Interesting TACs of the Week (July 14 – July 20, 2018)

Summary – A top-down review of interesting calls and comments made last week in Treasuries, monetary policy, economics, stocks, bonds & commodities. TAC is our acronym for Tweets, Articles, & Clips – our basic inputs for this article.

Editor’s Note: In this series of articles, we include important or interesting Tweets, Articles, Video Clips with our comments. This is an article that expresses our personal opinions about comments made on Television, Tweeter, and in Print. It is NOT intended to provide any investment advice of any type whatsoever. No one should base any investing decisions or conclusions based on anything written in or inferred from this article. Macro Viewpoints & its affiliates expressly disclaim all liability in respect to actions taken based on any or all of the information in this article. Investing is a serious matter and all investment decisions should only be taken after a detailed discussion with your investment advisor and should be subject to your objectives, suitability requirements and risk tolerance.

 

1.Is this —- ?

What year is this? We have seen comments from several gurus about 2018 being another 2008, 2000 or 1998. But this week we heard a very different comment from a guru with a terrific track record, a guru that explicitly called the credit bubble in October 2007 after warning about it in July 2007, a guru who said Draghi’s commitment to whatever needed in 2012 was very bullish. 

Larry Fink said this week to Erik Schatzker of BTV:

• “The question I am raising is is this 1994 when the markets were very concerned about growth; then the markets reasserted itself & then we got a 5-year bull market; we may be in that position; market may be wrong right now in that GDP will continue to grow, trade conversation is not that difficult for international commerce, & M&A and share repurchase will continue; if that is the case, we will wake up in a year from now and the market is going to be up 10-12%.”

What was the difference between 1994 and 2000/2007-2008? In the latter cases, the Fed raised interest rates until they busted the asset bubbles dominating markets & created recessions in the process. In contrast, the Fed began early in 1994 and stopped just in time. As a result, inflation was kept in check without killing growth. That created a disinflationary growth period for the next 3 years.

So the big difference is whether the Fed knows when to stop & whether the Fed decides it is safer to stop early rather than late. That brings us to:

2. “Debt coming due & we are raising rates – Really?“

Look what Henry McVey of KKR said to Erik Schatzker of BTV this week:

• ” … there is no other time in American history where you had the unemployment rate this low when you were stepping on the accelerator; there is some logic to that; if you have low rates & you can raise your nominal GDP faster, you can actually get pricing power, you can get some wage increases, you can actually reduce your deficits … “
  

Ex-Fed Governor Mark Olson said essentially the same thing to Rick Santelli this week:

• “Jay Powell is a financial guy; he understands that debt service capability is the driver here; & that’s why he is saying if the economy grows faster than debt then the ability of US economy to handle that debt is much more manageable”
  

Fed Chairman Powell said the same thing in this week’s Congressional Testimony that was perceived to be dovish.

So what is the problem? Richard Bernstein had said after the 2008 financial crisis that the Fed is essentially myopic in that they don’t see much beyond the US economy. They have been unable to identify the slowdown or contagion that seeps into America from overseas and therefore they keep focusing backwards on inflation and keep tightening until they blow up the economy.

Powell’s Fed may be repeating this mistake argued Viktor Shvets of MacQuarie this week in his discussion with Erik Schatzker of BTV. He argued that the Fed is looking at backwards inflation indicators and missing the biggest risk. What risk?

• “the US monetary base is actually contracting at the fastest pace any time since 1929“

Therefore Mr. Shvets urges the Fed to

1. “do no further tightenings” and
2. “stop reducing the size of their balance sheet in 3-6 months“.

David Rosenberg wrote on Friday – “The global economy, a decade past the financial crisis, has been fuelled by a record volume of debt“. Now ask yourselves – what economy on earth has managed to service its debts while its central bank is destroying liquidity at the rate of $50 billion per month, as this Fed is doing?

And what is the US economy after all? 70% of it is the US consumer. And how is the vaunted US consumer doing?

And is this affecting consumer spending?

 

5. Kudos

Below is President Trump’s interview with CNBC’s Joe Kernen. We think it is a must watch. If you do, you might see why Nobel Laureate Robert Shiller said on Friday on BTV – “President Trump brings to light things that need to be talked about“. 

The CNBC transcript of the interview can be found here.

Not only must Joe Kernen be happy about delivering such an important interview but he must also have been thrilled to hear President Trump describe his Squawk Box as a “highly respected” show. He is the only one left on Squawk Box from the original trio of Mark Haines, David Faber and himself. So he probably feels a sense of ownership of the show.

Kudos to CNBC as well for three interviews in one week that, we think, will prove to be important & revealing – President Trump, Larry Kudlow & Steve Bannon. We may well be “Untouchable” in a caste-system sense to CNBC but that doesn’t affect us. Partly because we love markets & partly because we have been so robustly insulted so often & by so many that insults & bad treatment rolls off us like water from a Duck’s back.

 

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