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.

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:

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

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:

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:

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:






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!

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.)

The Euro at a Tsipping Point: Greece Gets a Yellow Card, Not Yet a Red, As Merkel’s Bluff Gets Called

As expressed (and predicted) in this blog several months ago, if I owe you 240 euros, it’s my problem, but if I owe you 240 billion euros, it’s certainly your problem, too. Germany’s Chancellor, Angela Merkel, certainly doesn’t want to admit this, but it turns out that she made the Greeks an offer they could refuse, and now she has to face a choice that she thought she could avoid.

We are, of course, assuming that Merkel is functioning as the CEO of the eurozone. The Germans still get the Dutch to do their dirty work for them (Greek vote result “regrettable”); likewise, the “leadership” of the EU’s finance ministers council never acts without Merkel’s implicit OK; and similarly, the European Commission’s President Juncker seemed to function as Merkel’s hand puppet when it came to the Greek vote.

Not quite so for the IMF, led by Frenchwoman Christine Legarde. She was willing to let the IMF advance a case for at least an acknowledgement of the need for a Greek debt restructuring as part of any agreed bailout “package”–something that remains anathema to Merkel and her “orthodox” set of bankers and politicians, who apparently are still trying to prove, by way of their Greek petri dish, that Hoover, not Roosevelt, had the right solutions to a depression.

Although Legarde’s IMF gets the largest share of its funds from the United States, the tradition of European hegemony when it comes to IMF policy decisions apparently is too strong, for even U.S. Treasury Secretary Jack Lew’s exhortations to “all” partiesfinally to play “Let’s make a deal” fell on deaf ears in Legarde’s office. The IMF was determined to blow off a Greek settlement offer that was only a billion off the IMF’s own target (or less than 1 percent of Greece’s total debt), and also rejected a GDP target of .74 percent in 2016 that was only one quarter of 1 percent off the IMF’s GDP target.

Based on such apparently minor discrepancies, at least as compared with a 240 billion debt to eurozone countries, a worldwide financial markets crisis has apparently been triggered, at least according to the Monday market openings around the world. (Thanks for nothing, Christine! Next time, be more careful playing bluff poker with a guy who obviously has nothing to lose!)

It remains to be seen whether this relatively minor difference in the greater scheme of things was the reason for Greek Prime Minister Alexis Tsipras to play his referendum wild card–one that should have been but somehow wasn’t anticipated by anyone on the EU negotiating team from the start, given that another bunch of Greeks had played the same card back in 2011 in the context of an earlier proposed bailout dealwith strings attached regarding Greek austerity measures.

Now the EU folks are having their bluff called, in terms of their insistence that a “No” vote on the bailout referendum (however poorly phrased) would mean the Greeks would be viewed as having rejected their continuing membership in the eurozone. If that is indeed the case, then why all the meetings about what the EU should do now? Logically, there should be nothing for them to do since the Greeks crossed Merkel’s implicit “red line” (has she learned nothing from Obama?) Certainly there’s nothing to negotiate, is there, with a party who has left the euro?

One German official–Merkel’s deputy–said right after the vote results that any negotiations were hard to even “imagine,” but that sounds like German for “just a wee bit of wiggle room” about that red line, doesn’t it? Not quite the quick draw of the red card for an egregious foul right in the face of goalkeeper Chancellor Merkel.

But now Merkel has communed with her junior partner Monsieur Hollande in Paris at dinner on Monday night to assess what the Eurogroup’s response should be to whatever the Greeks do on Monday–it’s their move, the Germans say. But haven’t they, in Merkel’s own words, already made their move–out? What is there to assess (unless she means “re-assess”?) And then there is a EU leadership emergency summit called by Merkel’s colleague President Tusk of Poland just on Tuesday. Again, what is there to discuss if Greece is already out the door? Of course, there is that inconvenient little reality that your own Eurogroup rules provide that the euro is really the Hotel California of currencies–you can check out, but you can never leave!

So let me get this straight: the Greeks’ overwhelming rejection of the Troika’s bailout terms (61 percent to 39 percent, a landslide in any election math) means that the Greeks have pulled off the impossible: they have effectively abandoned the euro currency, even though by its own terms they can’t.

Here is how the classic business partnership solves that conundrum: if one partner decides to call it a day, the entire partnership is dissolved ipso facto. There is no remaining partnership, so its rules about membership are now irrelevant–no yellow card or red card for the bad guy, just … nothing. The remaining partners have to decide anew whether to re-form the group without the quitter. Merkel, for quite obvious reasons, doesn’t want to go there–not with Spain, and Portugal, and Italy, etc. So that elegant solution is not available to her.

The first hint of how effectively Tsipras has called what will henceforth be known as Merkel’s Bluff (not quite “Angela’s Ashes” –not yet anyway: sorry, Frank McCourt) will be whether the European Central Bank early this week continues to offer life-supporting euro-credits to the Greek Central Bank to prop up the country’s remaining banking institutions, which are running out of euros to stuff into ATMs and to pay pensioners.

If the ECB says “no mas” euros, then Greece really is out of the currency group, de facto if not de jure, simply and precisely because it just doesn’t have enough euros to function economically, and its Central Bank will have to issue scrip IOUs in the interim until it receives local authorization to print and distribute drachmas, which will not be paired on anything close to a 1:11 basis with any euro-based obligations. Greek citizens, of course, will thus get the mother of all “haircuts” on their own euro “holdings,” to the extent they remain in their mattresses–largely as stuffing.

But the next big haircut will come to Germany and the other eurozone countries that have guaranteed the ECB’s 89-billion-euro advances to the Greek banks, not to mention their holdings (and the IMF’s) of a total of 240 billion euros in Greek debt obligations. The euro leaders apparently want to save face by insisting Greece has to make the first move–and it has with the resignation of the finance minister who helped deliver the “No” vote but who offended the EU negotiators by calling them terrorists. So Merkel’s bluff has been called yet again with this conciliatory move by the Greek government.

What it comes down to at the end of the day (probably later this week) is this: is over 300 billion euros the price Merkel and the other eurozone countries are willing to pay to back up their bluff and refuse to sit down with Tsipras, or will they all start whistling a little Kenny Rogers, something like “Know when to hold’em, know when to fold’em?”

Recovering From Suicide In Palo Alto: A Work In Progress

In its June 2015 edition, San Francisco Magazine published a lengthy article entitled: “Why Are Palo Alto’s Kids Killing Themselves?’  It was quickly re-published in SFGate, and also nationally in Real Clear Politics and The Daily Beast.

As provocatively as the headline promises, the article dives deeply into student, parental and administrative reactions, inactions and false starts in response to the initial 2009 and more recent suicide clusters in 2014-15.  Most involved students stepping in the path of commuter trains near grade crossings on main routes to the city’s high schools. Noting that suicide “ideation isn’t rare among high-risk students,” the author says what is unusual for Palo Alto “is the rate – four or five times the national average” at which Palo Alto students have succeeded in committing suicide.

The author criticizes what she terms “an unofficial gag order” in the community due to fear of contagion by mere mention of the word “suicide.” She now finds somewhat more candor about increasing rates of depression among Palo Alto teens, as well as extended wait times for mental health services for them, noting  that students are more willing to reflect on a high school atmosphere they find  “unhealthily competitive” – “The kids paint a picture of a sort of academic coliseum, where students look down their noses at peers in a lower math ‘lane,’ guard their grade point averages like state secrets, brag about 2 a.m. cramming sessions and consider a B a disaster.”

Yet other students point to the “ideals of the community” as a prime source of angst about “never doing enough.”

The article concludes with students warning against “aiming arrows at false targets” as well as the “shady assumptions” that lie beneath the surface problems.

The unanswered question: what exactly are those “shady assumptions” in the cultural “ideals” of Palo Alto and Silicon Valley?

Silicon Valley’s tech, biotech and social media entrepreneurs have succeeded in becoming the new “Masters of the Universe” as in The Bonfire of the Vanities. Palo Alto (despite its mere 66,000 population and suburban landscape) may be likewise shaping itself into a new version of Manhattan. According to census data for both locales, Palo Alto is about the same in terms of square miles (23), and it has substantially higher median household income ($121K vs. $58K).

Palo Alto has its own Wall Street Journal outpost and New York Stock Exchange sales office,  and a prime 11 AM spot on CNBC’s market-day “Squawk Alley” program. Its downtown Apple store makes the news whenever CEO Tim Cook appears there to sell the first edition of the company’s newest device.

Palo Alto’s wealth culture was largely unscathed by the housing and financial meltdown that triggered the Great Recession of 2008-09. Lately, it’s nannies, pre-schools and tutoring firms that are “partying like it’s 1999.”Traffic is back to boom-time levels, as are real estate prices: up 21% over the past 12 months through April to a median $2.36 million.

These charmed circumstances, however, offer the same temptation that captured the imaginations of Manhattan’s 1980s bond traders: being really smart about one very big matter (as validated by the income scoreboard) can lead you to think you are right about everything that matters.

To its credit after the Great Recession, Silicon Valley got busy hiring while the rest of country was still firing. Its inventions are turning the publishing, music, telephone, news, automotive, data collection, retail, grocery, media, real estate, retailing, travel, taxi, hotel and health care businesses on their heads. The Valley is taking the California drought in stride with Astroturf lawns and “natural” landscaping. It seems no problem goes unsolved in the Valley.

And yet…there are the suicides, and in their aftermath, a challenge to think anew about Palo Alto’s “success culture” and  what really will constitute “success” for its children. After all, while the data does not reveal an abnormal amount of suicidal thoughts among Palo Alto youth, what does distinguish Palo Alto according to the San Francisco Magazine article is the alarming suicide success rate.

At its core, the Silicon Valley success culture reveals a fundamental contradiction. The Valley first convinced itself, and then told the rest of us, that the failure of a new product, service or VC investment was merely a step toward ultimate success (and a virtual guarantee of a new jobs for the failure’s authors). This can be a wonderfully inspiring, optimistic perspective. The Valley’s “failure is good” mantra, however, seems to be applied just to adults, and not to their children, especially not high school students prepping to be “credentialed” for life by college admission e-mail.  The Valley seems also to have invented a new category of youth: “trophy kids.”  F’s in business and finance are fine and dandy, but “we don’t do B’s.”

Even so, the kids aren’t cooperating lately; they don’t really want to think of themselves as human smartphones. High schools are not “clean rooms” for producing perfect “chips” off the old block. “Imperfect” has no safe place at Intel, but it is a daily occurrence in any high school. It’s so refreshing to see how Gunn High School students today are taking to Tumblr to celebrate themselves as they are.

But what about those vulnerable children who are still confronted at the core of their day with a literally impossible standard of perfection, seemingly hard-wired into their community’s culture? Who wants to be discarded or burnt-out (the fate of all imperfect chips)? Fear Of Missing Out can take hold in terms of social media driven by put-downs and put-ons; of social status driven by grade comps; of parental responses likewise calibrated; of college admissions office largesse driven by checked boxes and coded ratings on double-secret templates.

Why colleges don’t make their admission standards more transparent is beyond reckoning, except to enable the reprehensible “selectivity” game. Collectively, they are willfully fostering undue stress with children as pawns, and should be ashamed of themselves. Annual disclosure of college admissions scoring templates and algorithms (which would not preclude exceptions) should be a requirement of law for Federal aid flow to any college. Establishing such a system would not be “too hard” for the colleges with Silicon Valley’s help, given its leadership and expertise in big data analytics – some Stanford students are doing it already!

The “Real High Schoolers of Palo Alto” have been interviewed, surveyed, photographed, analyzed and categorized to the nth power, but not necessarily heard enough, supported enough and loved enough by their community.  If more adults followed the kids’ example, they could yet put the persistent optimism that is also part of the Valley’s culture to work on what has become its children’s most pressing problem.

Silicon Valley prides itself on recognizing unmet needs and satisfying them, even before we even realize them ourselves. But, like Tiger Woods the Elder, the Valley is not used to playing from behind, and not very good at it. At such a point of painful self-awareness, however, the Valley recipe has always been to go back to fundamentals, ask hard questions and question old assumptions. And many Palo Alto leaders – educators, students, parents, physicians, counselors, citizens – are beginning to do just that.

Consider the recent report and recommendations of the new Creative Schedule Committee of Gunn High School, designed to optimize both student well-being and student learning – a new balance in the vocabulary of Palo Alto  in terms of the mission of its public high schools. As stated in an editorial in the Palo Alto Weekly:               

“Few would have predicted…that a diverse group of Gunn High School teachers, students, parents and administrators would have been able to come to a consensus recommendation on a new school bell schedule….But…the ‘Creative Schedule Committee’ met its deadline and unanimously recommended a new ‘modified block’ schedule that will result in Gunn students having fewer and longer class periods each day….to improve the quality of class time, allow time for more individual attention and group learning, and eliminate the grind of daily homework assignments and due dates in every class.”

“…[S]tudents will end up attending three sessions per week for each of their classes, will have longer breaks between classes, and have a tutorial period on Tuesday mornings for meeting with teachers or counselors or attending grade-specific social-emotional learning programs. Teachers will have increased time for planning and collaboration.”

“The work of this committee should serve as a school district model for effective stakeholder engagement….Let this accomplishment be a lesson that it need not take years to accomplish important reforms, just clear goals, good leadership and a process that is inclusive but efficient.”

There remains much more to be accomplished, however, for Palo Alto to be a more sustaining community for all its high school students. For example, there is a critical lack of in-patient facilities for teens suffering acute mental and emotional distress, cited in both the San Francisco Magazine article and a very recent comprehensive study in the Palo Alto Weekly.

The Schedule Committee’s model shows how Palo Alto can put to use the best part of the Silicon Valley culture: a “can-do” attitude, especially about “unmet needs.” The needs of vulnerable Palo Alto teenagers are not unknown, they are crystal clear and they remain unfulfilled despite the type of known data that usually drives Silicon Valley thinking and action.

Three reasons are commonly cited to explain the absence of psych beds for teens in Santa Clara County – the home of Palo Alto and the heart of Silicon Valley;

1) Not enough beds to accommodate adults needing care;

  • Children’s needs peak during school terms, so beds go unused, resulting in income loss hospitals can’t afford;
  • Such specialized facilities (and staff) can’t be re-purposed to other critical functions.

These points are analytically valid, but they prove too much: if all are indeed true, then logically there should be no such facilities for children anywhere. Yet there are, even in neighboring California counties. Why does the unmet need for youth psychiatric care wind up in the “too hard” basket in the heart of Silicon Valley of all places?

It is time for the business, philanthropic and medical community leaders of Palo Alto to seize the opportunity to form and fund their own “creative” task force to find the way to bring critically needed close-by psychiatric care for Palo Alto’s most vulnerable students. What an opportunity that would be to create a new and positive example of “success” for Palo Alto’s teens! Remember:  it turned out that creating a new academic schedule for high school that everybody could agree with wasn’t really “too hard” after all.

Likewise, it should not be “too hard” any longer for America’s institutions of higher learning to own-up to the role they play in fostering unnecessary anxiety among high school students, abandon their selectivity game, and address the unmet need for far more transparency about their admissions standards. That step alone could make a major difference in the psyches of high school students, not only in Palo Alto but across the entire country.

The author is a Gunn High School parent and member of its Creative Schedule Committee.

Recently published in Huffington Post.


Terry Connelly is an economic expert and dean emeritus of the Ageno School of Business at Golden Gate University in San Francisco. Terry holds a law degree from NYU School of Law and his professional history includes positions with Ernst & Young Australia, the Queensland University of Technology Graduate School of Business, New York law firm Cravath, Swaine & Moore, global chief of staff at Salomon Brothers investment banking firm and global head of investment banking at Cowen & Company. In conjunction with Golden Gate University President Dan Angel, Terry co-authored Riptide: The New Normal In Higher Education.







What Is About To Crash – The Markets, The Economy? Neither, Even If Greenspan (Who?) Says So!

It’s late spring, and the Chicken Littles are back. They don’t fly but they do cluck.  Ever since the US economy again showed barely any growth for the first quarter of the year, and even before, there was no end to the nay-saying commentators that jumped to cable TV attention by declaring that finally, after five straight springs of false predictions of trading or commercial collapse due to this or that – this was going to be the year that everything finally falls apart, like the Titanic after it came upon the iceberg!

Indeed, the metaphor of “chickens coming home to roost” – mostly in terms of the US Federal Reserve’s “highly accommodative” monetary policy – was a common theme. Ignoring the strong economic growth in the second and third quarters of 2014 (4.6% and 5%), the strongest back-to- back quarters since 2003 with a respectable 2.2% in the fourth quarter,  the Wall Street Journal and a commentator for The Hill proclaimed it was time for the Fed to acknowledge that its policy of low interest rates  had not worked to stimulate the economy, even though it had repressed inflation to below the 2% target. To its critics, the Fed has failed to promote economic growth, even though three million net new jobs have been produced in the last 12 months, because productivity measures remain slack and wage growth remains subdued.

The critics then go on to predict a train wreck in both the financial markets and the real economy when everyone realizes that the Fed policy has only harmed savers dependent of fixed income securities who have seen their coupons cut to historic lows reflecting the Fed policy of “suppression” of “safe” returns, designed to force investors into riskier assets (translation: “equity securities”).

Doomsayers saw bubbles everywhere: bubbles in the US bond market and even more so abroad as the European Central Bank (ECB) at long last adopted the Fed policy of government securities purchases (“Quantitative Easing” or QE) which has pushed German “bund” yields down toward zero. Renowned bond investor Bill Gross called the German bond market the “short of a lifetime,” meaning that the extreme increase in the price of bunds on trading markets (which depresses  yields) did not reflect the real economy in Europe and would eventually reverse with a bang heard round the world.  But it hasn’t happened because of the ECB’s QE!

Gross’s  words had some immediate effects in the US bond market at the end of April and into May as good US job creation numbers for April reversed the slide below 100,000 for the prior month and suggested to some that the Fed might actually begin increasing the base interest rate above .25% as early as June. Prices on the ten year Treasury note dropped enough to raise yields as high as 2.27% on May 11 – up a third of a full percentage point just since late April, an extremely quick increase. Meanwhile, some surprisingly strong data on the German economy and in some other EU countries triggered a U-turn in the rise of the US dollar value vs. the Euro which in turn brought the quick rise in US Treasury yields to a pause.

In fact, it is equally likely that the increase in bond yields could also reflect the return of the “bond vigilantes:” i.e., those  bond and derivatives traders, hedge fund players and institutional investors – all long-frustrated with the Fed policy for reasons having to do with their own incomes. The vigilantes – as they did in the “taper tantrum” of summer 2013 – take market positions, often in the futures markets which require a lesser risk commitment, designed to force bond prices down and yields up in order to literally force the Fed to raise short term rates sooner than its own judgment would indicate in order to keep up with the Treasury market’s rapid run up in yields.

Even the main target of the vigilantes in the past, former Fed Chair Alan  Greenspan,  weighed in with his own prediction of doom and gloom by predicting that the markets would experience the equivalent of another taper tantrum once the Fed increases rates, as happened in 2013 when Chair Ben Bernanke indicated in May that the Fed would begin later that year to reduce and eventually bring to an end its extraordinary program  of quantitative easing due to the improving economy. Treasury yields spiked to the 3% level and stocks quickly corrected over 10% as investors bought in to the fear threat that the Fed was acting precipitously.  The same voices now calling for a 40% market crash or at least a very painful “correction” as the Fed contemplates beginning to increase interest rates later this year (Marc Faber and Dennis Gartman, for example) are at it again with virtually the same scripts, and for a while produced  the same results earlier this May.

CNBC of course chipped in with its usual “train wreck envy,” giving folks like Faber who have been wrong five years running a free platform to talk up his book; same for Gartman and others. And it worked for a while. The ten-year treasury note yield hit a high for the year; stock markets dropped below 18,000 on the Dow, 2100 on the  S&P and 5000 on the NASDAQ and the “correction” prediction proliferated on the CNBC website  and most every hour of live broadcast.

But investors finally woke up in the middle of this week to the fact that the drop in oil prices to fall as low as $10 a barrel  predicted by Gartman just over six months ago that would continue to impede US GDP had in fact turned into an almost 50% increase from the 2015 low in the mid-$40s to over $60! That winter weather that cut into energy sector construction and production, along with the West Coast port strike that hurt multiple sectors including retail in Q1, were well and truly over. Also, that the rise in the US dollar, which held back earnings and revenues for US multinationals and technology companies with huge overseas businesses, had come to an end as the EU had bounced off its technical bottom. The Dow rose by 192 points even on a day where retail sales (as traditionally measured with heavy focus on department stores rather than the new mobility of sales of goods) showed virtually no growth month over month.

This time around, the market manipulations of the past five springs seems to have fallen on more skeptical ears. “Fool me five times, it’s my fault” seems to be the order of the day in the markets. And the continued decline in weekly average jobless claims – a 15 year low – as of May 14, also showed that the economy might just do this year what it did last year and push GDP levels approaching 3% for the rest of the year. The Chicken Littles are taking cover for the moment!


Recently published on Huffington Post.

Terry Connelly is an economic expert and dean emeritus of the Ageno School of Business at Golden Gate University in San Francisco. Terry holds a law degree from NYU School of Law and his professional history includes positions with Ernst & Young Australia, the Queensland University of Technology Graduate School of Business, New York law firm Cravath, Swaine & Moore, global chief of staff at Salomon Brothers investment banking firm and global head of investment banking at Cowen & Company. In conjunction with Golden Gate University President Dan Angel, Terry co-authored Riptide: The New Normal In Higher Education.