"Kee" Points with Jim Kee, Ph.D.

Happy 2019!

The biggest news last week was probably Friday’s payroll report, which indicated that the U.S. economy added 312,000 new jobs in December. That was well ahead of expectations, and it brings the statistically more important 3-month average (October, November, and December) up to 254,000. This labor market data corroborates other data like recent ISM Purchasing Manager’s Indices (manufacturing and non-manufacturing) in painting a picture of pretty robust U.S. economic growth. It also supports what I took to be a pretty consensus view from economists at the American Economic Associations Annual Meeting last week that there was no pending recession signal in the U.S. economic data. Markets continue to show resiliency to the on-going partial government shutdown (that’s consistent with history), with positive sentiment being helped by Fed comments (perhaps fewer rate hikes this year) and by optimism regarding trade talks this week between U.S. and Chinese officials. As promised, here are some highlights from my notes from the AEA Annual Meeting:

Ten Years After the Great Financial Crisis (GFC)

Former Fed Chair Ben Bernanke, former Treasury Secretary Hank Paulson, and Timothy Geithner (who succeeded Paulson) held a great panel reflecting upon the Great Financial Crisis (GFC), ten years later. All discussed how the global financial system had outgrown the archaic regulatory structure, and how ambiguity regarding the Fed and the Treasury’s powers at a time when just about all of the world’s largest financial institutions were on the verge of collapse almost led to a second and much worse Great Depression. They needed emergency authority from Congress, which moves slowly, to deal with financial collapses, which move quickly. The reality seems vastly different from the back seat quarterbacking that characterized a lot of the press coverage at the time. All spoke with admiration of both Presidents Bush and Obama, stating that both men offered nothing but support and confidence during the crisis. Nobody ever thought the system was crisis-proof, and Bernanke commented that as long as there are risks in lending – “and there should be” – there is always the chance of crisis. Geithner felt that the U.S. was still being irresponsible by failing to further clarify emergency authority. When asked about the “mixed” results of the Fed’s programs, Bernanke responded, “Mixed? I’d say it is better than that!” He joked about how flattered he is to be blamed every time the market declines a little (“consequences of QE”), exclaiming that he must be pretty powerful to be able to move markets five years after leaving the Fed. He also joked that the best day of the crisis for him was when he had to be anesthetized for oral surgery and had to brief Vice Chair Donald Kohn in case he didn’t come out of it! When asked what advice they would give successors, Paulson said that in a crisis you are never going to have all of the information you need, so recognize that it is about either doing nothing, or doing something with limited information. Geithner chimed in that his advice was to err on the side of doing too much, too soon, rather than doing too little, too late. By the way, in a later panel on the risk of future crises, most felt that a cyber-attack on the financial system warranted more attention than anything else (including European debt, potential U.S. dollar/debt concerns, etc.). Here are some other bullet points from various research presented at the conference:

Other Quick Points from the Conference

  • Current stock market volatility, while high, is well within historical norms. The all-time volatility winner remains the Great Depression era of the 1930s.
  • “Credit spreads are powerful predictors of the economy.” Yes, and they have widened recently, which is a negative signal to be added to the positives in the opening paragraph above.
  • Digital analysis of historical text indicates that sometimes the daily news explains market movements well because of single, higher clarity events (e.g. “McKinley has been shot”). Other days have many reported stories, which are lower clarity events. So sometimes attributing the day’s market movements to this or that event makes sense and is legitimate, and sometimes it is garbage.
  • Kevin Hassett, Chairman of the Council of Economic Advisers (CEA), gave a talk indicating that investment spending and GDP growth following the President’s tax cuts have been about what the CEA actually forecasted.
  • Using option strategies (e.g. straddles, etc.) to guard against tail risks is really expensive, which leads said strategies to be long-term losers.
  • Infrastructure is in sad shape and there is a high probability of an infrastructure bill being passed, even with divided government.
  • In a fairly rational world, the only source of excess returns for investors is caused by stochastic volatility (i.e. random shocks). Worth keeping in mind in volatile times.
  • While government deficits (borrowing) might crowd out private borrowing, it is less true in a global economy than in a local economy.
  • Current low risk (government) interest rates are below nominal GDP growth rates, which means government debt-to-GDP ratios will decline even if borrowing does not.