You know the moment in a horror movie when the characters are going about their business and nothing bad has happened to them yet, but there seem to be ominous signs everywhere that only you, the viewer, notice?
That’s what watching global financial markets the last couple of weeks has felt like.
In a lot of ways, nothing looks particularly wrong. The S&P 500 was down 0.7 percent Wednesday, tumbling for a second consecutive session, but over all is down only about 5.5 percent from its early May high. The unemployment rate is at a five-decade low. With major companies nearly done releasing their first-quarter results, 76 percent had results above expectations.
But along the way, global bond prices have soared, driving interest rates down sharply. Ten-year Treasury bonds are yielding only 2.26 percent as of Wednesday’s market close, down nearly a full percentage point since November 2018. The outlook for inflation in the years ahead is falling as well, as are the prices of oil and other commodities.
Most significant, the fall in longer-term bond yields has not been matched by a fall in shorter-term rates. For example, a 30-day Treasury bill is yielding 2.35 percent — meaning you can earn more on your money tying it up for a month risk-free than you can tying it up for a full decade.
This is not normal. It is called an inverted yield curve, and historically it has been viewed as a sign of a recession in the offing. At a minimum, it indicates that bond investors believe the Federal Reserve will soon need to cut interest rates — in effect, that it overshot with those four rate increases last year.
There is also a soft underbelly to some of the good economic data of late. Orders for capital goods like business equipment fell 0.9 percent in April, suggesting companies may not be in an expansionary mood. The Institute for Supply Management’s index of activity at manufacturing companies fell sharply in the most recent reading, though it remained in expansion territory.
The financial markets don’t always tell a tidy little story about what is happening, but here’s a theory about reconciling the apparent calm in the economy with the many worrying signs.
The breakdown in trade negotiations with China and the imposition of tariffs on Chinese goods are part of the story, but only a part.
Businesses have weathered escalating tariffs for two years now, and while tariffs can be costly, they do not need to wreck the economy. After all, prices for products fluctuate for all sorts of reasons, and market economies are pretty good at adjusting.
The op-ed that got Stephen Moore his Fed nomination is based on two major falsehoods
President Trump reportedly chose Stephen Moore for one of the vacancies at the Federal Reserve Board after reading a Wall Street Journal op-ed Moore wrote attacking the Fed. The piece, co-authored with Louis Woodhill, made two central claims: (1) we’re experiencing deflation, and (2) the way to address it is to follow a rule adopted by Paul Volcker in the 1980s.
Slight problem though: Both of those claims are flat-out false. There is no deflation, and Volcker never created the imaginary “rule” Moore is now attributing to him. I know, because I asked Volcker — as Moore once suggested I do.
Deflation, for those unfamiliar, means prices are falling. There are three major measures of price changes: the consumer price index, the personal consumption expenditures (PCE) price index, and the “core” PCE price index (which excludes energy and food, which can be volatile). All three show modest but positive year-over-year price increases.
.. Moore and Woodhill explain this away by saying that in fact we shouldn’t be looking at overall price changes — instead we should be looking at just a small subset of prices, specifically commodities. Commodities refer to goods that are interchangeable with one another, such as metals, oil, soybeans, wheat, etc.
Now, there’s a reason why when people talk about inflation or deflation they usually focus on the overall index rather than some cherry-picked subset of products. Some products see prices go up (doctor visits); others see them go down (TVs); what we want to know is the big-picture trend. Sure, it’s possible that changes in commodity prices might eventually flow through to elsewhere in the economy. It’s also possible that commodities have weird, anomalous price changes driven by sudden shocks — a crop failure, say, or discovery of gold, or an oil embargo. These supply or demand shocks tell us little about whether there is too much money chasing too few goods, which is really what the Fed is trying to track.
Moore historically has had trouble distinguishing whether price changes in commodities are driven by monetary policy (that is, the Fed allowing too much or too little money to slosh around) or market-specific shocks. For instance, when I’ve appeared with him on CNN before, he has cited as evidence of “deflation” the fact that U.S. soybean prices have fallen. And hey, soybean prices are down! But as everyone in America except apparently Moore is aware, soybean prices have fallen primarily because China stopped buying U.S. soybeans in retaliation for Trump’s trade war, not because of changes in the money supply.
Nonetheless, Moore claimed in this op-ed, as well as in that CNN appearance, that his confused understanding of inflation and Fed policy was endorsed by none other than the godfather of sound Fed policy: former Fed chairman Paul Volcker.
.. On CNN, Moore said that we should follow the “Volcker Rule,” which he claimed was a rule Volcker set when he was chair in the 1980s that required linking interest rates according to movements in commodity prices. That is not actually anything close to what the Volcker Rule is about. It’s actually a regulation that prohibits banks from conducting certain investment activities with their own accounts, and has nothing to do with commodity prices or interest rates. I figured he’d misspoken, or gotten confused (this was around 7 a.m., after all), and moved on.
I was then surprised to see that Moore resuscitated this claim again in his recent Journal op-ed — you know, the one that earned him his Fed nomination. This time he didn’t foolishly refer to it the “Volcker Rule”; he said it was Volcker’s “commodity-price rule”:
The solution is obvious. The Fed should stabilize the value of the dollar by adopting the commodity-price rule used successfully by former Fed chief Paul Volcker. To break the crippling inflation of the 1970s, Mr. Volcker linked Fed monetary policy to real-time changes in commodity prices. When commodity prices rose, Mr. Volcker saw inflation coming and increased interest rates. When commodities fell in price, he lowered rates.
.. On Monday, I wrote to Moore to ask him where I could find more information about this rule, explaining that I had consulted Fed transcripts and other documents to no avail. He replied to say that Arthur Laffer, his longtime business partner and frequent co-author, had written “two very famous pieces” for the Wall Street Journal about the subject in the 1980s.
He eventually sent me one Journal op-ed from 1982, by Laffer and Charles Kadlec. It does not in fact say that Volcker adopted a price rule; rather, it says that Laffer and Kadlec speculated that such a relationship might be able to explain interest rate movements over the previous four months, and proposed how to test their theory. The headline, ending in a telltale question mark: “Has the Fed Already Put Itself on a Price Rule?”
Turns out Cato Institute senior fellow and economic historian George Selgin was also looking into Moore’s claim, and dug up another Laffer essay from this era. In this one (in Reason), Laffer explicitly says Volcker replied to that 1982 Journal op-ed to explain to Laffer why the Fed was not targeting commodity prices. Selgin also found a paper by another Fed official — written just after Volcker stepped down, in 1987 — arguing (apparently unsuccessfully) that the Fed should start adopting a rule such as the one Moore describes. Which, of course, implies that the Fed had not had any such rule when Volcker was in charge.
.. When I first, shall we say, expressed skepticism about Moore’s claim in that CNN debate, he suggested I get things from the horse’s mouth.
MOORE: Do you know what the Volcker Rule was? You know how he killed inflation? He followed commodity prices. Every time commodity prices went up, he — he raised interest rates, and every time —
RAMPELL: That’s not what the Volcker Rule is.
MOORE: Yes, it was. That’s what he did, and that’s how we conquered inflation, and that’s why —
RAMPELL: Google the Volcker Rule, people. That’s not what the Volcker Rule is.
MOORE: Yes, it was. Ask him. Ask him.
So I figured, why not ask Volcker? I sent an inquiry through his book publicist, who passed it along to Volcker’s assistant. The assistant replied: “I showed this to Mr. Volcker and he says that he does not remember ever establishing a commodity-price rule.”
There you have it. Trump has nominated to the world’s most powerful central bank a guy who has trouble telling whether prices are going up or down, and struggles to remember how the most famous Fed chair in history successfully stamped out inflation. But hey, Republican senators still seem keen on him because “the establishment” keeps pointing out how inept he is.
The Morality of Charles Koch
A libertarian billionaire embraces a Catholic business school for its ethics.
the chairman and chief executive officer of Koch Industries finds two aspects of the Washington-based business school highly attractive: at the personal level, its emphasis on character and virtue; at the social level, its message that the right way to get ahead and contribute to your community is by creating wealth and opportunity for others.
.. for his own hires, Mr. Koch ranks virtue higher than talent. “We believe that talented people with bad values can do far more damage than virtuous people with lesser talents,” he says.
.. “Tim always said, ‘You’re a Catholic but just don’t know it,’ ” says Mr. Koch. While he wouldn’t go that far, he will say he is attracted to Catholic University’s effort to put the human person at the heart of business life.
.. or many on the Catholic left, and increasingly on the Catholic right, the idea that free markets might advance Catholic social teaching is anathema.
.. “One can be in business and pursue bad profit,” Mr. Koch explains. “That is, by practicing cronyism—rigging the system to undermine competition, innovation and opportunity, making others worse off. Good profit should lead you to improve your ability to help others improve their lives. But that’s not how many businesses act today.” For Mr. Koch, everything from protectionist restrictions on goods and services to subsidies for preferred industries to arbitrary licensing requirements promote bad profit by unfairly limiting competition.
.. This distinction between good and bad profit illuminates the fundamental difference between how Mr. Koch regards the market and how his critics do. In the view of the critics, free markets treat working men and women as commodities to be bought and sold, and only through strong government intervention can workers hope for a decent standard of living. In Mr. Koch’s view, the most important capital is human, and the truly free market is vital because it’s the only place where the little guy can use his or her own unique talents to offer better a product or service without being unfairly blocked from competing.
.. workers, whose greatest protection is possible only in a dynamic, growing economy: The ability to tell the boss to “take this job and shove it”—secure in the knowledge that there is a good job available somewhere else.
.. The opposite of market competition is not cooperation, as is often assumed. It’s collusion—and almost always the kind that benefits the haves over the have-nots. Which explains why the moral threat to capitalism these days comes not from socialism but from cronyism and corporate welfare.
.. What he wants to encourage, he says, is an economic system open enough so that ordinary people who work hard and have their own unique abilities can build lives of dignity and hope for their families.
Canada Stays the Course on Budget Amid Improving Economy
Last year, Canada pledged to spend roughly 24 billion Canadian dollars ($18 billion) in infrastructure by 2020 in an effort to spur growth. It also introduced tax breaks targeted at middle-income earners and households with children
.. Deficits will remain a mainstay in Canadian public finances for the foreseeable future. Ottawa projects a deficit of C$28.5 billion next year, or 1.4% of Canada’s gross domestic product, and remain in the C$20 billion range for each year through 2022. The debt-to-GDP ratio is expected to stay slightly above 31% over the next four years.
.. the government is also benefiting from stabilizing oil prices, which is lifting fortunes in the resource-rich region of western Canada.
.. suggest Canada’s economy has moved into a higher gear, following two years of lackluster growth because of the swift fall in commodity prices.
.. The government projects growth of 1.9% this year and 2% in 2018, which is below the Bank of Canada consensus.
.. Three quarters of Canada’s exports—or the equivalent of 20% of Canadian output — go to the U.S.