Radio Show Notes: The Tesla Economy


Thursday, August 17, 2017 // Written by Enzio von Pfeil

We outline our iconoclastic thoughts re. waning faith in Trump (aka Council resignations), the Fed's repairing a Tesla using a horse buggy manual, and the end of the Trump rally


  1. Disbanding of US business councils following spate of resignations by high profile CEOs à execs have lost faith in Trump
    • Multiple members of both fora stepped down amid controversy over Trump’s ambivalent  reaction to the Charlottesville violence, which Trump declined to blame squarely on right wing hate groups.
    • Two forums get disbanded. Peter is referring to the
      • “Manufacturing and Jobs Council as well as
      • the  “Strategy and Policy Forum”
    • Hasty decision. Trump disbanded both Fora suddenly after a dozen top CEOs abandoned this For a altogether
    • Members who resigned.  Who, inter alia, belonged to his Strategy and Policy Forum”: some very high-powered execs!!
      • Lawrence Fink – BlackRock
      • Ginni Rometty – IBM, and
      • Richard Lesser – Boston Consulting Group
    • Implications:
      • Loss of optimism.  The sense that the President has lost influence has undermined the business community’s intial  business optimism (aka Trump rally).  Trump has got nowhere with Obamacare of tax reform, after all! 
      • Trump’s resignation. So when will Trump get fed up and resign in a huff?

 

  1. Dovish Fed minutes  è The TESLA economy
    • Results.
      • Fed Funds. As our listeners will recall, this time around the Fed decided NOT to raise rates.
        • This means that the Fed Funds rate remains at 1 ¼ %
        • This Fed Funds rate is the rate which is paid on required and excess reserves
      • Quantitative tightening. The other non-event: no introduction of Quantitative Tightening yet.
        • The Federal Open Market Committee  still has three meetings this year
          • 19th – 20th September
          • 31st October – 1st November, and
          • 12th – 13th December
        • The FOMC Minutes state that “the Committee expects to begin implementing its balance sheet normalisation programme relatively soon, provided that the economy evolves broadly as anticipated….”
          • Talk about leaving doors open: no brokers would allow their economist to get away with such two-handed mud…
    • Rear view mirror. The Fed forever will keep driving using a rear view mirror, namely that an expanding economy begets tight labour markets and thus wage inflation.
    • Horse buggy repair manual.  Thus, it keeps trying to repair a Tesla with the rules of a horse-buggy manual: tighten rates, slow the economy and thus wages growth.
    • The Tesla economy. But this anachronistic model really is SO outdated.  Here is the Tesla, being today’s economy:
      • Technology and Globalisation are the two forces that allow for stronger growth, tighter labour markets ANDS slower wages growth.
    • Revealing joke.  So, the current Fed attitude of staying with old techniques reminds of the man who meets a woman, who excitedly tells him that she has become a lesbian
      • The man asks the woman, “so what is a lesbian?” 
      • The woman replies, “she is someone deeply interested in other women”. 
      • At which point the man concludes: “Then I must be a lesbian, too!”
      • èSuch are the dangers of drawing wrong conclusions from facts!
    • Outlook
      • Fed funds rate. Fed Funds futures point to only a 33% chance of a third rate increase this calendar year, during which another three FOMC meetings get conducted, and
      • Quantitative Tightening.  The Fed is leaving its doors widely open on this one…..fearing another 2013 “taper tantrum”
        • Jackson Hole.  Other than a bunch of interesting research reports, don’t expect any major conclusions to be drawn at this coming week’s Central Bankers’ pow-wow at Jackson Hole, Wyoming.
    • Trump as the next Fed boss.  If he replaces Yellen with Cohn, then expect Trump to exert his rambunctious  influence on the Fed, too. All very unsettling and dangerous. 
      • Regulatory dismantling.  Already the White House is seeking to withdraw lots of regulations imposed especially on large lenders after the last bank crisis (2007/8).
Stanley Fischer’s critique. This Vice Chairman of the Fed’s Board of Governors, recently criticised calls to ease up on stress testing, saying that pressure to loosen standards on  big banks was ‘very, very dangerous’.  

  1. Markets- combination of above have led to sharp falls in US bond yields and the dollar overnight à Trump rally over with by now.
    • Bond yields. With that “Tesla inflation” remaining subdued, it is of little surprise that bond yields have not risen much throughout this year.
      • Flat yield curve.  Indeed this flat ÿield curve” means that our listeners  should worry about having too many financial counters e.g. banks, in their stock market portfolios:
      • how can a bank make money by lending money pretty mujch at the rate at which it is borrowing money?
    • Mushy dollar. According to yesterday’s Financial Times (FT):  since 1st January 2016, the dollar has fallen by 8.7% against six major developed-market currencies
      • But remember that all reserve currencies head south, whether it be Sterling or the dollar…the Central Bank prints too much currency in order to monetize domestic debt, thus creating an excess supply of dollars – so down goes its price, the dollar exchange rate!


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