbing oil demand.

As economies grow, be they developed like the U.S. or developing such as China, services gain a bigger share of spending while spending on goods fall. That’s another long-term deterrent to oil demand and the energy needed to produce goods.


Tuesday, October 2, 2018

US will win the Trade war | The Buyer has power over the Seller


See below for Transcript from Business Insider video

Here's the point that I continue to make. When you've got plenty of supply in the world, and I think you do — plenty of industrial capability, plenty of raw materials and so on — it's the buyer that has the upper hand not the seller. The buyer has the ultimate power and who's the buyer? US is the buyer, China is the seller. And besides that, if you say, if we weren't buying all those consumer goods from China, and you and I enjoy them, they're cheap, they're great. But if we weren't buying them, where would China sell them? They have no other place to sell them, and in the meanwhile, China's growth is slowing.

They've got a problem of huge debt expansion they're trying to curb, they're trying to deal with a shadow lending — a shadow banking system and so on and so forth. China isn't going to collapse obviously, but I think in this trade war, that the US has the upper hand.

If you look at how this whole thing developed, after World War II, the rest of the world was pretty much in ashes and we were promptly into the Cold War, so I think that implicitly or explicitly, we basically said, "We will let Japan and Europe export freely into the US," because that gave them the growth to revive in a postwar era and that was cheaper for us than garrisoning even more US troops around the world and having more border wars. Well, that was fine, but that era's over, and globalization has replaced it, so it's an entirely different scene, and I think as a result, you have this situation where China — China, you know, grew basically through exports and they went to Europe and North America.

But you know, they did it with some rather underhanded — we'd let them into the World Trade Center in 2001 and they basically have not fulfilled their promises, they have not opened up their technology, they're not opening up to our investments, they steal our technology, they demand tech transfers for companies that want to operate in China and so on. And so you've got a situation now where China is basically playing by the old game, when everybody could export to the US, but now when you see the unemployment problem, no growth and purchasing power for the average guy — the non-supervisory and production employees — no growth in real incomes for a decade and that has changed the whole scene and I think that's really what has gotten Trump elected and he's basically saying, "Hey wait a minute. We've got the upper hand here and we're going to go ahead."

I mean, people say nobody wins trade wars. Yeah, in the short-run you don't, but in the long-run ... the US will be better off.

Now, they could go to the mat. Xi, who is basically the president for life in China, and Trump, he won't be around forever of course, but they could go to the mat and you could get a really nasty, all-out trade war and a serious global recession. I'm not predicting that. I think they probably will settle and China will begrudgingly give ground. They'll import more US goods, they'll ease up on required tech transfers, steal less of it. They're not going to change their views entirely, but I think under pressure, they probably will give way and we'll end up winning the trade war.

I mean, people say nobody wins trade wars. Yeah, in the short-run you don't, but in the long-run, if it's a matter of changing what has been the world exporting to the US and the US buying it and what do we do? We give them paper. That's why they own half of our treasuries. I think that is being reversed and in the long-run, the US will be better off.

Monday, July 30, 2018

US home prices like to go higher

US residential market has a supply and demand issue says Gary Shilling in a Bloomberg article. He points that construction material costs, construction wages have gone up and investors holding properties longer as signs of supply issues.

"Residential construction is a small but very volatile component of the economy, accounting for 3.9 percent of GDP in the first quarter. Still, it can have oversized effects on overall economic performance due to its volatility. As a share of real GDP, it fell from 6.7 percent in late 2005 to 2.5 percent in early 2011 during the subprime mortgage collapse. That decline of 4.2 percentage points in itself constitutes a major recession."

"Housing activity is likely to recover further, but many of the supply and demand deterrents are unlikely to dissipate soon. As a result, residential construction is likely to be a much more subdued component of the economy for some time."

Monday, July 16, 2018

Thursday, May 3, 2018

US Dollar is still attractive compared to other currencies

The US Dollar has its share of believers and non-believers. Gary Shilling brings up some important points on why the US Dollar could be here to stay in the top position for a very long time. Article from Bloomberg follows below.

The most recent data from the International Monetary Fund on the composition of global foreign-exchange reserves paints a dour picture of the dollar. After a brief respite in the wake of the global financial crisis, the greenback’s share of reserves is back on the decline, falling to 62.7 percent as of the end of 2017, the least since 2013. At the peak in 2001, the dollar accounted for 72.7 percent of worldwide reserves. On top of that, the value of America’s currency has been depreciating fairly rapidly, with the Bloomberg Dollar Spot Index tumbling 11.3 percent over the past five quarters.

So, given the outlook for worsening U.S. debt and deficits, is it time to throw in the towel on the dollar? That would be premature. Despite the recent rough patch, the dollar’s preeminent status should remain intact because it continues to meet my six long-run criteria for a dominant international currency, revealed by our study of exchange rates since ancient times.

-Rapid growth in the economy and gross domestic product per capita. The recent U.S. tax cuts as well as enhanced military spending and infrastructure outlays should push annual real GDP to the 3.0 percent to 3.5 percent level versus the 2.2 percent since the recovery began in 2009. On the supply side, labor will likely be ample even without sizable immigration as youths who stayed in college during the Great Recession look for jobs and discouraged workers continue to return. American productivity growth has been slow but should catch up as new technologies grow large enough to move the aggregate needle.

In contrast, Europe is dragged by the lack of a common fiscal policy to complement the common currency. Japan’s two decades of slow growth will persist as its aging and declining population portend slower growth and more resources are devoted to retirees. In the usual development pattern, China’s growth is slowing as it matures while the earlier one child-per-couple policy and continuing low fertility rates will depress new labor force entrants. Also, U.S. President Donald Trump will probably limit the transfer of growth-enhancing American technology to China.

-A large economy, usually the world’s biggest. China’s GDP, the world’s second-biggest, is still just 58 percent of America’s. More important, its GDP per capita is only 15 percent of the U.S., and to close the gap, its GDP would need to grow about 10 percent per year for three decades. In last year’s fourth quarter, growth was 6.8 percent and continues to slow. Some countries such as Switzerland and Singapore are attractive, but are far too small to support global currencies.

-Deep and broad financial markets. International money -- especially with today’s electronic trading --wants to be where the action and liquidity are. The U.S. stock market capitalization as defined by the New York Stock Exchange and the Nasdaq is $27.4 trillion, dwarfing the euro zone’s $8.8 trillion, China’s $7.3 trillion and Japan’s $5 trillion. U.S. sovereign debt stands at $15.3 trillion, and foreigners own half of it. That compares with $7.6 trillion in Japan, where foreigners own just 7 percent, $6.1 trillion in China and $1.6 trillion in Germany.

-Free and open financial markets and economy. Foreign investors are willing to hold a country’s currency if they face few restrictions. The World Bank ranks the U.S. sixth out of 189 countries for business-friendly regulations while the top five are small countries. The U.K. is seventh, Germany is 20th and Japan is 34th. China is a distant 78th with its semi-controlled economy with a mercantilist policy. Furthermore, China’s heavy dependence on exports is reflected in the tightly controlled and at times manipulated yuan. Japan’s zeal for exports also leads to attempts to control the yen. In Europe, Germany and the Netherlands are relatively open economies for foreign investors, but that’s not true for the euro zone as a whole.

-Lack of substitutes. The Chinese want the yuan to be a global currency, but are unwilling to adopt the free and open financial markets that are required. Japan resists the yen becoming a global currency. The euro has been untroubled lately, but the threat of a euro-zone breakup is not completely gone after Greece threatened to leave several years ago. Today, immigrants from Syria and elsewhere are causing major worries in Europe, contributing to Brexit. Some 87.6 percent of global foreign-exchange market turnover involves the dollar. The euro is a distant second with 31.4 percent, while the Chinese yuan is involved in just 4.0 percent. The total adds to 200 percent since two currencies are involved in every transaction.

-Credibility. That is essential for a primary global currency, and there can’t be major concerns about devaluation. As the global premier currency, it’s difficult to see how the greenback could be devalued unilaterally. Against which currencies? Confidence can be fickle, but the dollar’s credibility is likely to improve as the U.S. current-account shrinks. Among other reasons, the postwar babies have been poor savers throughout their adult lives, and need to save robustly as they increasingly face retirement, or work until they die.


Monday, April 9, 2018

Increased Long Treasuries positions

"I think we are in a world of lot of deflationary forces. 
People worry about the Chinese dumping Treasuries. But their on record saying that they are not going to change their policies. Obviously if they started to sell treasuries, they would tank. Who would be the biggest losers ? The Chinese as the rest of their portfolios would be vastly reduced."

Excess Supply world
"We are in an excess supply world. That's why Trump's got the upper hand with the Chinese. In an excess supply world, whose got the upper hand, its the buyer, not the seller."

Listen to the full interview here on Bloomberg Markets AM

Tuesday, March 13, 2018

What could trigger a US recession

"Cumulative, you could have enough effects to touch off a recession. Now that would be for the first time, a death by a thousand cuts."

Monday, February 26, 2018

On Donald Trump - Interview part 2

Gary Shilling talks to ThinkAdvisor on President Donald Trump and his effect on the people and stock market.

What are the chief positives of President Trump’s tax package?

The cuts, kind of, even up the playing field in the corporate area. They don’t really do much net-net in the individual area. They front-loaded them, with the idea of spurring the economy. But it was a political game — we’ve got an election coming up this fall. However, there was serious need in the corporate area for updating in a globalized world. We had a 35% tax rate, and now it’s 21%. Amazon and Microsoft and [other companies] had cash stashed overseas.

Why will the cuts have little effect on individuals?

There’s an effect in the next year or two because they’re front-loaded. But then that’s basically taken away in the succeeding years. So it may spur incomes in the next year or two, but that fades over time.

Will people start spending more?

Higher-end people don’t adjust their spending when their incomes or assets go up and down. But with more money in their hands, middle- and lower-income people tend to spend. So I think that whatever increases they get in income will probably go to rebuilding their savings, particularly baby boomers, who have been notoriously poor savers throughout their entire lifespan.

How much do you credit Trump for the stock market’s record-setting performance?

Some things that Trump has accomplished suggest that he has had a measurable impact on stocks. The most important one is deregulation. That’s his biggest accomplishment. Deregulation isn’t dramatic. [I mean], there’s no Rose Garden signing ceremony for deregulation. It’s a little of this, a little of that. It’s putting different people in charge. It’s either ignoring regulations that they want to avoid or changing them.


Tuesday, February 20, 2018

The Fed is comprised of mostly academics

Globalization has helped some countries and hurt others. The US Federal Reserve seems not to understand some of its effects on its common citizens.

"The Fed is misreading reality for a whole host of reasons. One of the biggest is globalization. They’re very much in a domestic world and don’t realize the power of what globalization has done to manufacturing, how it’s decimated unions in this county, what it’s doing to the service areas, where companies are outsourcing legal and accounting work to India. The Fed is oblivious to all that."

"My view is that there aren’t many people there who have ever met a payroll — never had the responsibility for running a business and paying people. Almost all of them are academics or people who have spent their whole career in the regulatory area or in government agencies. "

via thinkadvisor

Wednesday, February 14, 2018

Gary Shilling: India VS China economy

Gary Shilling praises India as having good long term prospects, even more so than China.

"One that we’ve been very optimistic about is India, though it’s better known today than it was six years ago, when we first got enthusiastic about it. I wrote a report back then that India was a better bet in the long run than China. It’s a long-term play and still has a lot to go.

It has a lot of advantages: It’s a democracy, albeit a messy one — there’s a lot of graft and corruption — but it’s a democracy. China is a top-down dictatorship and is becoming more so. The world is pretty much saturated with manufactured goods now; and as economies grow, a greater portion of spending is on services. India is much more into services — software and so on. They’ve got a knack for it. And India has large private corporations. In China, they’re basically state-controlled and very inefficient."

Monday, February 12, 2018

Gary Shilling interview on the stock market - Part 1

Gary Shilling talks with ThinkAdvisor on the markets 

THINKADVISOR: Are you bullish about the market?

SHILLING: No, I’m not rampantly bullish. Stocks are expensive. The economy is getting long in the tooth. There’s reason for caution. But by the same token, I don’t see the party coming to a grinding halt in the immediate future.

THINKADVISOR: When we talked last July, you said the biggest threat to the market was complacency. Is it still?

SHILLING: Yes. It’s very much there. When you see this mad rush into index funds — passive investments — the attitude is: “I don’t care what the fundamentals are. I’m buying it because it’s going up.” So it’s onward and upward with no discrimination. The other manifestation is speculation — the same kind of speculative complacency we’ve seen in the Bitcoin area.

THINKADVISOR: What’s the stock market’s tipping point?

SHILLING: Good question. Historically, bull markets haven’t died of old age. There’s always some trigger mechanism. In the post-World War II period, they’ve come from two sources. One is that the Federal Reserve worries about an overheating economy and tightens up credit. By my reckoning, in 11 out of 12 tries, that has precipitated a recession. The only soft landing was in the mid-90s.


Thursday, February 1, 2018

In the past most rate hikes have led to a recession

Gary Shilling is out with his latest views, in which he discusses the changeover in the leadership of the US Fed from Janet Yellen to Jerome Powell. Also includes thoughts on why the Fed raised interest rates and how it may affect the markets. Read the column below.

With the pickup in global economic growth, central banks -- except for Japan’s -- are shifting to tightening from extremely easy money, including massive quantitative easing and trivial, if not negative, short-term interest rates. The Federal Reserve has raised its target for the federal funds rate five times since December 2015 and is suggesting three more increases this year.

But the Fed is confronted with a serious dilemma: Inflation and wage increases continue to undershoot its expectations at the same time the central bank confronts forces pressuring it toward credit tightening. 

The new chairman, Jerome Powell, who isn’t a trained economist, may change the central bank’s tone, but his soon-to-be predecessor Janet Yellen and the other academic economists who have dominated monetary policy, believe fervently in the theoretical Phillips Curve. It posits that a declining unemployment rate should spur inflation, despite evidence to the contrary. Rather than increase as the unemployment rate declined since the recession, the rate of inflation has largely stayed the same.

Nevertheless, the Fed wants to tighten credit slowly due to chronic low inflation and memories of the May 2013 “taper tantrum,” when a mere mention by then-Chairman Ben Bernanke of reducing the Fed’s rate of asset purchases sent financial markets into tailspins as interest rates leaped. 

Another reason for the Fed to tighten is to keep commercial banks from lending out the more than $2 trillion in excess reserves the Fed has given them through quantitative easing. These are simply an asset of the banks and a liability on the Fed balance sheet with little financial or economic consequences. But as economic growth picks up as a result of the tax cuts followed by likely massive fiscal stimulus, creditworthy borrowers will want to borrow, banks will be happy to lend and these excess reserves could turn into tons of money that would threaten major inflation.

The Fed is also concerned about market distortions caused by low rates. The problem isn’t low rates, per se, but investors' unwillingness to accept them despite the offsetting effects of low inflation. Adjusted for inflation, the 30-year Treasury bond yields 0.62 percent, lower than the 1.7 percent average of the last decade but not hugely so. Nevertheless, many investors and savers believe they deserve much higher returns than the 2.97 percent current yield on the 30-year Treasury and 2.73 percent on the 10-year note. So they’ve moved further out on the risk spectrum into assets such as  emerging-market bonds, student debts despite high delinquency rates and leveraged loans, to name but a few.

Fed officials, while they believe that in a normal, stable economy, the fed funds rate should be around 3 percent compared to the present 1.25 percent to 1.5 percent range, are also gradually adjusting to reality. They’re suggesting that it may be appropriate for rates to be lower for longer.

I remain convinced that a key reason the Fed has raised rates is because its credibility was at stake, and remains so. It has repeatedly forecast higher fed funds rates than it subsequently initiated. Bear in mind that the Fed controls that rate so it simply didn’t do what it intended. The gap between its fed funds forecasts and actions are extraordinarily wide, ranging to more than four percentage points.

Despite Powell's suggestion that the economy has not run out of slack, the majority of policy makers may worry that the tax cuts could prove stimulative enough to cause major economic strains. In addition, Republican plans for major infrastructure outlays will no doubt concern the Fed about an overheated economy. And that’s despite the likelihood that the actual spending won’t take place for several years.

Historically, once the Fed starts to raise rates it almost always continues until it precipitates a recession and a bear market in stocks. By my count, in 11 of 12 times since World War II, a recession followed a rate-raising campaign, though it can often take years for that to happen. The only soft landing was in the mid-1990s. This time, with so much excess liquidity around the world, it may also take years before higher rates and a reduction in the Fed’s balance sheet assets start to pinch the economy.

The yield curve -- the spread between short- and long-term Treasury rates -- may also behave differently this time. In the past, when the Fed jacked up rates to the point that yields on 2-year Treasuries exceeded those on 10-year notes, the yield curve “inverted” and a recession followed. Inversions typically occurred because 2-year yields rose faster than 10-year yields. Recently, however, the spread has narrowed because 2-year yields have risen but 10-year yields have been relatively stable. That’s unusual but probably reflects deflationary pressures that are more evident in longer maturities.

So, if an inverted yield curve occurs, it may not, as in the past, guarantee a nearby recession, and it may take years before Fed tightening precipitates one.