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

Jackson Hole: I guess the big event this week will be Fed Chairman Ben Bernanke’s speech at the Kansas City Fed’s annual meeting in Jackson Hole, Wyoming. In my opinion, this will be over-hyped by the media, and I don’t really expect Bernanke to say anything new but rather just reiterate that “the U.S. economy continues to expand moderately, global risks remain, Fed stands by ready to facilitate/assist growth/credit markets when/if needed, etc.”


I hear a lot of analysts talking about the Fed being out of “silver bullets.” My advice is to not think of the Fed as having silver bullets. Think of economic growth as being a function of production and exchange. On the monetary side, this can be facilitated or hampered through the banking system, which can be constrained by two things: (1) a lack of excess reserves in the system, meaning fewer business loans, or (2) binding capital requirements that curtail further lending. Excess reserves are near historical highs, so that’s not a constraint. Capital requirements are a little grey because of uncertainties regarding the implementation of the Dodd-Frank Act (Dodd-Frank Wall Street Reform and Consumer Protection Act). In fact, officials (Fed, FDIC, OCC) are considering delaying the implementation of capital-adequacy stress tests required by the Dodd-Frank Act until September 2013. Bank lending is probably a little constrained because of uncertainty there. But it is predominately fiscal policy uncertainty (tax, spending, regulation) that is hindering the demand for bank loans, and that’s not really in the Federal Reserve’s wheelhouse.


U.S. growth: Expansions are normally led by consumer “durables” purchases, namely houses and cars. That hasn’t been the case this time, but some of the slack has been made up for by business investment spending and exports. With both of these having slowed somewhat, it is a welcome sign to see bottoming signals and improvement from both the housing and auto markets.


Europe: Germany continues to pressure Greece to move forward with agreed-upon reforms, while Greece continues to hold off and tries to buy more time. In general, I’d say the Euro-zone topic of the day is whether and to what extent the European Central Bank (ECB) will “automatically” step in to buy sovereign (specific country) bonds in order to keep interest rates - and hence, member country financing costs - from rising. Some of this borders on illegal state financing, that is, it is outside of the ECB’s mandate. It will be interesting to see how the legal interpretation of such a policy evolves, if such a policy indeed comes to be.

China take: Data continue to show slowing in China, renewing headlines of a hard landing there. I think a recent CNBC interview with economist John Rutledge of Rutledge Capital (former econometric modeler back in the Reagan days) is worth a few lines. Rutledge spends a lot of time in China, and it is always good to hear a “boots on the ground” view. Here are his key points (CNBC FastMoney; Rutledge Capital website):


• China is slowing because of weak growth in Europe (China’s biggest trading partner)
and a shrinking residential property market in China; and


• Western observers are making too much of the slowdown, which will be modest, from 9% last year to 8%-8.5% this year.


Why a soft rather than hard landing in China? According to Rutledge, it will be because (1) income growth is strong in the cities and even stronger in rural areas, (2) government finances are very strong, (3) monetary policy is easing, and (4) restrictions on owning property and mortgage loans are being eased.

We’ll see, but Rutledge’s soft landing (>5% GDP growth) view is similar to just about all of the commentary I get from other professionals in or closest to China.