Four Ifs by Fed, Two Ifs by Me? Why the Reserve Board Will Likely keep Its Interest Rate Powder Relatively Dry in 2016

Since announcing last December that it would increase by .25 percent the range of its base interest rate for overnight lending for nearly a decade, the US Federal Reserve has signaled in multiple ways its intent to continue such increases four times during the course of this year. Initially, this intent was signaled by the release, in conjunction with its last 2015 meeting, of the “central tendency” of the projections of the rate-setting “Open Market Committee” participants (the now famous “dot plots” on a graph). Those plots showed that, disregarding the highest and lowest projections, the middle of the pack of opinion was represented by a path of four rate increases of .25 percent each by the start of 2017. While this would be a slower than usual pace of rate increases by past Fed standards, it would nonetheless bring the base rate to a range of 1.25 – 1.50 percent, essentially a full point higher than where the range stands today.

Ever since then, the US financial markets have more or less indicated their displeasure with this “tendency” in the best way they can to get attention. Bond markets rallied with prices higher and interest rates lower, reflecting a conviction among market participants that economic conditions have veered downward with deflation, rather than moving in the direction of continued modest expansion and 2 percent inflation projected by the Fed at its December meeting. Lately, a number of market participants are going even further and predicting the onset of a US recession (two or more consecutive quarters of negative movement in GDP), which would certainly argue for more, not less, Fed “accommodation” to the market–either in the form of another round of quantitative easing in bond purchases to pump lendable money out to banks, or course-reversing decreases in the base interest rate (for which the Fed has only marginal room at best before “going negative,” as Europe has.

Regardless of whether the bond market is right in suggesting a recessionary case, the equity market, which has been at odds with bond market expectations for most of the last few years, has also been shooting flares at the Fed’s intentions in very dramatic fashion. Indeed, there is simply no historical precedent for the precipitous drop in US equities since the first trading day of the year, when on average an investor lost $16 for every $1000 in the market and has kept on losing money ever since through the first two weeks of the year.

There are, of course, multiple rationales for the equity market correction (a 10 percent drop or more), the second in six months. Indeed, some of the reasons are the same as occurred in August: data showing a serious decline in the Chinese export economy, and a precipitous devaluation of the Chinese currency in the context of continued relative strength of the US dollar, as well as the partially-related continuing decline in the price of oil in view of increased current and anticipated market supply and weakening Chinese and emerging market demand, which also led to a drop in the pace of US manufacturing! In addition, there was a perception in some market quarters that the Federal Reserve might take steps to increase interest rates in September, while the US economy was showing signs of increasingly vulnerability to foreign emerging market damage, caused by the rising value of the US dollar against their currencies (exacerbated by the drop on the Chinese yuan) and the ensuing flight of capital from their economies–which would be made worse by such an increase.

Ironically, the decision of the Fed to hold off an expected September rate increase was roundly criticized in some quarters because the Fed expressly cited global economic conditions potentially threatening the US recovery as one of its reasons for deferring the first increase at that time. These critics said the Fed has no business taking foreign situations into account to the extent that it seemed to be adding a “third mandate” in terms of global financial market stability to its list of responsibilities.

Now, the Fed was never adopting a third mandate to work for foreign countries. Its September focus on negative Chinese and global economic trends was quite obviously because of the potential US-side effects of those negatives on the Fed’s statutory twin mandates–optimal employment and stable prices! Indeed, today’s Fed critics are adopting that very same perspective the Fed was criticized for back in September, urging the Fed to most certainly pay heed to the adverse developments in the Chinese and emerging market economies because they may be leading to a global recession that will be imported along with attendant deflation to the US.

Nonetheless, in the past week, both Vice Chair Stanley Fischer and New York Federal Reserve Bank President William Dudley went out of their way in public remarks to assert that the projected four rate increases this year were still “in the ballpark” and definitely on the table, notwithstanding the offshore negatives. Yet the minutes of the Fed’s Open Market Committee’s December meeting, released January 6, reveal the Fed itself was divided and unsure of the direction of the US economy, citing “significant concern about the still low readings on actual inflation” and “risks present in in the inflation outlook.” These concerns would now seem to be increased by the continuing drop of the current market price of oil to levels below $30 per barrel, not seen since 2003.

Coincidentally, the same Business Section of The New York Times that offered the headlines “Oil Prices Decline More than 5 Percent as Stockpiles Increase,” and “New Fears of a Slowdown in China Spur Selling” (January 7, 2016) also contained the article titled “Minutes Indicate That Fed Still Has Inflation Doubts.” The story noted questions about how much farther Fed officials are willing to raise rates without clear evidence the pace of inflation is also rising. Fortune Magazine had a similar take on the Fed’s divided state of mind.

In the coming days and weeks, there will be multiple data points to be considered before the Fed’s coming January and March meetings (nobody expects a rate increase in January, but the “four more hikes” play call virtually requires one in March) by a Federal Reserve that has promised its interest rates decisions going forward will be “data dependent,” regardless of their dot-plot projections: fourth-quarter 2015 GDP (currently within 1 percent or less of recession levels in most forecasts); January and February employment reports; manufacturing and service business trajectory; consumer spending levels; retail and housing sales; and, of course, producer and consumer price levels. A generally centrist Fed official, St. Louis Reserve Bank President James Bullard, while not directly contradicting the “four more in 2016” rate rise track, did note the potential impact of falling oil prices on the Fed’s 2 percent inflation target. This note may well imply that such incoming data will prove to be more important than the dot-plot projections of four rate increases this year, especially because of the effects of further downturns in China on the drivers of that data, such as the price of oil and the prospects for currency-related, deflationary discounts on products imported to the US.

But there have been very few mentions of another factor that could tip the balance against four or more rate increase this year: 2016 is a presidential election year. The Fed meets only eight times a year, so four increases would average one increase every other meeting. Assuming the incoming data causes a March deferral, that would leave only six for four, right into the teeth of the nominating and final election campaign. George H. W. Bush famously blamed his re-election loss in 1992 on the Fed’s Alan Greenspan, for his resistance to cutting interest rates faster during the recession preceding the vote.

The Fed certainly would want to avoid a mistake in terms of excessive interest rate increases that tip the economy into recession (that’s why its public statements hedge with respect to “data dependence”). But it would also not want to be perceived to tip the election to one candidate or another; let’s just call that “date dependence”–the date of the election! The prediction here is that this year will see two rate increases at most: one in April or later, and the other after the election in December.

For the moment, Chinese GDP data has come in at 6.9 percent for 2015, down .4 percent from the prior year and in line with reduced expectation, stabilized by retail sales growth of 11.1 percent year over year (just short of estimates), while manufacturing contributions continued to tumble as expected.

These numbers reflect an overall 25-year low in GDP, but also suggest a level of stabilization that left markets in Asia marginally positive, with Shanghai up slightly as well. What remains to be seen is whether these numbers will in turn stabilize the US markets enough for the Fed to jump ahead with a .25 percent increase in March. And that would seem to turn on whether the strong employment data averages of 284,000 net new jobs in Q4 2015 will persist, and whether there emerges actual (not just projected) upward inflation data in Q1 2016. The sense here is “no” on both counts–and that might mean the US equity market could even turn upward, as it did eventually after last September’s Fed flinch.

What Could Trigger the Next US Recession: How About Trump’s Plan to Deport 11+ Million “Illegal” Consumers?

Maybe it’s finally time to take the idea of President Donald Trump seriously. After all, it seems like America’s largest retailer, Walmart, might be doing just that: a few days ago, the giant company lowered its outlook for revenues and earnings, citing a “tougher sales environment” than it expected a year ago (when, of course, Trump was not yet running for President or promising mass deportations). Could it be that the smart, experienced executives who run that company have begun to think through just what the effect on Walmart’s sales would be given a post-election mass deportation of all the estimated 11-12 million undocumented immigrants (plus a goodly number — estimates range from range estimates range from 3.7 million up to 4.5 million — of children born here to undocumented fore whose citizenship Trump plans to revoke by court order)

Likewise, America’s major hospital chains, such as Community Health Systems and LifePoint , have been lowering their expectations for admissions going forward. Perhaps that’s no all due to some or other supposed effect of ObamaCare.

Certainly, there are few if any financial models or precedents for such a mass forced emigration program from the United States. The Japanese internment program in World War II involved only around 127,000 individuals — and most of those persons were held captive within US borders, where they were fed and housed and schooled and provided medical care, while the wartime production economy was booming. The Trump deportation plan (such as it is) involves a vastly larger number of people and logistics, but with the ultimate result of eliminating the equivalent of the entire populations of New York City and Los Angeles from both the production and consumption sides of the US economy. Indeed, the right-wing radio talk show host Rush Limbaugh, who is one of the most consistently vocal backers of Trump’s plan, estimates the number of illegals at 20 million (and that’s just the illegal workers), so he would presumably see the total hit to the economy as including the entire population of America’s five largest cities, plus the Bay Area of San Francisco.

Since candidate Trump has provided few details of his mass deportation plan as yet, we’ll have to use our imagination to work out the scenario; he has said multiple times, however, that it would proceed humanely. But there are only so many ways to search out, pick up, pack up, pen up and then ship out 20 million people in time for the next election. So let’s visualize: the easy part will be stripping out the undocumented felony prisoners, and they already have a place to stay until their plane is ready. But the vast majority also have families, which would argue for at least trying to round them up at the same time, as Trump has indicated he would like to allow families to stay (i.e., “leave”) together.

After that, let’s assume President Trump follows the usual stereotypes of his talk radio chorus. We can imagine would probably become known as “The Night of the Nanny Snatchers,” doing it after dark would be more humane than picking them up as they drop off their charges at school, or via an ICE sweep through the kitchens of upper Park Avenue and Greenwich at dinner time — great for high TV ratings, Donald, but not the kind you’ll want. Likewise, the Federalized National Guard sweeps through the meat-packing plants in Nebraska and Iowa can be carried out first in the night shifts, and those Midwest locations are hardly major TV markets (but Trump will have to do something about the I-phone Twitter videos — he knows all about Twitter).

Rounding up the kitchen and waiting staff of urban restaurants won’t be pretty (but Trump will point out it could lead for an economic boom from the rediscovery of the automat). Nor will hitting the Catholic Church “sanctuaries”, but Trump can get that done on Sundays while most people are watching football. Finally, getting those pesky “Dreamers” rooted out of their college dorms to rejoin their parents in the processing camps, as well their little brothers and sisters in grade and high schools might be a little tougher yet, especially under Trump’s Second Amendment Enforcement Act, which will allow all those kids and their teacher-sympathizers to be armed to the teeth!

But once it’s all done, will the US really experience the economic nirvana of spending savings and surge in job creation that Trump promises from shrinking the US population by at least 15 million? Even if as he promises “the good ones can come back”, from the back of the line, of course? Let’s think about it.

The housing market, which is now finally and firmly in real recovery, would be hit with a glut of millions of abandoned private homes (and, of course, related mortgage obligations — hardly great for homeowners looking to sell for ordinary reasons, or the banks, which will take another round of hits to their balance sheets as housing prices tumble back down with the a new wave of “for sale” signs). Certainly not great for US GDP, as we have seen before, when that figure went deep in the red with the last great housing meltdown.

As to the “giant sucking sound,” as Ross Perot used to say, this time coming from abandoned rental apartment, a big jump in the vacancy rate would lead to lower rents for us citizens, but the deflationary pressures this would pose for the economy would also keep the Federal Reserve from any serious effort to normalize interest rates, which ironically might now be needed to prevent a deflationary spiral toward recession. Those apartments can’t all be turned into Airbnb units — and who’s going to afford vacations with the onset of another recession.

Cutting against the risk of deflation, however, would be the enormous jump in the price of agricultural commodities. Undocumented immigrants constitute slightly more than an estimated 50 percent of all agricultural workers in the US, or over 600,000, who would not readily and easily be replaced without another Civilian Conservation Corps-type of conscription program for unemployed youth. Trump would at least have to go to Congress to authorize America’s first “Lettuce Draft,” but an enormous jump in grocery prices while that gets approved, set up and running would have its own recessionary impact on the balance of consumer spending on goods and services.

Americas GDP is driven 70 percent by consumer spending, not to mention sales tax receipts for states that depend on those receipts in the absence of income taxes. With the collapse in housing from the bottom up due to a deportation exodus, moreover, property tax receipts in these states would also “head south” (figuratively, of course). Restaurant prices would scale up with the cost of fruits and vegetables, which would hit consumption, too, as our citizen families struggle to pay for salads and smoothies. And just think about what will happen to the new and used car markets and the millions of job we now know depend on them, with so many millions of abandoned vehicles left behind to scavengers and junk yards or at best sold quick and cheap before the owners get forced on the plane.

And just think about the collective hit from housing and retail to the US GDP growth rate, which just established a somewhat firmer but disappointing footing of around 2 percent annually, and to the recently resurgent new and used car markets.

One Trump supporter has suggested that the government could put some of the undocumented to work building Trump’s wall on the Mexican border, but apparently they would be paid in pesos, which won’t do much for currency liquidity in the US. But Trump’s experiment with forced labor camps, mass roundups without trial, temporary concentration camps and mass deportation by bus, plane and ship — irrespective of its moral cost — is surely likely to have a dramatic downward effect on America’s economic growth. Unlike the housing crisis, which first bloomed out of sight in the stealthy canyons of Wall Street, this economic debacle can be foreseen with clear eyes well ahead of time — especially as Trump’s mass deportation “plan” continues, in its politically calculating way, to leave things to our imagination.

Top Campaign Songs of Summer 2015

With apologies to the immortal Casey Kasem, here’s America’s top tunes on the summer 2015 campaign hit parade.

This Number One hit goes out on request to Hillary in Chappaqua (or was it D.C., Brooklyn, or Illinois someplace): a fresh take on The Beach Boys’ all-timer, this one called “Server Girl.”

Little server, private one,
My campaign’s come all undone,
Lazy, crazy;
Now I’m Server Girl (Server Girl? My god, I’m Server Girl).

Sent my e-mails near and far.
Kept in my own cookie jar.
Now it’s broken
Open; Server Girl.

Some will say I’ve breached their trust;
But I just did what I must.
No retrieval:
Evil? Surfer Girl. (ooh ooh wee–ee–ooh)

We might ride this out forever,
If we can keep our cool.
Bill said hit “Delete” together:
(I must be a fool!)

Now it’s with the FBI;
My excuses didn’t fly.
China’s spying,
Crying–Server Girl.

The next request goes out to “The Donald” – “You’re so Vain”

You walked into our Party
Like you’re the best thing we ever got;
Your hat strategically placed to hide your hair,
Your spray-tan was apricot.
You had both eyes on the cameras
As you trashed the other guys–
They dreamed that they’d be your VP, they’d be your VP, and

You’re so vain
I bet you think the Party will pick you
You’re so vain,
I bet you think the Party will pick you. (Don’t you, don’t you?)

Well you had me several years ago,
When you were still Democrat.
Now you say you’ve evolved just like Reagan did,
But who knows just where you’re at?
You’re on the cable all the time,
And when you’re not, you’re hiring Latinos, hiring Latinos, and

You’re so vain,
You probably think you’ve got this one sewn up.
You’re so vain,
Don’t you know we need someone who’s grown up! (Don’t we, don’t we?)

You said you’ll muscle Mexico
To pay for your precious Wall;
Then you flew your new jet
To a Scottish golf match:
That’s really no plan at all.
You promise jobs will come right back:
But you don’t say they’ll pay Chinese wages, pay Chinese wages, oh

You’re so vain,
I bet you think you’ve got this thing wired;
You’re so vain,
Can’t wait till FoxNews says “You’re Fired”… Fired …

Summer song number 3 goes out to Joe Biden: He’s just “Bidin’ His Time.”

I’m bidin’ my time
‘Cause that’s the kind of guy I’m!
I might be running,
Damn, it’s cunning,
Just bidin’ my time.

I’m right more than wrong,
Let’s put it in song:
Iraq, gay marriage,
You can’t disparage
Me bidin’ my time.

I’m set for the journey
If she can’t handle Bernie.
I’m not like Cuomo,
I’ve got more FOMO
Just bidin’ my time.

Who else knows the score?
Not O’Malley or Gore!
The Party likes me;
(Just don’t mike me)
While I’m bidin’ my time.

On the same theme, here’s #4 for Elizabeth Warren: “It Could Have Been Me.”

I’m surely not Right, but I’m never wrong;
I could make a case in this race, it’s where I belong.
It should have been me, I’m Lefter than he;
Why Sanders not me, did I miss my time?

I want to win, not merely compete,
Why did I pass this easy chance
To take on the Street?
It’s got to be me, not Bernie or she,
If not Hillary, then it should be me.

That ultimate prize, that POTUS success,
Was waiting for me if I took the call;
But I turned it down, I settled for less,
But maybe now there’s still a chance I can have it all.

Can’t go it alone, that way is a flop;
I can’t let down the folks who cheered
When I was on top.
It’s got to be me, just not HRC
Itching to try, I can’t tell a lie,

It’s gonna be me!

Let’s dedicate this fifth number to Jeb Bush: “Stuck with the Clowns”

Isn’t he rich?
I’m full of fear.
Just when I finally got ready
For MY OWN career!
I’m running with clowns,
Who sent in the clowns?

A dozen plus four,
Have taken my floor,
I’m smarter and nicer
(but also, a bore)
I fidget and frown,
I’ve let Mother down,
I’m running with clowns.

Cruz, Christie and Paul,
Are jokes in disguise,
So’s Huckabee, Walker and Carson,
Heck, all of those guys.

Stating my case with my usual flair:
Make a point here; make a point there.
I’ve got the best name;
I’d better get Game–
I’m losing to clowns.

Thought it was George
I’d have to disown;
Turns out I’m losing this contest
All on my own.
Send in the clowns?
There ought to be clowns?

Don’t bother, they’re here!

Song number 6 is dedicated to the newest star on the summer circuit, “I, Carly” Fiorina to the tune of “That’s Amore.”

When…the…girl smacks a guy
With a punch in the eye:
Fiorina!

When she takes on the Trump
He comes off like a chump:
Fiorina!

Some will say she may fade far away
But you best
keep your distance.

She plays rough, strong and tough,
Just enough
To break down your resistance.

She…. broke…out of the pack,
So you’d best watch your back:
Fiorina!

So she fired 30K in one day,
That’s her way
To show love.

If you vote GOP
And want a fresh she
In t’arena

That takes on HRC,
With both passion and glee:
Fiorina!

And finally, last but certainly not least in at number 7, it’s John (just in) Kasich; although he’s from Ohio, it’s Simon & Garfunkel’s “59th Street Bridge Song”–aka “Feelin’ Groovy”

So what, I got in last,
I can build momentum fast.
Just counting my elect’ral votes,
Lookin’ for love and feelin’ groovy.

Hey New Hampshire
How’s it goin’?
Heard that Christie’s
Mojo’s slowin’
Thanks for makin’
Time for me.
Just a good guy:
Always groovin’.

I’ve got nothing to lose,
No promises to make,
I’m shakin’ and bakin’–
LeBron on a break.
Let the radio talk shows
Keep dishing on me;
Boy, I love it,
I’m so groovy!

Bush falls, I’ll be right there;
Need Ohio–own that chair.
Popular as I can be;
Medicaid is
Always groovy!

Nice guys can finish first;
Take New Hampshire, start the burst;
That will move the polls to me:
Squeeze out Walker;
That’s so groovy!

Tweak Trump;
But use a smile.
Easy manner goes a mile, but
Got to keep
My temper cool.
I can win if
I stay groovy!

Stay tuned for more from Ted Cruz (“I’ll Always Walk Alone”); Rand Paul (“Hey, You, Get Off’a My Phone”); and of course Mike Huckabee (“I Got Trouble, Right Here in River City…”).

Is the Market Being Pushed Down to Help CNBC, Trump, and a Few Speculators?

There has been really bad news on the Chinese economy almost daily as its industrial profits fall to the lowest level since 2011, when the US stock market had its last 10 percent “correction.” Indeed, CNBC has finally got the market “correction” the business network has been promoting since this past spring. Remember, CNBC reporters can’t own individual stocks; some of its personnel are virulently biased (one,Rick Santelli, started the Tea Party) against both the Fed Chair Janet Yellen and President Obama and thus would love to see them both embarrassed by a market crash. This could, at least for a short term, help the network’s ratings, which have been so poor that they fired their rating agency.

A crash could also help Donald Trump’s campaign by validating his thesis that the US economy is really in a mess despite GDP growth in the last reported quarter of 3.9 percent. Indeed, CNBC splashed the headline that Carl Icahn, Trump’s ally andproposed Treasury Secretary, was forecasting an economic “catastrophe”.

Let’s put aside the question why CNBC and most market commentators only define a market “correction” as a downward move (as if the only way a market can be wrong is being priced too high and never too low). And even put aside the fact that many, if not most, retail investors do not engage in short selling strategies–which are certainly legitimate market activities–so that they don’t recognize how the scores of pessimistic Cassandras whom CNBC trots out to talk down the market on a repetitive basis (e.g.,Bill Fleckenstein, year after year) may well be just “talking their own book” of short positions, and thus are not inherently more credible than well-known stock promoters, even if now they turn out to be right with a little push from CNBC.

Put aside even Rick Santelli, who thinks he knows more than everyone, including the Fed Chair, because he resides on a trading floor, exemplified by his daily ‘Santelli Exchange” anti-Fed diatribes. Rick also tends to shout down anyone who has the temerity to disagree with his views, even the respected reporter Steve Leisman, who has genuine expertise on Fed policy and obviously tries to play the news straight down the middle.

CNBC’s trader programs (Half Time Report and Fast Money) are stacked with players who tend to take a negative view of market developments to matter what: Scott Brown, who persistently warns viewers that the market is bound to re-test its lows, which of course leads viewers to sell before that happens. Guy Adami takes the same view, but he takes pains be fair and not dismissive of other opinions. Dan Nathan also tends to see any stock as on its way down. And Brian Kelly, a shouter and bully, repetitively constantly refers to himself in the third person while spinning his decidedly negative views of market direction and broad-brush reading of the lack of growth in the US economy, notwithstanding much data to the contrary.

As for Brian Sullivan, he just delights in playing the wise simpleton but with a bias toward calling the next Armageddon, while Michelle Caruso-Cabrera spends most of her time auditioning for Fox News with diatribes against anything that might be viewed as contrary to her “You Know I’m Right [Wing]” views.

One almost hopes for more appearances from the conservative economist Larry Kudlow, who clearly does not pose as a “reporter” like Cabrara or Lee or Santelli and delivers his predictions and prescriptions with wit, good humor and acknowledgement that there is often another side.

What CNBC’s market-negative bias gets down to is the “headline tilt” that shows up, most acutely on its website home page news feed, often oversimplifying market developments in a negative tone. Here are some examples of stories headlined on CNBC in the past week:

http://www.cnbc.com/2015/09/25/john-boehner-just-made-janet-yellens-life-harder.html

http://www.cnbc.com/2015/09/25/maybe-we-need-a-government-shutdown-commentary.html

http://www.cnbc.com/2015/09/22/look-out-below-where-stocks-could-bottom-paulsen.html

http://www.cnbc.com/2015/09/24/markets-want-normal-fed-didnt-deliver-strategist.html

http://www.cnbc.com/2015/09/23/heres-why-buying-interest-has-dried-up.html

All of these stories and others aim at undermining market confidence in the Federal Reserve Board and the government in general (read Obama). As expected, CNBC had known Fed critic Peter Schiff was ready to re-launch his criticism of what he called the Fed’s “con” on the markets that will provoke a “currency crisis” and a “bond market collapse,” and presumably take stocks down precipitously as well.

Add to these dire warnings Jim Cramer’s September 24 call of the end of the Bull Market, by pronouncing on his show that we are now in a classic Bear Market, no matter how well companies are in fact doing. This despite the fact that, while several market sectors are down by 20 percent or more from their highs, the usual “tell” benchmark for the onset of a Bear Market, the broad market, is barely down by the 10 percent “correction’ metric.

Cramer has stuck to his guns, although curiously CNBC did nothing to expressly trumpet his Bear Market call for a few days.

If you don’t believe this observer, I challenge you to just watch CNBC from start to finish on any given trading day this week or next. And who is advantaged by CNBC’s bias?

Consider this: on Friday, October 3, the monthly jobs report will be announced for September. Given the active promotion of “we’re heading to recession” theories on CNBC by folks like Santelli and others, one might expect that job creation will be taking a downturn and unemployment an upturn. This would confirm the theory (made up by some CNBC commentators out of thin air) of the Federal Reserve allegedly surprise decision to hold off a rate increase at its last meeting (which by the way was not expected by market sentiment as measured both by debt market yield levels or surveys of traders) because it had lost confidence in the economy and perhaps saw a recession on the horizon as well.

But if the jobs report further confirms the 200,000-plus pattern of job creation (and–as viewed likely here–also adjusts the weaker August report to upwards of 200,000), then most of the “confusion” CNBC accuses the Fed of perpetrating on the markets (joined by this weekend Financial Times which directly accused the Fed Chair of lying–“prevarication”–to the markets about its intentions) will dissipate. See the web-current version of the following article:http://www.ft.com/intl/cms/s/0/b65c519c-6355-11e5-97e9-7f0bf5e7177b.html – axzz3mzO1fCob

Note that the web-version of the article omits the sub-headline referencing “US prevarication”, tied to a page-one headline about “Fed Prevarication” in the hard-copy home-delivered edition of the same weekend Financial Times edition. Perhaps the FT has more second thoughts than CNBC about stretching the truth of things, and good for them to correct the record.

Chair Yellen has made quite clear on multiple occasions lately that more strong jobs reports will trump (sorry!) transitory deflation worries and allow the Fed to get the first rate rise of 25 basis points over with by year end–even as early as its October 28 meeting!

If that happens, the stock market stands a good chance to go up strongly, and who will make a fortune? All those hedge funds that will be quietly scooping up cheap shares of all sorts of strong companies, dumped by ‘weak hands” shareholders spooked by CNBC’s constant stream of warnings about a potential market meltdown.

Having missed the crash of 2008, one can understand why CNBC wants to be their first to call one coming. But ratings are one thing, “fair and balanced” is quite another. Remember, there are plenty of seasoned professional traders laughing all the way to the bank right now as they listen to CNBC predict Armageddon yet again (see below) and give them a chance to buy great and growing American companies on the cheap. One hopes these speculators at least buy the CNBC folks a nice dinner or two with the proceeds.

Let’s see how much, if any, focus CNBC has given to the latest report of improving financial conditions in China, China being the bell cow of CNBC’s oft-repeated focus on the potential global recession China will provoke that will bring the US economy (and the stock market) down, down, down. For the moment, however, the network continues to focus on the most dire predictions: the “Fast Money” trader Steve Grasso said on Monday, September 28, that the market “could be” setting up for an “Armageddon situation”.

On the same program, CNBC featured its on-call chartist Carter Worth declaring, like Cramer, the end of the Bull Market and that, “in my estimation, we’re in a Bear Market.” But investors should remember the Wall Street adage: charts are always right–until they’re wrong!

When Is A Fed Rate Hike Not A Rate Hike? Maybe When it Just Drops The Zero and Goes Back To The Future!

We have lived in an age of the non-denial denial; the non-bank bank; the non-responsive response. Maybe the time is just right for a Federal Reserve interest rate hike that’s really not a rate hike.

The Federal Reserve Board leadership has been stressing the virtue of “transparency” regarding the factors it is considering as it approached the first increase in interest rates since 2006, potentially at it’s mid-September meeting.

Transparency of intentions, however, becomes extremely difficult when the deliberations of the Fed Open Market Committee (which sets the rate) are explicitly data-dependent and the data is mixed! As a result, many of the Committee’s voting members are left, as Jon Hilsenrath documented in the case of San Francisco Reserve Bank Governor John Williams, find themselves “on the fence” as to whether or when to start the increase process.

Such a posture wouldn’t come as a surprise to those inclined to see economists (the profession of most Fed Board members and Governors) as a classic “on the one hand, on the other hand” kind of decision-makers. Politicians, too – and some might say the Fed has a few of those, too — can be that way. Consider the old pejorative political nickname “Mugwumps“: — office-seekers whose “mugs” were perpetually on one side of the fence, while their “wumps” were on the other.

More importantly, however, this posture may be the natural result when the only data available are subject to multiple reasonable interpretations. So it is with the rate decision: even the markets themselves seen as confused as the Fed officials – the bond market has generally been reacting as though no increase should be undertaken just now even though most bond traders seem to think the Fed is already behind and may have missed its chance earlier in the summer to get off the dime.

At the same time bond prices have been showing few signs of an imminently-expected rate increase, the stock market has put itself through a dramatically quick downward correction for the first time in nearly four years. Some commentators considered this late-August move both a cry of pain that the Fed might soon move away from its famous stock market “put” (the zero interest rate policy underwriting and even encouraging a “risk-on” market) but also a cry to the Fed to simply “get it over with already” and end the uncertainty that traders abhor like nature hates a vacuum.

A sudden Chinese currency devaluation led in turn to sudden volatility which in turn triggered computerized trading strategies and ETF pricing difficulties that created a self-reinforcing downward spiral of 1000 Dow points. Some commentators to concluded that the downturn was not merely an overdue correction needed to spur more buying at more attractive valuations but rather the warning signs of global share market vulnerability and a potential bear market, with many US sectors and momentum-driven stocks already down over 20%, the traditional bear market benchmark.

Some even saw the stock price slide as a signal of a coming global recession that could spread to the US itself, despite final revised 3.7% GDP growth in the second quarter of this year — especially if the Fed did not stay its hand. Meanwhile, the IMF and the World Bank have repeatedly warned the Fed not to raise rates just yet because of the effect it might well have on emerging market economies reeling from the impact of the Chinese economic downturn and currency devaluation.

The general sense in the markets and among commentators seemed to be summed up with the well-worn phrase that, in terms of interest rate policy, the Federal Reserve officials were “damned if they do” initiate a rate increase, and “damned if they don’t” as well.

In its July statement on rate policy, the Open Market Committee itself said that in determining how long to maintain the overnight interest rate at the zero to .25% range, it will “assess progress – both realized and expected – toward its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments.

“The Committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen some further improvement in the labor market and is reasonably confident that inflation will move n back to its 2 percent objective over the medium term”.Federal Reserve Press Release, July 29, 2015

In addition, in a speech in July, Fed Chair Janet Yellen added that the reference to “medium term” inflation for her meant over “the next few years”. This fairly relaxed standard in terms of estimating the upward path of inflation suggests that current low inflation in the US and further deflationary pressures emanating from China may not be enough to tip the balance against a rate increase in September, especially given recent evidence of “further improvement in the labor market” — including theSeptember 9 release of record job openings in the US.

Even the lower than expected end-August payrolls report of only 173, 000 net new jobs , which also took the unemployment rate down to the 5.1% level expected by the Fed not before year-end, is likely to be revised upward by around 75,00 if the five-year average for August revisions holds.

Accordingly, the September decision seems to hinge primarily on the Fed’s third decision factor: namely, the state of “financial and international developments”. In that connection, the Financial Times reported on September 9 that the World Bank’s chief economist renewed the warning that the Fed risks triggering “panic and turmoil” if it proceeds with a rate increase. Moreover, Citigroups’ chief global economistsopined that the Chinese economy was in worse shape than official statistics indicate and predicted that a coming precipitous fall in Chinese GDP growth would create a 55% chance of a global recession!

In this high-pressure context, it is best to ask ahead of time “What is are the Fed officials thinking?” before we ask later, “What were they thinking?”

Recent public speeches and interviews of the voting members of the Open Market Committee that will decide show a house seriously divided. Two voters, Jeffrey Lacker of the Richmond Reserve Bank and Dennis Lockhart of Atlanta, have both come out rather forcefully in favor of a rate increase in September even in the face of global concerns.

Charles Dudley
of the New York Fed, hover, recently opined that the case of a September increase has become “less compelling”. Also, Vice Chair Stanley Fischergave an interview to CNBC that appeared to leave a September increase clearly on the table. But in a speech the next day observed that he and his colleagues “are following developments in the Chinese economy and their actual and potential effects on the other economies even more closly than usual”.

Fed Governor Lael Brainard spoke in June of the danger of overestimating the positive effects of dollar appreciation and oil depreciation on the US economy, and underestimating the negative effects. Thus fed Chair Janet Yellen faces the prospects of more than one dissent from either a decision to raise the federal funds rate from it current range, of instead to continue with what Brainard called a policy of “watchful waiting”.

The key fact is this: multiple dissents from any September decision would present serious market challenges to the Fed’s credibility, so it is safe to assume that Chair Yellen will want to find a way to thread the interest rate policy needle in such a way as to keep any dissents to a minimum. Thus the most likely and optimal September policy choice would seem to be the one that would produce the fewest dissents. Could there be a way that both the rate “hawks” and “doves” could claim enough of a win to sign on to the statement without dissenting?

How about this: start with a achieving consensus that, whatever the international financial risks, the current level of strength in the US economy and labor markets is decidedly inconsistent with a “zero interest rate policy”. No voting member of the Fed’s Open Market Committee has challenged this view, regardless of whatever his or her view is of the world economic situation. Then consider the possibility that the Fed could simply abandon its “target range” focus (which it initiated only in December 2008 when it created to current range of zero to .25%) and revert instead to its former practice of setting a specific funds rate target.

Combining those two steps, it is conceivable that Yellen could limit dissents to either just one or even none by a decision at the September meeting to set the new specific “target” for federal funds interest rate at .25% — ie, just dropping the zero rate!

Doing the latter should please (if not fully satisfy) the Fed “hawks”; and setting the new target at .25% — consistent with the rate the Fed current pays on bank reserve deposits with the Fed – should mollify the “doves”. Moreover, both the IMF and World Bank could reasonably conclude that going forward merely at the top end of the current target range would not constitute any real change and thus not e perceived as an attack on emerging market economies.

Call this maneuver a “baby step” or a “back to the future” finesse if you will — but sometimes the simplest way is the best route out of a complex policy box!

Revoking 14th Amendment Birthright Citizenship: The Ultimate in Voter Suppression

Presidential candidate Donald Trump and several of his Republican competitors have now endorsed the notion of doing away with the very first sentence of the 14th Amendment to the United States Constitution, at least insofar as it has been interpreted to grant automatic citizenship to children born of undocumented immigrants. And, Trump adds, this policy should be retroactive with respect to those currently considered citizens.

That Amendment provides that:

“All persons born or naturalized in the United States, and subject to the jurisdiction thereof, are citizens of the United States and of the State wherein they reside.”

While many commentators have assumed that such a change would require a new constitutional amendment to accomplish this goal, many of those who seek to deny future citizenship (or potentially even revoke existing citizenship) of children of undocumented parents would prefer to attempt to make the change under the simpler route of congressional legislation or, as Trump has proposed, by court action re-interpreting the 14th Amendment language.

The legislative route would involve passing a law deeming that any person born in the United States would not be considered “subject to the jurisdiction” of the United States within the meaning of the 14th Amendment language unless at least one of his or her parents was, within nine or so months previous to his or her birth (to obviate the issue where a father dies before birth but after conception), a citizen or legal resident of the United States. Congress has specific power under Section 5 of the 14th Amendment “to enforce, by appropriate legislation, the Amendment’s provisions.”

Congress also has power, under Article I, Section 8 of the Constitution, to establish “a uniform Rule of Naturalization” — but this provision would seem not applicable in terms of defining who exactly is automatically a citizen by virtue of being “born” here rather than being “naturalized” under congressional rule.

Such legislation, if passed by a Congress under Republican control and signed by a GOP president (or possibly an Independent President Trump), would of course be subject to legal challenge in terms of the definitive meaning of the birthright citizenship clause in the 14th Amendment. The history here is not absolutely clear.

In terms of legislative history, the focus was clearly on granting citizenship to children of slaves with unmistakable clarity, and the main bone of contention involved children of Indians with whom the U.S. had treaties, which fuzzed-up the issue of “jurisdiction.” The sponsor of the Amendment in the Senate said that the jurisdiction clause was intended to exclude only children born in the U.S. whose parents were ministers and ambassadors from foreign nations; the Chair of the Senate Judiciary Committee also agreed. As noted in the link, opponents of birthright citizenship often misquote the sponsor by eliding and adding to his literal words.

In the Slaughterhouse Cases, 83 U.S.36 (1873), the US Supreme Court, in dicta merely noted in passing irrelevant to its actual holding on another issue, stated that the “jurisdiction” phrase was “intended to exclude from its operation children of ministers, consuls and citizens or subjects of foreign States born within the United States.”

Twenty-five years later, however, the Court decided specifically on point that a person born in the United States of parents who, at the time of such birth, are subjects of a foreign power and presently domiciled within the United States, conducting a business and not employed in any diplomatic or official capacity, would automatically become a citizen of the United States under the 14th Amendment language and centuries of precedent [United States v. Wong Kim Ack, 169 U.S. 649 (1898)]. In this case, however, the parents were legally present in the U.S. at the time of birth, so it could be distinguished from a situation where the parents are undocumented. Births to undocumented parents amount to somewhere around 340,000 to 400,000 per year, according to estimates, and total about 4 million citizens as of now.

Accordingly, while it has been common practice for over a century to treat children of undocumented immigrants born in the U.S. as citizens by birth, one must take seriously the gathering momentum behind efforts like Trump’s, to force a new Supreme Court decision in today’s circumstances on the point of such children either directly, by challenging the century-old Wong holding, or by legislation purporting to deny or even revoke such an outcome under cover of the 14th Amendment’s own enforcement clause. Revocation would not constitute an “ex post facto” law prohibited by Article I, section 9, because it would not create a criminal offense after the fact but merely potential civil grounds for deportation. (See “The United States Constitution: What It says, what it means” by JusticeLearning.org.)

Trump’s proposal makes no mention of a Constitutional amendment route, and could even be taken to suggest that he would try to accomplish the result through an executive order, if he could (perhaps based on an 1873 attorney general’s opinion). But, at the very least, any GOP president could attempt to work his or her will through a Congress still in control of the Republicans.

Members of the GOP have already attempted, in both Arizona and Mexico, to deny such citizenship in practice through legislation (Arizona) or, through administrative “security” rulings (Texas Health Commission), to deny birth certificates to children of undocumented immigrants on the basis that parentage cannot be proven one way or the other by any acceptable documentation of their parents’ status.

If federal legislation were to be passed on the “subject to jurisdiction” clause, as outlined above, and then survive constitutional challenge in today’s GOP-dominated Supreme Court, then essentially the same effect would ensue.

In addition to being unable to attend public school and receive medical care, or public assistance of any kind, because of their lack of even a birth certificate, the U.S.-born children of the undocumented would ipso facto no longer be citizens, and thus would no longer enjoy the rights under the Constitution specially applicable to citizens: the “privileges and immunities” clause of the 14th Amendment, and the right to vote under the 15th Amendment.

If congressional legislation actually attempted to revoke all such existing citizenships (as Trump proposes to do by court action), there would doubtless be a push at the state level to purge voting rolls of all those who cannot prove that at least one of their parents was either a U.S. citizen or legal resident — a task of enormous complexity requiring not only herculean research efforts by millions of voters themselves, but also (and ironically) the very kind of “big, intrusive government” enforcement and record-keeping operations that many in today’s Republican Party profess to abhor.

Thus, we would, under the Trump proposal as well as perhaps those of Governors Walker, Christie and Jindal and possibly Senator Cruz, not only undertake mass deportation of 11 million undocumented persons, but also a mass purge of state voting rolls. Remember: if any of these contenders becomes the GOP nominee, these outcomes would in all likelihood be enshrined — indeed, even promised — in the Party’s official campaign platform. The economic consequences of such unprecedented social disruption in terms of collapse in housing demand and values, loss of tax revenue, federal budget deficits growth and collapse in GDP, are almost unfathomable.

Gratefully, there are significant complications in this scenario. If the end result is accomplished by legislation that declares such children formally outside the “jurisdiction” of the United States, then how exactly could the federal government actually “deport” them? They would not have “entered” the country illegally (a finable misdemeanor, but not in itself ground for deportation in any event). Once “born” here without citizenship or papers, however, they would be “present” without documentation. Normally, that would be the formal grounds for civil deportation procedures. But that requires “jurisdiction,” which Congress would have just declared to be absent!

So there would be a new, unprecedented, official permanent “underclass” in America, thanks to government action: with no rights as citizens, but un-deportable by operation of the very law that denies them citizenship. (Perhaps this is the reason for Trump’s proposal for a well-funded “refugee” plan for expanding foster care — but even that is practically impossible, without birth certificates, under state law.)

The new underclass would apparently still be considered constitutional “persons,” for the several protections and rights the Constitution provides expressly to “persons” or “the people” (e.g., 5th Amendment, 2nd Amendment), or federal, state and local anti-discrimination laws, focus not solely or specifically on protecting “citizens.” Congress might try to draft around this problem by attempting artfully to preserve “jurisdiction” for the sole purpose of deportation, but that could weaken the case for affirming such statute at the Supreme Court, or at the very least trigger an even broader effort to deport all those whose citizenship would be revoked, bringing the deportation total target to at least 15 million.

Presently, the fashionable view seems to be to treat the immigration proposals of Trump and others along these lines with the back of the hand or even with derision. This scenario analysis suggests a more serious study of these proposed implications for the kind of American “Exceptionalism” — a core of which is our longstanding commitment to birthright citizenship — which really is an exception compared to most countries, especially those in Europe. By the way, current experience in Europeclearly shows that the absence of birthright citizenship does virtually nothing to stem the tide of undocumented migration!

Besides setting off the mother of all voter suppression legislation and enforcement, revoking birthright citizenship and deportation of 11-15 million residents of the U.S. would have enormous adverse economic consequences: for housing demand, finance and prices; food prices and employment in the agriculture industry; economic activity, consumer spending and GDP, and foreign trade.

The sheer cost of the proposed mass deportations has been estimated (see above link) at over a quarter trillion dollars.

It has been fashionable for some Republicans and progressives to dismiss the Trump candidacy with contempt, or just with laughter. But the level of support in the average of polling data suggests that at least his first formal policy proposal regarding immigration is no laughing matter, and should be analyzed and evaluated on its own merits (and dangers).

Trumpism: Did Swift-boating McCain Go Too Far? Or Will the Rest of the GOP Have to Start a Third Party?

There is a lot many do not know about Donald Trump. They know he is rich, of course, but they probably don’t know he is one of the oldest candidates. If elected, he would be 70 ½ years old at the time of his inauguration—the age when we have to take mandatory withdrawals from our IRAs and 401k’s because we are getting … older. He is two years senior to Hillary Clinton, who is currently 67. More on this subject below.

Way more important, Trump is tapping into a strain of American public opinion regarding immigration and the legitimacy of the Obama Presidency to capture now close to 20 percent support for the Republican nomination for that office. That percentage does not sound like a very compelling number, but with now 18 candidates in the GOP field, it could become a very big number, especially when the contest shifts to the later primaries where winner-takes-all rules could award someone with 20 percent of the vote the entirety of a state’s convention delegates! It all depends on whether a large number of candidates remain in the race for a long period of time.

This journal (the Huffington Post, Ed.) has chosen to cover the Trump campaign as entertainment rather than as a political event. That being said, recent polling—even away from the usual political pollsters’ work—demonstrates that The Donald is very forcefully representing a fairly consistent set of political views among the GOP base of Tea Party and evangelical Christian voters.

For example, polling by the Public Religion Research Institute, a non-profit, politically unaffiliated organization in Washington, D.C., shows that:

  • Sixty-nine percent of white evangelicals oppose same-sex marriage.
  • Tea Party members overwhelmingly believe (56 percent vs. 24 percent) in the free market as the solution to climate change (if they even believe in climate change as a reality.)
  • Seventy-seven percent of white evangelicals are more likely to attribute severe natural disasters to biblical end times; only 23 percent of Tea Party members can be classed as climate change “believers”—in common with the same percentage as Republicans generally.
  • Most importantly for Trump, 37 percent of Tea Party members favor a policy that would identify and deport all immigrants in the US illegally—the highest percentage among any political subgroup in America.
  • Similarly, 58 percent of Tea Party identifiers oppose raising taxes on Americans earning more than $250,000 per year.

The notion that Donald Trump is out of step with the mainstream of Republican opinion on the issues he seems to care most about is patently absurd. He instead seems to be coming on strong in the polls precisely because he is doing the best job of identifying with the GOP’s basest values. Underneath the verbal assaults, however, Trump also seems to be benefitting from an unstated assumption: namely that, because he is a reported multi-billionaire, he has unique ability to actually get done what he threatens to do (like charge Mexico for each illegal immigrant; get China to change its currency policy; persuade European nations, Russia and China to support new sanctions on Iran, etc.).

None of these campaign assurances have any reliable basis in either fact or articulated strategy. But The Donald has not been forced to debate any of these issues. He also gets a lot of “silent majority” type of support for his show-business reputation for firing people. Many in the GOP base have been angered by politicians letting those who fail in their managerial duties “resign” (e.g., Kathleen Sibelius, the head of the VA, etc.) rather than be discharged.

Trump is a master at intimidating interviewers: he came to public prominence outside of his real estate-development world as a frequent guest of New York radio race-baiter Don Imus (famously kicked off the air for his derogatory and defamatory comments likening the Rutgers University women’s basketball team to a collection of whores). By way of contrast, Trump enjoyed a worshipful presence on the Imus radio program (Imus first designated him as “The Donald”), which often parodied the relationship between Trump and the black heavyweight Mike Tyson (who was portrayed as a virtual Trump field hand).

Trump is attempting to literally personify the “angry white males” who are at the heart of the modern Republican Party base. Whether there are enough of those sorts of folks to deliver the presidency to Mr. Trump is certainly an open question, especially among Republican leaders such as Senator Lindsey Graham. But there clearly are enough to deliver him the GOP nomination in an ultra-crowded field.

This past weekend, it appeared that Trump had made his first major mistake in attacking the war-hero status of Senator John McCain, the Republican nominee for the presidency in 2008 and still a United States Senator from Arizona, because he had allowed himself to be captured.

One by one, most of Trump’s rivals—as the immediate Twitterverse showed—stepped up to distance themselves from Trump’s remarks. They recognized that a goodly number of the Tea Party, evangelical and “angry white male” base of the GOP actually are veterans themselves and have a rather high regard for soldiers who survived captivity in the way Senator McCain did. They also called attention to the fact that Trump never put himself in harm’s way of capture through military service: he grew up in a time when the draft lottery prevailed, and he was medically deferred. That’s why his age actually may matter in the campaign. (Trump graduated from the Wharton School at Penn in 1968.)

But not all of the other 17 candidates joined in bashing the Trump piñata, especially those who would hope to benefit by inheriting the support of the base that Trump has heretofore captured. Senator Cruz, Ben Carson and Rick Santorum seemed happy to praise McCain’s heroism, but eschewed any direct criticism of The Donald. This situation is exactly Trump’s advantage—the author of The Art of the Deal certainly knows how to divide and conquer.

The best evidence of whether Trump has talked himself out of his leading position for the nomination will not only be the immediate polls following the weekend events, but also the reactions of right-wing talk radio commentators: angry white males like Rush Limbaugh, who has lately fallen in sort of puppy love with Trump and his anti-immigrant rhetoric.

Most likely, Limbaugh will attack the press rather than The Donald. But the weekend events demonstrate, nonetheless, that the most likely source of any “Stop Trump” movement will be Trump himself—he has already scored his first own goal in Iowa!

(Note: The author is a board member of the Public Religion Research Institute cited in this blog.)