HI Market View Commentary 10-14-2024
NO VIDEO THIS WEEK
Middle of the month of October and here come earnings !!!
- Most of our stocks are protected for earnings and ready to go
- Put options: give us the right to sell stock at a certain price for a certain amount of time
- Strike price: the price that we are allowed to sell our stock if we choose to do so
Staying protected longer for Election
- Bought protection out to the third and fourth weeks of November to get us through any election surprises or reactions
- October typically a volatile / down month
- Hurricanes blasting the east coast
- Wars in the middle east and continuing with Russia/Ukraine.
End of the year run letting stocks run
- Christmas rally which typically happens every year
What happens if Kamala is elected?
- (perceptions of the market):
- Positive: status quo (the market like predictability)
- Negative: Tax hikes
What happens if Trump is elected?
- (perception of the market):
- Positive: Tax cuts
- Negative: Trade war worries (again?) which is an uncertainty that the market isn’t comfortable with
Earnings dates:
AAPL 10/31 AMC
BA 10/23 BMO
BABA 11/21 BMO
BAC 10/15 BMO
BIDU 11/26 est
DG 12/05 est
DIS 11/14 BMO
F 10/28 AMC
GM 10/22 BMO
GOOGL 10/22 AMC
JCI 11/06 AMC
KO 10/23 BMO
LMT 10/22 BMO
META 10/30 AMC
MU 12/28 est
O 11/04 AMC
SQ 11/07 AMC
TGT 11/20 BMO
UAA 11/11 est
V 10/22 AMC
VZ 10/22 BMO
ZION 10/21 AMC
https://www.briefing.com/the-big-picture
The Big Picture
Last Updated: 11-Oct-24 15:24 ET | Archive
Why the Treasury market’s direction of travel matters
The day is September 17. The 2-yr note yield is 3.60% and the 10-yr note yield is 3.64%. The market is eagerly anticipating a rate cut by the Federal Reserve on September 18. The Federal Reserve did not disappoint.
On September 18, the Federal Open Market Committee (FOMC) voted to cut the target range for the fed funds rate by 50 basis points to 4.75-5.00%. That was not a unanimous vote. Fed Governor Bowman dissented in favor of a smaller 25-basis points cut.
What followed the rate cut news was interesting in more ways than one. Something that stood out is that rates at the front of the yield curve and the back of the curve both went up after the FOMC cut rates.
Eyes Wide Open
The 2-yr note is more sensitive to changes in the fed funds rate. It went down initially on the rate cut, but at 3.95% today, it sits 35 basis points higher than where it was on September 17.
This adjustment stems from an acceptance that the market got too far ahead of itself in pricing in rate cuts, so the market has given back some of what it took in its hopeful policy easing view.
Interestingly, the fed funds futures market is in alignment now with the Fed’s own median estimate that there will be another 50 basis points of easing before the end of 2024 and another 100 basis points in 2025. Shortly before the September 18 rate cut decision, the fed funds futures market had priced in 100 basis points of easing before the end of 2024 and another 150 basis points by September 2025.
The difference is that the market now sees 50 basis points less of easing by September 2025, so it stands to reason why the 2-yr note yield has risen since that September 18 decision.
The changed outlook has been a byproduct of two things: (1) the arrival of economic data that remains suggestive of a soft landing/no landing outlook and (2) Fed officials, including Fed Chair Powell, tamping down the market’s more aggressive rate cut outlook.
Fed Chair Powell set the tone in this respect, saying overtly that there is likely to be two more 25-basis points cuts before the end of 2024 if the economy evolves as expected. It’s worth noting that Atlanta Fed President Bostic (FOMC voter) said recently that he would be open to skipping a rate cut in November. He said that following a Consumer Price Index for September that featured a 3.3% year-over-year increase in core-CPI, which excludes food and energy, up from 3.2% in August.
That is a long way still from the Fed’s 2% inflation goal, which admittedly is targeted for the PCE inflation rate, but it goes to show that the Fed can’t declare mission accomplished on its inflation mandate as it tends to shoring up the labor market with easier monetary policy.
The long end of the yield curve, which is more sensitive to inflation and which the Fed does not control, is eyes wide open in this respect.
Inflation Relapse?
The 10-yr note yield, which hit 4.11% this past week, sits currently at 4.07%, up 43 basis points from where it was on September 17.
Long rates were expected by many to come down further when the Fed started cutting rates. That’s because the Fed wouldn’t cut rates unless it was confident inflation would hit its 2% target on a sustained basis, right?
With PCE inflation up 2.2% year-over-year in August, the Fed has room to feel confident.
That doesn’t mean, however, the market isn’t worried about an inflation relapse. After all, the labor market is still in solid shape, evidenced by a 254,000 increase in September nonfarm payrolls, a 4.1% unemployment rate, and a 4.0% increase in average hourly earnings. Furthermore:
- The S&P 500 is at a record high.
- The personal savings rate, at 4.8%, is much higher than previously thought before recent revisions.
- There is a record $6.47 trillion in money market funds.
- The services sector saw an acceleration in activity in September and an increase in prices.
- China has announced a new wave of policy stimulus that has pushed up commodity prices.
- Gold, considered a hedge against inflation, recently hit a record high.
- Major central banks around the world are cutting rates.
- Oil futures have pressed higher on the escalating military tension between Israel and Iran.
An Uncomfortable Thought
Is this inflation worry why the 10-yr note yield has risen after the Fed cut rates? It’s possible, but it is also possible that the back of the curve, like the front of the curve, has adjusted simply to account for a better-than-feared economic outlook, which would mean fewer rate cuts.
Other considerations include an asset reallocation trade out of bonds and into a stock market that keeps climbing a wall of worry, aided by its belief in the soft landing outcome, the AI revolution, the continuation of rate cuts, and the restoration of the so-called “Fed put,” which is to say the market believes the Fed will be quick to step in with policy accommodation to prevent a stock market meltdown that would threaten the smooth functioning of the financial system.
Another explanation revolves around the persistent budget deficit and incessant increase in the national debt, which is $35.7 trillion or 124.3% of GDP.
The added concern is that there isn’t any concerted effort in Washington to reverse this untenable situation. The CBO estimates the budget deficit will be $1.8 trillion in FY24, up 11% from FY23. Additionally, the economic plans put forward by both presidential candidates are projected to add $3.5-7.5 trillion more in new debt over 10 years, according to the Committee for a Responsible Federal Budget.
The worry is that the exploding debt will either drive interest rates up or that bond vigilantes will drive interest rates up to force the U.S. government’s hand into getting the debt situation under control. Neither is a comfortable thought.
What It All Means
The stock market for its part has looked plenty comfortable following the September 18 rate cut. The market cap-weighted S&P 500, the equal-weighted S&P 500, Dow Jones Industrial Average, and S&P Midcap 400 have all hit new record highs.
They have done so with market rates rising, which suggests the stock market has welcomed the rise in rates so far as an expression of a stronger growth outlook that will be good for corporate earnings as opposed to the scarier thoughts of inflation reigniting or the debt problem coming home to roost.
That doesn’t mean the stock market can’t, or won’t, change its mind if circumstances change.
Neither the Treasury market nor the stock market needs an inflation scare or a debt scare, but it is the Treasury market that is likely to suss things out first, so keep an eye on the back end of the curve, which the Fed does not control.
The stock market can tolerate higher rates against a better growth backdrop, but it will struggle with a rapid increase in rates driven by an inflation scare or a debt scare, particularly since the stock market trades with a full, if not rich, valuation.
Where the 10-yr note yield goes, then, and how fast it goes in the direction of travel, will have a lot to do with the stock market’s next step and its view of the Fed’s credibility.
—Patrick J. O’Hare, Briefing.com
(Editor’s Note: the next installment of The Big Picture will be published the week of October 21)
Where will our markets end this week?
Lower
DJIA – Bullish
SPX – Bullish
COMP – Bullish
Where Will the SPX end October 2024?
10-14-2024 -2.00%
10-07-2024 -2.50%
09-30-2024 -2.50%
Earnings:
Mon:
Tues: BAC, SCHW, C, GS, JNJ, UNH, WBA, UAL
Wed: ABT, FHN, MS, USB, AA, CSX
Thur: KEY, NOK, ISRG, NFLX
Fri: PG, SLB
Econ Reports:
Mon:
Tue Empire Manufacturing
Wed: MBA,
Thur: Initial Claims, Continuing Claims, Retail Sales, Retain ex-trans, Capacity Utilization, Industrial Production, Business Inventories, NAHB Housing Market Index,
Fri: Housing Starts, Building Permits
How am I looking to trade?
We added protection to: AAPL, DIS, BAC, GOOGL, VZ, CB, LMT
Already HAD sq
www.myhurleyinvestment.com = Blogsite
info@hurleyinvestments.com = Email
Questions???
Jamie Dimon says geopolitical risks are surging: ‘Conditions are treacherous and getting worse’
Published Fri, Oct 11 20247:34 AM EDTUpdated Fri, Oct 11 20242:19 PM EDT
Kristian Burt@in/kristian-burt-633536212/
Key Points
- JPMorgan Chase CEO Jamie Dimon sees risks climbing around the world amid widening conflicts in the Middle East and with Russia’s invasion of Ukraine showing no signs of abating.
- “We have been closely monitoring the geopolitical situation for some time, and recent events show that conditions are treacherous and getting worse,” Dimon said Friday in the bank’s third-quarter earnings release.
- Dimon also said that he remained wary about the future of the economy, despite signs that the Federal Reserve has engineered a soft landing.
JPMorgan Chase CEO Jamie Dimon sees risks climbing around the world amid widening conflicts in the Middle East and with Russia’s invasion of Ukraine showing no signs of abating.
“We have been closely monitoring the geopolitical situation for some time, and recent events show that conditions are treacherous and getting worse,” Dimon said Friday in the bank’s third-quarter earnings release.
“There is significant human suffering, and the outcome of these situations could have far-reaching effects on both short-term economic outcomes and more importantly on the course of history,” he said.
The international order in place since the end of World War II is unraveling in light of conflicts in the Middle East and Ukraine, rising U.S.-China tensions, and the risk of “nuclear blackmail” from Iran, North Korea and Russia, Dimon said last month during a fireside chat held at Georgetown University.
“It’s ratcheting up, folks, and it takes really strong American leadership and Western world leaders to do something about that,” Dimon said at Georgetown. “That’s my No. 1 concern, and it dwarves any I’ve had since I’ve been working.”
The ongoing conflict between Israel and Hamas recently hit the one-year mark since Hamas’ attack on Oct. 7, 2023, sparked war, and there have been few signs of it slowing down. Tens of thousands of people have been killed as the conflict has broadened into fighting on multiple fronts, including with Hezbollah and Iran.
At least 22 people were killed and more than 100 injured in Beirut from Israeli airstrikes on Thursday. Iran launched more than 180 missiles against Israel on Oct. 1, and worries have risen that an Israeli retaliation could target Iranian oil facilities.
Meanwhile, the Russian government approved a draft budget last week that boosted defense spending by 25% from 2024 levels, a sign that Russia is determined to continue its invasion of Ukraine, analysts say.
Dimon also said Friday that he remained wary about the future of the economy, despite signs that the Federal Reserve has engineered a soft landing.
“While inflation is slowing and the U.S. economy remains resilient, several critical issues remain, including large fiscal deficits, infrastructure needs, restructuring of trade and remilitarization of the world,” Dimon said. “While we hope for the best, these events and the prevailing uncertainty demonstrate why we must be prepared for any environment.”
Inflation rate hit 2.4% in September, topping expectations; jobless claims highest since August 2023
Published Thu, Oct 10 20248:32 AM EDTUpdated an hour ago
Jeff Cox@jeff.cox.7528@JeffCoxCNBCcom
ShareShare Article via FacebookShare Article via TwitterShare Article via LinkedInShare Article via Email
Key Points
- The consumer price index increased a seasonally adjusted 0.2% for the month, putting the annual inflation rate at 2.4%. Both were 0.1 percentage point higher than forecast.
- Excluding food and energy, core prices rose 0.3% on the month, putting the annual rate at 3.3%. Both core readings also were 0.1 percentage point above forecast.
- Initial filings for unemployment benefits took an unexpected turn higher, hitting as seasonally adjusted 258,000 for the week ending Oct. 5, the highest total since Aug. 5, 2023.
watch now
VIDEO04:41
Consumer prices rose 0.2% in September, hotter than expected; annual rate increased 2.4%
The pace of price increases over the past year was higher than forecast in September while jobless claims posted an unexpected jump following Hurricane Helene and the Boeing strike, the Labor Department reported Thursday.
The consumer price index, a broad gauge measuring the costs of goods and services across the U.S. economy, increased a seasonally adjusted 0.2% for the month, putting the annual inflation rate at 2.4%. Both readings were 0.1 percentage point above the Dow Jones consensus.
The annual inflation rate was 0.1 percentage point lower than August and is the lowest since February 2021.
Excluding food and energy, core prices increased 0.3% on the month, putting the annual rate at 3.3%. Both core readings also were 0.1 percentage point above forecast.
A separate report Thursday showed weekly jobless claims hitting a 14-month high, indicating potential softness in the labor market despite the big jump in nonfarm payrolls in September. However, most of the surge could be tied to the hurricane and strike.
Much of the inflation increase — more than three-quarters of the move higher — came from a 0.4% jump in food prices and a 0.2% gain in shelter costs, the Bureau of Labor Statistics said in the release. That offset a 1.9% fall in energy prices.
Other items contributing to the gain included a 0.3% increase in used vehicle costs and a 0.2% rise in new vehicles. Medical care services were up 0.7% and apparel prices surged 1.1%.
Stock market futures moved lower following the report while Treasury yields were mixed.
The release comes as the Federal Reserve has begun to lower benchmark interest rates. After a half percentage point reduction in September, the central bank is expected to continue cutting, though the pace and degree remain in question.
Fed officials have become more confident that inflation is easing back toward their 2% goal while expressing some concern over the state of the labor market.
“The overall trend is what’s important, not the day to day fluctuations,” Chicago Fed President Austan Goolsbee said said in an interview on CNBC’s “Squawk on the Street” following the release. “The overall trend over 12, 18 months is clearly that inflation has come down a lot, and the job market has cooled to a level which is around where we think full employment is.”
While the CPI is not the Fed’s official inflation barometer, it is part of the dashboard central bank policymakers use when making decisions. Several of its components filter directly into the Fed’s key personal consumption expenditures price index.
Though the inflation reading was higher than expected, traders in futures markets increased their bets that the Fed would lower rates by a quarter percentage point at their Nov. 6-7 policy meeting, to about 86%, according to the CME Group’s FedWatch gauge.
Goolsbee said the data is largely in line with Fed expectations and shouldn’t be viewed in isolation as having an outsized influence on policy.
“I just want to caution everybody, let’s settle down when one month numbers come in,” he said. “That’s not what we should be basing the monetary policy on. We should be basing it on the long part.”
In recent days, policymakers have said they see rising risks in the labor market, and another data point Thursday helped buttress that point.
Initial filings for unemployment benefits took an unexpected turn higher, hitting a seasonally adjusted 258,000 for the week ended Oct. 5. That was the highest total since Aug. 5, 2023, a gain of 33,000 from the previous week and well above the forecast for 230,000.
Continuing claims, which run a week behind, rose to 1.861 million, a rise of 42,000.
The jobless claims figures follow the damage from Hurricane Helene, which struck Sept. 26 and impacted a large swath of the Southeast. Florida and North Carolina, two of the hardest-hit states, posted a combined increase of 12,376, according to unadjusted data.
A strike by 33,000 Boeing workers also could be hitting the numbers. Michigan had the largest gain in claims, up 9,490 on the week.
On the inflation side, rising prices across a variety of food categories showed that it is proving sticky.
Egg prices leaped 8.4% higher, putting the 12-month unadjusted gain at 39.6%. Butter was up 2.8% on the month and 7.8% from a year ago.
However, shelter costs, which have held higher than Fed officials anticipated this year, were up 4.9% year over year, a step down that could indicate an easing of broader price pressures ahead. The category makes up more than one-third of the total weighting in calculating the CPI.
How Warren Buffett decides when to sell a stock, and why he might be dumping Bank of America
Published Sun, Sep 29 20247:00 AM EDT
When Warren Buffett, the ultimate buy-and-hold investor, sells a stock, it often sends a negative signal about the underlying business and maybe even the entire industry.
The Sage of Omaha, whose preferred holding period is forever, is usually only motivated to exit a big position when he judges that the competitive edge of a business has eroded.
“We’re more reluctant to sell them than most people,” Buffett said of his large positions at Berkshire’s annual meeting in 2009. “If we made the right decision going in, we like to ride that a very long time, and we’ve owned some stocks for decades. But if the competitive advantage disappears, if we really lose faith in the management, if we were wrong in the original analysis — and that happens — we sell.”
For example, when Buffett invested in newspapers like the Omaha World-Herald and Buffalo News in the 1970s, he thought their franchises were impregnable. But by the early 2000s his view on the industry soured as declining advertising revenue and the transition to digital platforms destroyed profits. He eventually sold his 30-odd newspapers in early 2020.
Bank of America sales
Many top holdings in Berkshire Hathaway’s equity portfolio are decades old — Buffett has held Coca-Cola shares since 1988 and American Express since 1991.
Maybe that’s why the 94-year-old investment legend recently raised eyebrows as he dumped about $9 billion of Bank of America shares in a selling spree starting in mid-July.
Buffett famously bought $5 billion of BofA preferred stock and warrants in 2011 to shore up confidence in the embattled lender struggling with losses tied to subprime mortgages. He converted the warrants to common stock in 2017, making Berkshire the largest shareholder in BofA. The “Oracle of Omaha” then added 300 million more shares to his bet in 2018 and 2019.
The recent BofA sales came after Buffett spent the past few years dumping a variety of longtime holdings in the banking industry, including JPMorgan, Goldman Sachs, Wells Fargo and U.S. Bancorp. Berkshire still holds a 10.3% stake in Bank of America. If the selling continues and the holding drops below the 10% reporting threshold, we won’t know how far Buffett has reduced the position until the quarterly 13-F updates.
‘We’re very cautious’
So, does Buffett think BofA and others have lost their competitive advantage?
Maybe.
Last year, shortly after the regional banking crisis that drove Silicon Valley Bank and First Republic into the arms of saviors, the Berkshire CEO hinted at nascent problems in the banking industry.
“We don’t know where the shareholders of the big banks, necessarily, or the regional banks or any bank, are heading now,” Buffett said in 2023. “The American public is probably as confused about banking as ever. And that has consequences. Nobody knows what the consequences are because every event starts recreating a different dynamic.”
Buffett said bank failures in 2008 during the Global Financial Crisis, and again in 2023, lessened confidence in the system, made worse by poor messaging by regulators and politicians. Meanwhile, digitalization and fintech made bank runs a simple matter at times of crisis.
The collapse of Silicon Valley and Signature Bank early last year, two of the largest bank failures ever, prompted extraordinary rescues from regulators, who backstopped all deposits in the failed lenders and provided an additional funding facility for other troubled banks.
“You don’t know what has happened to the stickiness of deposits at all,” Buffett said. “It got changed by 2008. It’s gotten changed by this. And that changes everything. We’re very cautious in a situation like that about ownership of banks.”
At the time, Buffett foresaw more bank failures down the road, but stuck with his Bank of America investment, partly because he personally negotiated the original deal and admired CEO Brian Moynihan.
“But do I know how to project out what’s going to happen from here?,” Buffett asked at the time of last year’s failures. “The answer is I don’t.”
Not exactly a ringing endorsement.
https://www.ksl.com/article/51152730/that-online-pharmacy-could-kill-you-feds-warn
That online ‘pharmacy’ could kill you, feds warn
By Josh Campbell, CNN | Updated – Oct. 13, 2024 at 10:32 a.m. | Posted – Oct. 10, 2024 at 9:57 p.m.
WASHINGTON — The order from an online “pharmacy” was for oxycodone, a powerful narcotic used to treat pain.
The pills looked exactly like the real things, their true contents masked by meticulous counterfeiting. Days after receiving her online shipment, the woman who ordered them was dead from acute fentanyl poisoning.
The incident is recounted in a new public safety alert from U.S. Drug Enforcement Administration investigators, who warn about a rise in illegal, typically foreign-based online stores that are allegedly targeting American consumers with deceptive practices.
“These companies operate illegally, deliberately deceiving American customers into believing they are purchasing safe, regulated medications when they are actually selling fake, counterfeit pills made with fentanyl or methamphetamine,” the DEA said, noting that the fake pharmacies often use U.S. website addresses and are professionally designed.
And rather than selling products manufactured by reputable pharmaceutical companies, the DEA said, “Many of these sites purport to be legitimate, U.S. based or FDA approved sites, but are actually working with drug traffickers to fulfill online orders with fake pills.”
Authorities say there are numerous red flags that can alert consumers to a possible scam, including sites that sell drugs without requiring a valid prescription, those with prices listed in foreign currency, sites with no proof of valid state and federal licensing, and the arrival of damaged packaging in a foreign language or pills with no expiration dates.
In a similar warning this month from the U.S. Centers for Disease Control and Prevention, authorities said suspicious online pharmacies have also been known to “offer deep discounts or prices that seem too good to be true.”
Fake pharmacy websites identified by DEA agents include many with generic names, such as pharmacystoresonline.com, careonlinestore.com, orderpainkillersonline.com and USAmedstores.com. Those sites now redirect visitors to a message indicating that the domain has been seized by U.S. authorities.
“If you have purchased alleged medication from any of these websites, you should immediately stop using it and contact your local DEA office,” or report the incident online, the DEA warned.
In addition to publicly alerting consumers about the dangers of fake online pharmacies, federal agents have been working behind the scenes to disrupt and dismantle deadly trafficking operations.
Last month, the U.S. Justice Department announced criminal charges against 18 defendants alleged to have operated fake online pharmacies after an investigation by the DEA and the Homeland Security Investigations agency.
Officials say the group, with members based in the U.S., India and the Dominican Republic, allegedly distributed millions of counterfeit pharmaceuticals online, including fake pills that killed at least nine unsuspecting customers.
If convicted, all 18 defendants face up to life in federal prison, the Department of Justice said.
“These individuals sold millions of dangerous fake pills to victims in every U.S. state and the District of Columbia,” DEA administrator Anne Milgram said in a statement. “The defendants did this to make money by driving addiction with deadly, highly-addictive fentanyl. The DEA is relentlessly focused on saving lives by finding these criminal networks and shutting them down.”
https://thedailyeconomy.org/article/the-feds-remarkable-independence-claim/
The Fed’s Remarkable ‘Independence’ Claim
Despite its claims, the Fed operates politically, loyally financing the government’s deficit as needed, and without accountability.
October 10, 2024
In the course of human events, the Federal Reserve is constantly declaring itself independent — that it both is and should be independent. The specific issue of whether this unelected body should be independent of the elected President has again been raised in the 2024 presidential campaign. The general issue of whether a central bank as part of the government can or should be independent is classic.
Given the foundations of American political philosophy, to say that the Federal Reserve should be independent is a remarkable claim. The Constitutional bedrock of the American government is that all its parts be subject to checks and balances from others. Should one immensely powerful part of the government, the Fed, be exempt from checks and balances? It seems to me that the answer is obvious: of course not.
Yet many people, especially economists and journalists, believe the Fed should somehow be independent. How can this be? That the Fed itself should unendingly promote this idea, and therefore its own power, is not a surprise. Every government bureaucracy yearns to be free of any meaningful oversight and discipline by the mere elected representatives of the People. But by what feat of public relations brilliance did the Fed manage to convince so many others of this hardly self-evident proposition?
The Fed’s Knowledge Problem
Put simply, the Fed is an ongoing attempt at central planning and price fixing. It is an unelected committee whose actions are based on debatable and changing theories applied to data which is already from the past by definition. The Fed fixes the price of money, performs various bailouts and lends to the government. (For all this, its preferred, more dignified name is “monetary policy.”)
The promoters of Fed independence share an unspoken and mistaken assumption: that the Fed is competent to have unchecked power of price fixing and manipulating money and credit–or in a more grandiose vision, of “managing the economy.” Although in fact neither the Fed nor anybody else can have the knowledge required to do this, it is assumed that the Fed knows what the results will be of, for example, monetizing $8 trillion of long-term bonds and mortgages. These unprecedented “quantitative easing” investments were accurately described by former-Fed Chairman Ben Bernanke as “a gamble.” The Fed cannot know what the results of its own actions will be — rather, it is flying by the seat of its pants.
An insightful old story compares the Fed’s monetary task to trying to land a 747 aircraft with the windshield painted over, and with instruments which tell it only approximately where the aircraft was and approximately how fast it was flying 15 minutes ago. The Fed’s problem is even harder than this, since financial actors are always anticipating what it may do, and therefore the airport it is trying to reach is in effect moving around. Moreover, the Fed has to be constantly busy trying to promote the crew’s credibility and assure the passengers on this 747 that there is nothing to worry about because it is in control.
Like all attempts at central planning, the Fed’s efforts are faced with recursive complexity and inescapable uncertainty. Although it will have some successes, it is also doomed to recurring failures. It cannot escape the problems of an unknowable economic and financial future and an insufficiently understood present. Even how to interpret the economic past always remains debatable. In short, the Fed inevitably suffers from the knowledge problem of all central planners demonstrated by Ludwig von Mises and Friedrich Hayek.
Neither the Fed nor anybody else can know, but only guess about, for example, what the celebrated “neutral rate of interest” is or was or will be. That this theoretical neutral rate is called “r-star” gave rise to the brilliant and honest aphorism of Fed Chairman Jerome Powell: “We are navigating by the stars under cloudy skies.”
How Should the Fed Fit into the Constitutional System of Checks and Balances?
While flying by the seat of your pants, gambling with many trillions of dollars, and navigating by the stars under cloudy skies, how independent should you be?
The Chairman of the House Committee on Banking and Currency in 1964 was Wright Patman, a populist Democrat from Texas and sharp critic of the Fed. He conducted hearings that year in which the Committee’s Domestic Finance Subcommittee reviewed in detail “The Federal Reserve After Fifty Years.” Here are some of their conclusions:
- “An independent central bank is essentially undemocratic.”
- “Americans have been against ideas and institutions which smack of government by philosopher kings.”
- “Our democratic tradition alone will be enough to make many thoughtful people demand a politically accountable central bank.”
- “To the extent that the [Federal Reserve] Board operates autonomously, it would seem to run contrary to another principle of our constitutional order — that of the accountability of power.
It seems to me that these conclusions of 60 years ago are all exactly correct (although I do not agree with other conclusions of the report).
If one agrees with Wright Patman that government by philosopher kings is contrary to American principles, that the Fed should not try to be a philosopher-king and should therefore be accountable and not independent, the question remains: to whom should the Fed be accountable and from whom independent?
My conclusion is that the Fed should be independent of the President and the Treasury, but it should be accountable to, not independent of, the Congress. The Congress is the possessor of the Constitutional Money Power (“To coin money [and] regulate the value thereof”) and the Taxing Power (“To lay and collect Taxes”). The Fed serves as a critical part of both. We must include taxation because the inflation the Fed creates is in fact a tax, which takes the People’s purchasing power and transfers it to the government.
The President and the Treasury
It is natural that the President and his Treasury Department should want to control the Fed, since this gives them the power to keep spending money when they are in deficit, by having the Fed print it up. Presidents of both parties have often wanted lower, or at least not higher, interest rates for political purposes and used their influence with the Fed accordingly.
The Treasury Department of course likes lower interest rates which reduce the cost of the debt it issues, and reduce the amount of new debt needed to pay the interest on the old debt. This natural connection was displayed in the original version of the Federal Reserve Act in 1913, which made the Secretary of the Treasury automatically the Chairman of the Federal Reserve Board (this provision was in force until 1935).
For extended times in Federal Reserve history, especially during major wars and emergencies — beginning with the American entry into World War I in 1917 when it was three years old — the Fed has been subservient to the Treasury Department. In these times, the Fed devoted itself to loyally financing the government’s deficit as needed. It did so again during the Covid financial and economic crisis and aftermath in 2020-21. Will the Fed repeat this performance in the future? Given a war or other emergency big enough, it will.
Historically, under the master politician Franklin Roosevelt, “the Treasury controlled most decisions” and “the Federal Reserve had a subsidiary role,” according to Allan Meltzer’s magisterial A History of the Federal Reserve. Also during this period, the Treasury took every ounce of the Federal Reserve’s gold. Meltzer summarizes this period as the Fed “in the backseat.”
The intense dispute between President Truman and his Treasury Department, on one side, and the Fed, on the other, in 1951 is notable in Fed history. Truman was in the middle of the Korean War, the American Army had retreated down the Korean peninsula under the Chinese onslaught, and the Treasury had to finance the war. They wanted the Fed to keep buying Treasury bonds at the rate pegged since World War II at 2.5 percent. But in this instance, the Fed thought interest rates should rise a little. Truman told the Fed Chairman, Thomas McCabe, “That is exactly what Mr. Stalin wants. He then in effect forced out McCabe and put in a new Chairman who he thought was his own man, William McChesney Martin of the Treasury Department. Martin, however, favored somewhat higher rates to control inflation and a Fed “independent within the government.” Truman called Martin to his face a “traitor.”
President Lyndon Johnson had a memorable dispute with the Fed, when the Fed raised interest rates to confront the rising inflation from Johnson’s Vietnam War and welfare expansion deficits. “How can I run the country and the government if… Bill Martin is going to run his own economy?” the furious President reportedly demanded. Martin (who as Fed Chairman was on his fourth President) traveled to Johnson’s Texas ranch to discuss the issue. Johnson called Martin’s action “despicable” and according to one report, physically pushed the proper Martin around the living room of the ranch, shouting at him. Quite a scene to picture.
We come to the interesting relationship between President Nixon and Fed Chairman Arthur Burns. Meltzer writes, “Ample evidence…supports the claim that President Nixon urged Burns to follow a very expansive policy and that Burns agreed to do it.” In Burns’ defense, Meltzer adds that at that time “many economists and politicians…wanted to reduce unemployment using highly expansive policies.” Wittily and cynically, Nixon said he hoped the independent Fed Chairman would independently decide to agree with the President.
Burns is said to have remarked with fine irony, “We dare not exercise our independence for fear of losing it.”
The Fed is always in a web of presidential and financial politics. President Trump’s pressure on Fed Chairman Jerome Powell to lower interest rates, while delivered in some characteristic language, repeated the historical precedents.
We can safely predict that this natural tension between the President, the Treasury and the Fed will continue into the future as far as we can imagine. Nonetheless, the Fed should be Constitutionally accountable to the Congress, not to the President and the Treasury.
The Congress
At all times, the Fed remains a creature of Congress, if the Congress exerts its authority. If Congress has the will and the political forces align, it can rewrite the Federal Reserve Act and in so doing, redirect, instruct, restructure, or even abolish the Fed. In addition, as the then-President of the New York Fed testified during the 1964 hearings, “Obviously, the Congress which set us up has the authority and should review our actions at any time they want to, and in any way they want to.” Should Congress audit the Fed? Of course, any time it wants to.
The definition of the kind of money the nation will have is an essential Congressional responsibility, not a prerogative of the Federal Reserve. Another Congressional responsibility is definition of the powers and organization of the Fed. The Congress in the past has often legislated on these central public questions, including:
- The Gold Standard Act of 1900 — defining money.
- The Federal Reserve Act of 1913 — creating the Fed.
- The Gold Reserve Act of 1934 — taking away the Fed’s gold and taking the country off the gold standard into a fiat paper money standard.
- The Banking Act of 1935 — reorganizing and centralizing the Fed.
- The Bretton-Woods Agreement Act of 1945 — taking the United States into a new international monetary system. Central to it was the commitment to foreign governments that the US would redeem dollars for gold at the fixed rate of $35 per ounce (The dollar has since depreciated against gold by more than 98 percent). In 1971, under President Nixon, the US reneged on the Bretton-Woods Agreement, putting the world on a pure fiat money regime and enabling the Great Inflation of the 1970s.
- The Federal Reserve Reform Act of 1977 — trying to make the Fed more accountable to Congress and assigning the Fed its so-called “dual mandate” of maximum employment and stable prices.
- The Humphrey-Hawkins Act of 1978 — suggesting a long-term inflation goal of zero if consistent with the dual mandate.
Regarding the essential political goal of stable prices, in 2012 the Fed on its own authority, without the approval of Congress, redefined “stable prices” to mean perpetual inflation. It unilaterally proclaimed that the United States should have 2 percent inflation forever. At that rate, in a single lifetime of 80 years, average consumer prices will quintuple. Whether America wants that kind of constantly depreciating currency is a fundamental political question for the Congress.
How in the world did the Fed imagine that it had the authority all on its own to commit the nation to perpetual inflation and perpetual depreciation of the currency at some rate of its own choosing? It suggests a certain arrogance — something a philosopher-king could do, but not a government body subject to Constitutional checks and balances. The idea should have been submitted to the Congress for approval. It wasn’t.
Therefore I propose a Federal Reserve Reform Act of 2025, numbering among its provisions these:
- Congress should cancel the 2 percent inflation target set unilaterally by the Fed until Congress has approved that or some other guidance. For better guidance, I suggest price stability. This would mean a long-run average inflation rate of approximately zero — or perhaps for political agreement, between zero and one percent. The Fed should be a key participant in this discussion, but not the decision-maker.
- Congress should make it clear that the Fed in general does not have unilateral authority to decide on the nature of US money, which is an essential public question, and that any such decision requires review and approval by Congress.
- Congress should seriously review the financial statements of the Fed. Since the Fed has now lost $200 billion over the last two years, it has burned through all its retained earnings and all its paid-in capital more than four times over. This massive loss means that the Fed’s real capital is now negative $156 billion. Any organization that claims independence, even if it doesn’t really have it, ought at least to be solvent. Congress should recapitalize the Fed.
Such reforms would constrain the Federal Reserve’s declarations of independence with Constitutional accountability.
Trump to move fast on tariffs, says Wall Street firm, citing clients who met with ex-trade chief
Published Sat, Oct 12 20248:29 AM EDTUpdated Sun, Oct 13 20249:47 AM EDT
Kevin Breuninger@KevinWilliamB
Key Points
- Former U.S. Trade Representative Robert Lighthizer is apparently telling Wall Street money managers that if the Republican presidential nominee is reelected, he could start implementing his sweeping tariff proposals quickly after taking office, according to policy analysts at Piper Sandler.
- Trump claims his sweeping tariffs will rake in enough money to pay for an array of major tax cuts and other intitiatives.
- Lighthizer is seen as a top prospect for a number of senior roles in a potential second Trump administration.
Donald Trump’s longtime trade adviser is apparently telling Wall Street money managers that if the Republican presidential nominee is reelected, he could start implementing his sweeping tariff proposals quickly after taking office, according to policy analysts at Piper Sandler.
“We’ve heard from a number of clients that Trump’s former US Trade Representative, Robert Lighthizer, has been meeting with investor groups and telling them that Trump could announce 60% Chinese tariffs and 10% across-the-board tariffs shortly after taking office,” wrote the trio of research analysts at the investment bank in a note Friday.
Asked about the note, Trump campaign press secretary Karoline Leavitt did not deny that Lighthizer has been meeting with investors. But she cautioned, “No policy should be deemed official unless it comes from President Trump directly.”
It was not immediately clear which groups have spoken with Lighthizer, and the Piper Sandler analysts did not reply to a request from CNBC for more details. But clients of the firm would likely be large asset management firms that pay for its stock and economic research.
Lighthizer is advising Trump’s presidential campaign on economic issues, according to Inside U.S. Trade.
A key player in crafting and enacting Trump’s first-term trade policies, Lighthizer is also seen as a top prospect for a number of senior posts in a potential Trump Cabinet, including commerce secretary and treasury secretary.
He currently serves as chair of the Center for American Trade at the Trump-aligned Washington think tank, America First Policy Institute. A spokesperson for AFPI did not reply to a request for comment. Lighthizer is also a director of Trump Media, the publicly traded social media company that is majority owned by the former president.
Lighthizer’s reported conversations, and his apparent influence with Trump, both underscore how central tariffs are to carrying out Trump’s overall economic vision.
Numerous economists and tax experts have warned that Trump’s expansive tariff plans will raise prices, lower U.S. gross domestic product and hurt employment in key industries.
Democratic presidential nominee Kamala Harris has repeatedly cited a progressive group’s analysis that Trump’s tariffs could equate to a nearly $4,000 tax increase for the average U.S. family.
The Trump campaign stressed to CNBC that Trump’s tariff ideas should be viewed in concert with his broader plans, which include slashing regulations, ramping up U.S. oil drilling and deporting millions of undocumented immigrants.
Republican National Committee spokeswoman Anna Kelly also noted that Harris and President Joe Biden have maintained, and in some cases boosted, many of the tariffs from Trump’s first term in office.
“Harris has always opposed tariffs because she can’t be trusted to put workers first, but President Trump will re-shore American jobs, keep inflation low, and raise real wages by lowering taxes, cutting regulations, and unshackling American energy,” Kelly told CNBC in a statement.
‘Flood the zone’
The Piper Sandler analysts in Friday’s note relayed their information about Lighthizer as they warned investors to take seriously Trump’s promises to hike tariffs to historic levels.
“We expect the tariffs to come quicker in a second Trump term than the first,” they wrote.
Trump “has the will and the way to follow through on his commitment to impose 60% tariffs on Chinese imports.”
The analysts wrote that it would not be surprising if Trump were to try to enact a broad 10% tariff by force, even though such an effort would likely be tangled up in court battles over his authority to do so.
If that happens, they wrote, Trump could “flood the zone” with even more targeted tariffs.
Those narrower tariffs could be focused on countries with whom the U.S. has large trade deficits, or on selected industries like the auto industry, where Trump has vowed to protect U.S. companies.
The analysts added, “There is little doubt Trump would use the threat of higher tariffs as leverage to win concessions on unrelated issues.”
Deterrent or cash cow?
Trump’s love of tariffs is well documented. He has presented them on the campaign trail as a panacea, both the key to prosperity and the master tool for reshaping the U.S. economy in a protectionist mold.
“Tariffs are the greatest thing ever invented,” the former president said during a September town hall in Warren, Michigan.
He argues that his tariff plans will rake in enough money to pay for an array of massive tax cuts, without requiring any compromises or cuts to costly government programs like Social Security and Medicare.
At the same time, Trump has vowed to use tariffs as a tool to deter unwanted foreign competition, and to gain geopolitical leverage over other nations.
Trump has repeatedly called for a 10% universal baseline tariff on foreign imports, and he has floated the possibility of expanding that tariff to 20%.
He has also called for a 60% tariff on all Chinese imports, and has suggested he would push for even higher tariffs in specific circumstances.
In a speech Thursday at the Detroit Economic Club, for instance, Trump complained that China is building factories in Mexico to produce cars that would be sold in the U.S.
“I will impose whatever tariffs are required” to stop that effort, Trump said.
“100%, 200% … 1,000%,” he said. “They’re not going to sell any cars into the United States with those plants they’re building.”
He has also proposed using tariffs as part of a carrot-and-stick approach to boosting domestic manufacturing.
“If you don’t make your product here, then you will have to pay a tax, or tariff, when you send your product into the United States,” he said in a campaign speech in Michigan in late September. “And we will take in hundred of billions of dollars into our treasury and use that money to benefit the American citizens.”
In a June meeting with Republican lawmakers on Capitol Hill, Trump even floated the idea of scrapping the federal income tax altogether, and replacing it with revenues from tariffs.
The Peterson Institute for International Economics torched that idea, saying it is “literally impossible for tariffs to fully replace income taxes” and warning that such a plan would wreak economic havoc.
All the while, Trump asserts that his tariffs will not exacerbate already-high consumer prices, which he blames Biden and Harris for causing.
“They aren’t gonna have higher prices,” Trump said during the Sept. 10 presidential debate. “Who’s gonna have higher prices is China and all of the countries that have been ripping us off for years.”
HI Financial Services Mid-Week 06-24-2014