“When times get tough, economic nationalism and protectionism tends to rise because it is always easier to blame someone else for self-inflicted problems.”
. . . Ian McAvity
I have written about this subject too often recently, but it is because I am losing my friends and mentors. Over the past few years we lost Barton Biggs, Marty Zweig and this past weekend sage pundit Ian McAvity passed away. Ian was involved in finance for more than 40 years, as a banker, broker, and since 1975 as an independent advisor and consultant, specializing in technical analysis. His analysis and views were published in Ian McAvity's Deliberations on World Markets newsletter since 1972. He will be missed. We heard from another sage pundit last week, namely Alan Greenspan. He was interviewed on Bloomberg and said (as paraphrased):
The fundamental problem that confronts central banks is to maintain sound currency, and we’ve gone far from that and indeed required of central banks to do much of what the fiscal system tends to do. And . . . the cause of the [stagnation] that we’re dealing with in recent years is a fiscal problem. It’s not a monetary problem. And if you look at the data . . . productivity growth on average of the last five years for virtually all of the major countries and a . . . number of the emerging nations . . . [is] less than one percent.
Mr. Greenspan went on to speak about entitlements by noting (again as paraphrased):
[Entitlements] will grow wholly independently of what the ability to fund it is. And the ability to fund it is largely related to the GDP… [Further, the] interesting thing about it is that during Republican administrations, entitlements grew more than on average during Democratic administrations.
My friend, the erudite Dennis Gartman (The Gartman Letter) responds:
On this he is also quite correct. Entitlements have indeed grown under Republicans and Democrats and have grown more under the former than the latter. It is this that has turned many on the Right so vehemently against the so-called ‘Establishment’ for with control of the Senate and the House presently nothing has been done to curtail Entitlement spending. The very foundations of minority families have been torn asunder because of the pernicious nature of Entitlements and yet nothing . . . NOTHING . . . has been done. Therein lies the impetus for the rebellion by the Trump supporters and at times we fully understand their anger.
One can argue the various markets, and sectors, are at the margin reacting to the election race and the question of who is winning in the polls. Clearly the policies between the candidates vary widely implying there will be winning and losing sectors depending on who becomes President. But, a better question would be, “Is the Federal Reserve falling behind the curve?” Speaking to this point are my keen-sighted friends at the GaveKal organization(I own their funds) in their commentary of March 17, 2016:
The Federal Reserve surprised no one yesterday when it decided to remain on hold. But the downward shift in its projection of year-end inflation from 1.6% to 1.2%—and the consequent revision of its dot plot to show two, rather than four, rate hikes in 2016—should have raised a few eyebrows. By adopting such a dovish stance, the Fed is in increasing danger of falling behind the curve on inflation, which in turn implies that the risk of sharper rate hikes further down the road is rising. For the time being, that is not a possibility that is troubling the market. In response to yesterday’s Fed statement, US treasury yields fell by some -10bp at both the short and the long end, and the US dollar fell more than -1% against the euro. However, consumer price index data released yesterday clearly showed that consumer inflation is ticking up. Excluding the impact of lower oil prices, core CPI inflation rose to its highest since the 2008 financial crisis at 2.3% YoY. In her press conference, Fed chair Janet Yellen dismissed this uptick as due to volatile components ‘without very much significance.’ Even so, there are good reasons to believe that consumer inflation may rise further and faster than the Fed expects.