Druckenmiller and Trump were right

[thefatbaboon]

Cardboard, I find it unnerving that I now don’t understand where the Fed is coming from so I have no idea what they will do.  What happened to take the fed from being so cautious under Yellen to reckless under Powell?  Why did no one want to pause to see so many hikes flow through before doing anything more? It is so different to the fed behaviour of 2015 and 2016.

 

I am neither a trump supporter nor a conspiracy theorist but there was no real data to support their latest move and out of their own mouths both Powell and Williams were both saying that economic growth was already slowing and inflation below target.  So what is motivating Powell& co?  Can they really have so much confidence in their modelling guesses of neutral rates that they would base action on that alone against every other economic stat and  financial market?

 

 

[SharperDingaan]

You might want to look 'up', not 'down', and ask what has suddenly changed?

 

It would seem to us that the Fed credibly believes that Trump is musing 'firing' the Fed Chairman, after just 'firing' the US Secretary of Defense, declaring the war against ISIS won, and ordering the immediate withdrawal of troops from Syria. Zero consultation, and not exactly 'stabilizing'.

 

The US markets are currently down how much this year?, the US Fed is supposed to be independent of politics, and the US government currently doesn't have the authority to pay its bills. What do you suppose happens when millions of government workers don't receive a pay deposit to cover their christmas bills at the end of this month?

 

Do you really think Trump and the senate are going to agree on the spending bill anytime soon?

The man merely asked the banks about their liquidity, and arguably has very good reason.

We just didn't like the answer.

 

SD

 

 

 

 

 

[thefatbaboon]

SD, Not sure if you reply directed at me or another, but I was questioning fed not treasury sec.

[EliG]

Robert Shiller on the Fed and the hike:

 

https://www.valuewalk.com/2018/12/robert-shiller-fed-hike-rates/

 

The link includes a transcript but it's poorly done. I recommend that you watch the short video.

 

 

[Spekulatius]

Robert Shiller on the Fed and the hike:

 

https://www.valuewalk.com/2018/12/robert-shiller-fed-hike-rates/

 

The link includes a transcript but it's poorly done. I recommend that you watch the short video.

 

I believe that slump is caused by Trump more so than the Fed. For one thing, the “Trump slump” started before the Fed raised the interest rates, which shouldn’t have come as a surprise for the market, as it was well telegraphed.  What comes as a surprise is the lack of predictability from the current government and the infighting. That’s the issue that should be addressed and has nothing to do with the Fed. The market has shrugged of the political muppet show for a long time, but not any more apparently. It’s a little bit like the situation in Britain, where politicians continue to shoot themselves in the foot.

 

As far as interest rates are concerned a 2.5% interest rate seems on the low side, if we get 2.5% growth ne t year and 2% inflation. That’s still basically free money I agree with Druckenmillet

R that the rate of change could be important , but then again, we are at such low levels in terms of interest rates, that the rate of change starting from zero has to be somewhat significant to actually accomplish something. I am pretty sure that the Fed will change their plan for hikes next year, when the data warrants it. I am not so sure that our president stops digging when he finds himself in the hole deeper and deeper.

[thefatbaboon]

Robert Shiller on the Fed and the hike:

 

https://www.valuewalk.com/2018/12/robert-shiller-fed-hike-rates/

 

The link includes a transcript but it's poorly done. I recommend that you watch the short video.

 

Schiller: it’s One little rate hike?  It’s 8 hikes in a row squeezed into 2 years.

 

Schiller: We need to the raise cost of money so it costs least a bit about zero in real terms.  Didn’t  he see the 10 year at 2.8, and 30 at 3, and all the inflation inputs crashing. Didnt that tell you that the great majority see inflation falling? So it’s not really a matter of “just” getting money to real zero, we might have passed that four hikes ago.

[shalab]

Spekulitis - I generally like your posts but the below doesnt make sense. If China has 10% growth rate and 4% inflation, they should have 14% interest rate per your calculation. That kind of interest rate will kill any growth in China.

 

Fed's mandate is to keep inflation low and employment high. Their goal is not to kill wage growth, employment and cause deflation. The fed badly missed the boat here.

 

That said, I appreciate their help to make me rich in the longer term - a lot of assets are going cheap and I like it.

 

Robert Shiller on the Fed and the hike:

 

https://www.valuewalk.com/2018/12/robert-shiller-fed-hike-rates/

 

The link includes a transcript but it's poorly done. I recommend that you watch the short video.

 

 

As far as interest rates are concerned a 2.5% interest rate seems on the low side, if we get 2.5% growth ne t year and 2% inflation. That’s still basically free money

[Spekulatius]

True, a country with a 4% inflation and a 10% growth rate and 14% interest rate would never occur as the data with each other. But such an economy could handle risk free  interest rates higher than 4% for sure. a 4%  risk free interest rate with a 4% inflation is still free money basically. same with a 2.5% interest rate and 2.0% Inflation, yielding a 0.5% net cost for a borrower. Generally speaking a risk free rate at about the rate of inflation seems to be OK. Any interest rate below the

 

The argument remains whether the rate of change for interest rates is too fast. Now, that we are about level with inflation, further increases need to be more carefully considered. There is also the “risk” that inflation falls with a slowdown, pushing the net interest rate (interest rate minus rate of inflation) up.

 

Then, as I understand it, the Fed doesn’t look at overall inflation, it looks at core inflation, which takes out volatile components like energy. Energy was up huge in October, but has fallen significantly since. Seems like quite and interest set of challenges for the Fed to look at, and getting it right isn’t easy.

 

[shalab]

You are right about the pace of increase - the rule of thumb is to keep interest rates around inflation rate. So the current interest rate is right and no more increases are needed. It is not that hard - especially when the economy is decelerating and the yield curve is flat.

 

But the decision making is partly qualitative, subject to human biases and this leads to incorrect decisions.

 

The federal reserve could have simply said - we keep the option of increasing interest rates if the situation changes. The biggest concern of the market is that this federal reserve goes off rails in 2019.

 

I read an article that said - the market has predicted 10 of the last 5 recessions whereas the federal reserve has predicted none. This is very accurate.

 

Here is one prediction of potential interest rate cut in 2019:

 

https://www.cnbc.com/2018/12/24/art-cashin-doesnt-expect-the-fed-to-raise-rates-at-all-next-year.html

 

...

The argument remains whether the rate of change for interest rates is too fast. Now, that we are about level with inflation, further increases need to be more carefully considered. There is also the “risk” that inflation falls with a slowdown, pushing the net interest rate (interest rate minus rate of inflation) up.

 

...

[NewbieD]

I know Tepper basically just declared the Fed Put dead, but all the writing on the wall, at least to me, seems to indicate that with a little more pain, a lot of folks are going to start looking to resurrect it.

 

Well, to be fair to him he declared it dead for 400 S&P points - kinda like what you're saying. S&P was at 2500 when he said that. So like 11-12% down from 2350 where we are now I guess he estimates it might be resurrected.

[Cardboard]

"I believe that slump is caused by Trump more so than the Fed. For one thing, the “Trump slump” started before the Fed raised the interest rates, which shouldn’t have come as a surprise for the market, as it was well telegraphed.  What comes as a surprise is the lack of predictability from the current government and the infighting. That’s the issue that should be addressed and has nothing to do with the Fed. The market has shrugged of the political muppet show for a long time, but not any more apparently. It’s a little bit like the situation in Britain, where politicians continue to shoot themselves in the foot."

 

If the FED believes that Trump is now doing crazy things which hurt economic growth, reduce inflation and lower employment then their mandate calls for no rate increase or even to lower them. That is what a data dependent and independent FED should do. If things have changed for the worst, then they need to adapt and act based on new reality. Not stick with some pre-determined schedule based on old, now irrelevant data.

 

I have a hard time understanding why people mix political partisanship with a FED decision who should be independent, honest and smart people.

 

Well, I guess I should not be surprised with a bunch of anti-Trump. It is sad because this attitude only reinforces the conspiration theory as to why there has been 8 rate increases since Trump has been elected and zero under Obama.

 

Cardboard

[Dalal.Holdings]

Somebody call the Wahmbulance!

 

Omg Trump has more rate increases than Obama, the odds are totally stacked against him!!

 

Obama had it so easy walking into the oval office in January 2009 at the depths of the largest recession since the Great Depression with double digit unemployment.

 

Donald J Trump; however, is a beacon of a man who has gone through real hardships like 25bp Powell rate increases from record low rates during record low unemployment (low unemployment not at all due to Obama though).

 

Since He was a child, He had to learn to lift his silver spoon by Himself. Let us not forget His crippling bone spurs which prevented His service in Vietnam but did not stop Him against a valiant fight against HIV in the 90s. This man knows honor, knows sacrifice.

 

The FED (I capitalize it to show my tinfoil hat) is to blame for all market declines. Trade war? Crazy tweets? Unhinged speeches? The FED needs to learn to bring rates DOWN after Trump acts to accommodate him and his volatility. Everyone Trump has hired were the best people when he picked them (Powell included), but somehow always lose their way. These people are to blame for all of the Executive branch's mistakes. The mistakes do not emanate from the top--only the positive success stories do.

 

Nothing on the downside is Trump’s fault. Everything on the upside is due to him though.

 

Am I doing it right?

 

This thread belongs in the politics section.

[John Hjorth]

Dalal.Holdings,

 

Personally, I respectfully disagree with you [with regard to the belonging of this topic], because this is the key:

 

... If the FED believes that Trump is now doing crazy things which hurt economic growth, reduce inflation and lower employment then their mandate calls for no rate increase or even to lower them. That is what a data dependent and independent FED should do. If things have changed for the worst, then they need to adapt and act based on new reality. Not stick with some pre-determined schedule based on old, now irrelevant data. ...

 

The question and also the key here is, which available data should we look at right now? This will get this topic in a data driven direction, in my humble opinion, and thereby provide value to CoBF members reading and / or participating in this topic.

[Dalal.Holdings]

The question and also the key here is, which available data should we look at right now? This will get this topic in a data driven direction, in my humble opinion, and thereby provide value to CoBF members reading and / or participating in this topic.

 

It’s obvious—the S&P500 (Mr. Market) as Druckenmiller states is the Best indicator. So what if algos drive a large number of movements. There must be hidden signals in there.

 

And of course, as value investors who follow in the path of Berkshire here, we fear volatility and must lash out at the FED whenever we see volatility (as many have in these pages). Who was the great investor who said that “volatility is an investor’s worst enemy”?

 

Certainly many on here fear volatility, that’s for sure. I guess we realize who was swimming naked now that the tide has gone out...

[Spekulatius]

"I believe that slump is caused by Trump more so than the Fed. For one thing, the “Trump slump” started before the Fed raised the interest rates, which shouldn’t have come as a surprise for the market, as it was well telegraphed.  What comes as a surprise is the lack of predictability from the current government and the infighting. That’s the issue that should be addressed and has nothing to do with the Fed. The market has shrugged of the political muppet show for a long time, but not any more apparently. It’s a little bit like the situation in Britain, where politicians continue to shoot themselves in the foot."

 

If the FED believes that Trump is now doing crazy things which hurt economic growth, reduce inflation and lower employment then their mandate calls for no rate increase or even to lower them. That is what a data dependent and independent FED should do. If things have changed for the worst, then they need to adapt and act based on new reality. Not stick with some pre-determined schedule based on old, now irrelevant data.

 

I have a hard time understanding why people mix political partisanship with a FED decision who should be independent, honest and smart people.

 

Well, I guess I should not be surprised with a bunch of anti-Trump. It is sad because this attitude only reinforces the conspiration theory as to why there has been 8 rate increases since Trump has been elected and zero under Obama.

 

Cardboard

 

I think Trump needs to own his mistakes. The Fed can own theirs, if it comes to that. Also, where the the conspiracy if a Fed chair elected by Trump raises the interest rates? He could have just kept Janet Yellen, if he likes the low interest rate policy?

 

Anyways, I see this correction more like the one in 1987. back then, we had rising interest rates, a fairly strong economy, the Regan tax cuts buffing the economy and a considerable stock market rout they in the end meant very little for the real economy.

[Gregmal]

"I believe that slump is caused by Trump more so than the Fed. For one thing, the “Trump slump” started before the Fed raised the interest rates, which shouldn’t have come as a surprise for the market, as it was well telegraphed.  What comes as a surprise is the lack of predictability from the current government and the infighting. That’s the issue that should be addressed and has nothing to do with the Fed. The market has shrugged of the political muppet show for a long time, but not any more apparently. It’s a little bit like the situation in Britain, where politicians continue to shoot themselves in the foot."

 

If the FED believes that Trump is now doing crazy things which hurt economic growth, reduce inflation and lower employment then their mandate calls for no rate increase or even to lower them. That is what a data dependent and independent FED should do. If things have changed for the worst, then they need to adapt and act based on new reality. Not stick with some pre-determined schedule based on old, now irrelevant data.

 

I have a hard time understanding why people mix political partisanship with a FED decision who should be independent, honest and smart people.

 

Well, I guess I should not be surprised with a bunch of anti-Trump. It is sad because this attitude only reinforces the conspiration theory as to why there has been 8 rate increases since Trump has been elected and zero under Obama.

 

Cardboard

 

I think Trump needs to own his mistakes. The Fed can own theirs, if it comes to that. Also, where the the conspiracy if a Fed chair elected by Trump raises the interest rates? He could have just kept Janet Yellen, if he likes the low interest rate policy?

 

Anyways, I see this correction more like the one in 1987. back then, we had rising interest rates, a fairly strong economy, the Regan tax cuts buffing the economy and a considerable stock market rout they in the end meant very little for the real economy.

 

Spot on.

 

Trump hated Yellen and handpicked Powell. I really can't explain how he would make those decisions then, with the expectations that things would be any different than they are now.

[EliG]

It doesn't matter if it's Powell or Yellen. Fed chair doesn't set the rates; FOMC does. The "C" in FOMC stands for committee. There are normally 12 members (currently 10) and they all get to vote. Chairman's vote doesn't carry an extra weight. The last vote was unanimous which is not always the case. Even well known doves voted to hike this time.

 

Half of the members are regional bank presidents. They are 100% independent of both Powell and Trump. They are only accountable to their regional boards. Powell can try to persuade them but he can't whip them to vote certain way.

 

This is a good explainer of why personal attacks on Powell don't make any sense:

 

http://nymag.com/intelligencer/2018/12/jerome-powell-trump-fed.html

 

[John Hjorth]

Thank you, Eli,

 

- for contributing to giving this topic direction, with facts!

[rb]

It doesn't matter if it's Powell or Yellen. Fed chair doesn't set the rates; FOMC does. The "C" in FOMC stands for committee. There are normally 12 members (currently 10) and they all get to vote. Chairman's vote doesn't carry an extra weight. The last vote was unanimous which is not always the case. Even well known doves voted to hike this time.

 

Half of the members are regional bank presidents. They are 100% independent of both Powell and Trump. They are only accountable to their regional boards. Powell can try to persuade them but he can't whip them to vote certain way.

 

This is a good explainer of why personal attacks on Powell don't make any sense:

 

http://nymag.com/intelligencer/2018/12/jerome-powell-trump-fed.html

+1. That's what the people don't really understand. It's FMOC that sets policy. Each governor gets one vote. The Chairman is also a governor and gets one vote. Is there some hand wringing behind the scenes? Sure. But not that much, because the Chairman doesn't have the power to get a governor to do shit.

 

As others said. Yellen was more dovish and a brilliant economist. Powell was always more hawkish than Yellen. They've put Powell in charge, so what did they really expect? Shouldn't this be what they wanted? I guess Yellen was no good because she was appointed by Obama, so she had to go.

 

Maybe this post should belong in the politics section. Conservatives wanted to sting up Bernake. They were all bitching about loose money before. But now Trump complains about a rate hike and they're ready to wage jihad against the FED. Apparently, in their view, the right way to run monetary policy is to be tight when the economy is weak and be loose when the economy is doing well. This is why the FED was designed to be independent. Because if the US would run monetary policy the way they run fiscal policy we'd all be fucked.

[rb]

My last post was a bit testy, but our esteemed colleague John, asked for some facts based ideas here. So here it is. The FED doesn't see its job as reacting to inflation in order to bring it down to it's target. It doesn't want it to go out of control in the first place. So they have an idea about capacity and try not to go over it.

 

When it comes to that, at this level of unemployment unless they see a decline in core inflation or a serious jump in productivity the FED is looking for about 100k job creation per month. Above that they'll be in a tightening mood.

[John Hjorth]

It's OK, rb [ :- ) ],

 

Here are some facts & data:

 

Facts:

 

Federal Reserve Bank of New York - Press Release [April 3^rd 2018] : John C. Williams Named President and CEO of New York Fed.

 

That press release actually verbatim confirms what Eli posted about the election process for the regional Federal Reserve banks.

 

Data :

 

Federal Reserve Bank of New York - Liberty Street Economics [December 4^th 2018] : Labor Markets in the Region Are Exceptionally Tight.

 

Presentation.

 

- - - o 0 o - - -

 

[Just as an example. - Data all over the place!]

[meiroy]

Here's my own personal "data":

 

1. Fed members are human beings.

2. These people have incentives, political ideas, and biases.

3. Sometimes, their decisions are directly linked to political events, see Yellen's decision not to raise rates when she should have.

4. The Fed chairman has a significant influence on the other members. Either directly or by providing their view to the public in advance.  The chairman's impact in the real world is far greater than just being one vote of several.

 

Imagine, if you will, that before the previous vote, Powell would go on TV stating that there should be a pause. He would then start the meeting by declaring there should be a pause.  You can bet that such actions would flip some votes. That's the way it works.

 

"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 objective, or even the fundamental forces driving inflation," -- Yellen

 

5. They have shown time and time again they do not really understand how the economy works. They just play with the models they learned in school.

 

6. The natural state of the market is disequilibrium. This is something the Fed will never accept.  Which is why they end up creating worse bubbles and recessions.

 

And I'm saying this as someone who thinks the institutions, the institutional capital, is what makes America great.

 

 

 

[Dalal.Holdings]

6. The natural state of the market is disequilibrium. This is something the Fed will never accept.  Which is why they end up creating worse bubbles and recessions.

 

The chronic meme of "the economic (boom/recession) would have been much shallower if only the Fed had (raised/lowered) rates by x months by Monday morning quarterbacks (usually "macro" traders like Druck or CNBC commentators like Cramer) is amusing. Just sum it down to: "everything bad in the economic cycle is the Fed's fault".

 

If you want "real data", look at the United States before the Fed existed on Wikipedia (they used to call them Panics for a reason):

 

Panic of 1907

The Panic of 1907 – also known as the 1907 Bankers' Panic or Knickerbocker Crisis[1] – was a United States financial crisis that took place over a three-week period starting in mid-October, when the New York Stock Exchange fell almost 50% from its peak the previous year. Panic occurred, as this was during a time of economic recession, and there were numerous runs on banks and trust companies. The 1907 panic eventually spread throughout the nation when many state and local banks and businesses entered bankruptcy. Primary causes of the run included a retraction of market liquidity by a number of New York City banks and a loss of confidence among depositors, exacerbated by unregulated side bets at bucket shops.[2

 

Panic of 1901

The Panic of 1901 was the first stock market crash on the New York Stock Exchange, caused in part by struggles between E. H. Harriman, Jacob Schiff, and J. P. Morgan/James J. Hill for the financial control of the Northern Pacific Railway.

 

Panic of 1896

The Panic of 1896 was an acute economic depression in the United States that was less serious than other panics of the era, precipitated by a drop in silver reserves, and market concerns on the effects it would have on the gold standard. Deflation of commodities' prices drove the stock market to new lows in a trend that began to reverse only after the 1896 election of William McKinley.

 

Panic of 1893

The Panic of 1893 was a serious economic depression in the United States that began in 1893 and ended in 1897.

 

Panic of 1884

The Panic of 1884 was an economic panic during the Depression of 1882-85. Gold reserves of Europe were depleted, and the New York City national banks, with tacit approval of the United States Treasury Department, halted investments in the rest of the United States and called in outstanding loans. A larger crisis was averted when New York Clearing House bailed out banks in risk of failure. Nevertheless, the investment firms Grant & Ward, Marine Bank of New York, and Penn Bank of Pittsburgh failed along with more than 10,000 small firms.

 

The list goes on (and on)...

 

So if you want to argue that the Fed makes things worse, please provide data of similar caliber.

 

Can't wait until historians write about the Fed induced great economic crash of 2018 where the S&P sold off (almost) 20% from all-time-highs and nearly everyone who wanted a job had one...

[no_free_lunch]

 

So if you want to argue that the Fed makes things worse, please provide data of similar caliber.

 

 

I actually realized that I made a mistake when I posted before.  The US stock market did 7% from 1871 to 1913, including all of your panics that you are panicking about.  There was actually price deflation this entire period.  Investors did very well.

 

From 1913 to today, the US stock market did about 6.6%.  I will call that a rounding error and say it was about the same.

 

I don't think anyone needs to prove the fed made things worse.  Prove they made things better.  If you can't why don't we just revert back to a more natural state.  Why do we keep rolling the dice with central planning?

[clutch]

6. The natural state of the market is disequilibrium. This is something the Fed will never accept.  Which is why they end up creating worse bubbles and recessions.

 

The chronic meme of "the economic (boom/recession) would have been much shallower if only the Fed had (raised/lowered) rates by x months by Monday morning quarterbacks (usually "macro" traders like Druck or CNBC commentators like Cramer) is amusing. Just sum it down to: "everything bad in the economic cycle is the Fed's fault".

 

If you want "real data", look at the United States before the Fed existed on Wikipedia (they used to call them Panics for a reason):

 

Panic of 1907

The Panic of 1907 – also known as the 1907 Bankers' Panic or Knickerbocker Crisis[1] – was a United States financial crisis that took place over a three-week period starting in mid-October, when the New York Stock Exchange fell almost 50% from its peak the previous year. Panic occurred, as this was during a time of economic recession, and there were numerous runs on banks and trust companies. The 1907 panic eventually spread throughout the nation when many state and local banks and businesses entered bankruptcy. Primary causes of the run included a retraction of market liquidity by a number of New York City banks and a loss of confidence among depositors, exacerbated by unregulated side bets at bucket shops.[2

 

Panic of 1901

The Panic of 1901 was the first stock market crash on the New York Stock Exchange, caused in part by struggles between E. H. Harriman, Jacob Schiff, and J. P. Morgan/James J. Hill for the financial control of the Northern Pacific Railway.

 

Panic of 1896

The Panic of 1896 was an acute economic depression in the United States that was less serious than other panics of the era, precipitated by a drop in silver reserves, and market concerns on the effects it would have on the gold standard. Deflation of commodities' prices drove the stock market to new lows in a trend that began to reverse only after the 1896 election of William McKinley.

 

Panic of 1893

The Panic of 1893 was a serious economic depression in the United States that began in 1893 and ended in 1897.

 

Panic of 1884

The Panic of 1884 was an economic panic during the Depression of 1882-85. Gold reserves of Europe were depleted, and the New York City national banks, with tacit approval of the United States Treasury Department, halted investments in the rest of the United States and called in outstanding loans. A larger crisis was averted when New York Clearing House bailed out banks in risk of failure. Nevertheless, the investment firms Grant & Ward, Marine Bank of New York, and Penn Bank of Pittsburgh failed along with more than 10,000 small firms.

 

The list goes on (and on)...

 

So if you want to argue that the Fed makes things worse, please provide data of similar caliber.

 

Can't wait until historians write about the Fed induced great economic crash of 2018 where the S&P sold off (almost) 20% from all-time-highs and nearly everyone who wanted a job had one...

 

I don't have a strong opinion about Fed one way or another... but if you want to disapprove the hypothesis that Fed makes things worse, you shouldn't provide evidence on how things were bad before Fed. It's like showing how many people starved to death before communism in Russia to disapprove the point that communism made Russia worse.  ::)