5G, Huawei, Trade War, Shooting War

From the onset of the Trump trade war we’ve argued that the broad-brush tariffs advocated by Peter Navarro were damaging and that a very targeted approach on security and intellectual property would have been better. Finally, the tariff fight with China is being defined over 5G, which is where critical agreements always needed to be forged.

Market Commentary - Cumberland Advisors - 5G, Huawei, Trade War, Shooting War

Here is an interesting feature article from Reuters about 5G and security and a warning to the US from Australia: https://www.reuters.com/investigates/special-report/huawei-usa-campaign/ . My thanks to Erwan Mahe for bringing this reporting to my attention.

Targeted security and defense protectionism can be understood by Americans and investment market agents. Bludgeoning soybean farmers still makes no sense. Agricultural bankruptcy rates are climbing.

Raising sneakers prices for Americans doesn’t make us safer. Remember, tariffs are a sales tax on the American consumer. Trump knows it. The people around him know it.

So can they admit their error? Not likely. But a possible compromise is to be very heavy-handed on security issues and to rescind protectionist tariffs that punish Americans. Focus 100% on security tariffs. Use quotas. But be prepared for the countermeasures. Remember, the second word of the phrase trade war is war. We are now engaged in it.

Note the implications of the word war. The modern version of warfare plays out in the economic and sanctions realm. That is not an unreasonable alternative to the traditional version. However, history warns us about economic wars turning into shooting wars.

Moreover, we need to stay abreast of where future battlelines are forming, such as the struggle for access to rare earths. (See http://www.nationaldefensemagazine.org/articles/2019/3/21/viewpoint-china-solidifies-dominance-in-rare-earth-processing.) The Chinese are already acting strategically on this front and have decisively outmaneuvered the US.

Trump’s tactics require that military prowess be sharply honed by the USA. And funded fully by Congress. That readiness has now become necessary, whether we like it or not.

We have rebalanced our position in the defense sector and continue it as an overweight selection in our US stock market ETF portfolios.

David R. Kotok
Chairman and Chief Investment Officer
Email | Bio


Links to other websites or electronic media controlled or offered by Third-Parties (non-affiliates of Cumberland Advisors) are provided only as a reference and courtesy to our users. Cumberland Advisors has no control over such websites, does not recommend or endorse any opinions, ideas, products, information, or content of such sites, and makes no warranties as to the accuracy, completeness, reliability or suitability of their content. Cumberland Advisors hereby disclaims liability for any information, materials, products or services posted or offered at any of the Third-Party websites. The Third-Party may have a privacy and/or security policy different from that of Cumberland Advisors. Therefore, please refer to the specific privacy and security policies of the Third-Party when accessing their websites.

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Cumberland Advisors Market Commentaries offer insights and analysis on upcoming, important economic issues that potentially impact global financial markets. Our team shares their thinking on global economic developments, market news and other factors that often influence investment opportunities and strategies.




“Nations, Wars and Liberal Democracy” by George Friedman

My friend George Friedman is an internationally known geopolitical forecaster and strategist on international affairs and the founder and chairman of Geopolitical Futures (https://geopoliticalfutures.com/).

“Nations, Wars and Liberal Democracy” by George Friedman

He’s also a bestselling author whose most popular book, The Next 100 Years, is kept alive by the prescience of its predictions. George has briefed numerous military and government organizations in the US and overseas and appears regularly in the major media as an expert on international affairs, foreign policy, and intelligence issues.

Geopolitical Futures has developed a very particular, robust, and effective methodology for analyzing and forecasting international geopolitics, as they explain on their website:

“Geopolitical Futures tells you the continuing story of the future. We do that by charting the course of the international system.

“We have a model, a way of looking at the world, based on the assumption that impersonal forces – things like geography, politics, economics, military capability and demography – govern world leaders, not the other way around. It’s an important distinction you don’t see anywhere else. Because when you know what compels and constrains a leader, you can predict how the nation they lead will behave. When you know how nations behave, you can anticipate how the international system will change. When you can anticipate how the international system will change, you begin to see world events as we do: in the context of a much longer and more interesting story than the mainstream media can tell, one that traces dispassionately the rise and fall of world powers.”

With that background in mind, please take a look at the following thoughtful piece on liberal democracy in the context of current geopolitical realities, which George Friedman has kindly allowed us to share in its entirety with our readers.

Nations, Wars and Liberal Democracy

By George Friedman
April 25, 2019
Having considered the origins of the United StatesAustralia and Hungary over the past month, it is time to return to the underlying issue of the origin of nations and other communities and the relationship of the individual to community.

In looking at these three examples, we can see that nations originate in the movement of people from one place to another. In the case of the United States and Australia, it was the movement of individuals from different origins to a place and the emergence of a national identity from fragments of other nations that led to the formation of a nation. For Hungary, it was the mass movement of a coherent and self-aware people to the place in which they finally settled that led to the establishment of a nation, even though the Magyar people existed long before the Hungarian nation was created.

All nations, at some point in their history, displace, reshape or destroy another group of people. In this process, which can take years or even centuries, nations form and reform. America is a nation built of people with European and African origins that displaced a large number of other nations. Those nations were collectively called Indians but were actually distinct peoples with unique languages and cultural memories, who also continually displaced each other prior to the arrival of Europeans.

Even in the Bible, we can see a history of displacement of nations, the creation of new nations, and the subsuming of individuals in that matrix. According to the Old Testament, a nation emerges from family. Abraham and Sarah gave rise to a distinct people that victimized and was victimized by others. The nation emerges from core biological relationships and searches for a place to settle. This process is seen as so vital to human existence that God’s relationship to humanity is mediated through the transformation of the family into a nation.

The family and nation are, therefore, intimately linked. Just as the family defines who a child is, so too it defines the nation, and the nation in turn defines the family. When Europeans came to the United States, they came as families or formed families once there, and the emergent power of the national culture was a crucible that shaped these families. There are exceptions, however. African slaves brought to the United States were denied the right to form autonomous families and, therefore, were prevented from developing an organic relationship to the nation, something that resonates centuries later.

In the family, we gain our language and culture, our friends and enemies. But it is in the larger community – the nation – that these things are defined. There are three layers in human existence: the individual, who is born of family and lives within the matrix of family and nation; the family, which creates the individual and transmits the general culture to its members; and the nation, which shapes the culture and confronts other nations to protect the family, sometimes by sacrificing individuals. And all of this occurs in the place in which the nation was created, and that place determines a great deal of the nation’s culture and its enemies.

This model poses a problem for liberal democracy – the doctrine on which the United States was founded. America has two founding principles. The first, and the most important, is the right to life, liberty and the pursuit of happiness. In elevating this principle to the cornerstone of American society, the United States turned the pursuit of happiness into the central moral project of liberal democracy. In other ideologies, sacrifice and duty to others is at the center. In liberal democracy, it is the individual that is at the heart of the nation.

The second principle is the right to national self-determination. Based on this principle, foreign interference in the right of other nations to govern themselves is viewed as immoral. But the history of humanity is full of such interference – the American Revolution itself was necessary because of the British desire to block the American nation from evolving. Thus, national self-determination is not a moral principle that has been respected or adhered to throughout history.

But this is an old story. The deeper question in liberal democracy is how the right to pursue happiness can be reconciled with an individual’s obligation to the nation. Adam Smith tried to solve the problem by arguing that the individual pursuit of wealth helps nations develop. But that pertains only to economic life. The nation emerges from the bonding together of individuals, and that process creates obligations between them. Those obligations are most extreme when a nation is at war – at such times, life, liberty and the pursuit of happiness can be curtailed in the most radical way imaginable.

That creates a moral problem for me. I believe deeply in the American project and in the right to pursue happiness. I also believe deeply in the obligation of citizens to perform their duties as citizens, even to the point of going to war. Since war is endemic to nations, there seems to be a contradiction between the two understandings of citizenship.

There’s a fundamental tension between the individual, the family and the nation. Every human being wishes to be happy. But the nation may demand an individual to sacrifice their happiness, just as a family may require parents to sacrifice their happiness. The desire for happiness would seem to make the family tenuous and the nation almost impossible to create. Yet it is there. It is an objective reality that defines human history. So either liberal democracy’s moral hierarchy is invalid, or the fundamental motivation of human beings must to be seen as more complex than liberal democracy might claim.

This is an important question for my work. The foundation of geopolitics is that place shapes the community, the community shapes the family, and the family shapes the individual. In other words, the individual is a product of powerful forces and is free only in a limited sense. Liberal democracy sees the individual as the fundamental unit of humanity and the driver of history. Both views can’t be true. Therefore, we must make one of three conclusions: liberal democracy is wrong (which would be a tragedy for me), geopolitics does not grasp reality (which I think it does), or the two can be reconciled on some subtler level.

That’s where I want to go. Let’s see if I can get there.

(https://geopoliticalfutures.com/nations-wars-liberal-democracy/)




Trade War’s Hammerlock on Bond Market Puts Lower Yields in Sight

Excerpt from Bloomberg.com article,

Trade War’s Hammerlock on Bond Market Puts Lower Yields in Sight

By Liz McCormick
May 18, 2019

Cumberland-Advisors-David-Kotok-In-The-News

Insight Ahead

Next week, traders will gain fresh insight into the state of America’s housing market and purchases of big-ticket items. Minutes from the Fed’s last gathering will be released Wednesday and there’s a slew of speakers, including Chairman Jerome Powell. There’s little expectation that officials will waver from their pledge of patience with rates.

“The Fed will look at the tariffs as an exogenous shock and that it’s not systemic and therefore won’t change monetary policy,” said David Kotok, chief investment officer at Cumberland Advisors, which manages about $3 billion.

Fed funds futures imply the central bank’s benchmark rate will fall to 2.09% by the end of 2019, signifying more than a quarter-point cut. Officials’ most recent quarterly forecasts projected no change in 2019 and a quarter-point increase in 2020.

Given the Fed’s plans for rates and elevated Treasury issuance, Kotok says yields are too low. He expects the 10-year yield to be at 3% to 3.25% by year-end.

Still, the daily ebb and flow of information about tariffs is seen as pivotal.

“There is more risk of yields going lower given the concerns about trade,” said Justin Lederer, a strategist at Cantor Fitzgerald.

Read the full article by Liz McCormick at the Bloomberg website: www.bloomberg.com

 




Why the US-China trade war won’t last

How Trump’s trade war is unraveling the Trump rally

Cumberland Advisors in the News

Excerpts below.

By Matt Egan, CNN Business
Tuesday, May 14th 2019

The United States and China don’t just coexist. Their massive economies are deeply intertwined in ways that make the intensifying trade war unsustainable.

Tariffs are the weapons of choice as both sides attempt to improve their negotiating leverage. Consumers and businesses find themselves caught in the crossfire. The levies will increase costs, muddle supply chains and drive up debilitating uncertainty.

UBS cut its 2019 GDP growth forecast for China from 6.4% to 6.2%. While Beijing will try to soften the blow with stimulus, UBS said growth could slip below 6% in 2019 and 2020 if the trade war deepens.

“The risk is monstrous. It’s very troubling,” said David Kotok, chairman and chief investment officer at Cumberland Advisors.

The interconnectedness of China and the United States has been driven in part by the millions of people in China that have been lifted out of poverty.

“You have an expanding middle class wealth effect,” said Kotok, who also serves as director of the Global Interdependence Center, an organization advocating for the expansion of free trade.

Read the full article here: CNN Business


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Cumberland Advisors Market Commentary –  Robert Brusca Ph.D. on Tariffs, Trade, and the Fed

Market-Commentary-Cumberland-Advisors-Trade

My longtime friend and veteran international economist, Bob Brusca, has given us permission to publish his superb discussion of the trade war effects.

Here is the link: Robert Brusca, Ph.D. of FAO-Economics on Tariffs, Trade, and the Fed

-David




Cumberland Advisors Market Commentary –  White House Considers Economist Judy Shelton for Fed Board

For a history of the Fed Board of Governors and its changes over the past century, see https://www.federalreserve.gov/aboutthefed/bios/board/boardmembership.htm .

Federal Reserve Building

Right now we have five of seven governors’ seats filled. One of those seats is held by Lael Brainard, and she is in a holdover capacity. She was appointed by President Obama in 2014.

In a perfect world there would be seven sitting governors, and they would have staggered 14-year terms. That structure was designed to take the politics out of the Fed so it could act independently as the nation’s central bank. Lots of luck with that one! Anyone who follows the state of our government knows the results are otherwise. That is true under Trump and was also true under Obama and under Bush, and so it goes.

So, how can we get the best out of what we have for our system? That is the question financial market agents should ask. We may opine about political changes that would improve the Fed, but the present system is about all we can ever expect. It may be messy, but it is our American mess.

We thank the many readers who replied to our “Fed Appointees” piece. (See https://www.cumber.com/fed-appointees/.)

Let me quote from a former Fed Reserve Bank president, Charles Plosser, who wrote eloquently about the Fed shortly after his retirement, in the Wall St. Journal on 12/9/2015. He wrote:

“When the Federal Open Market Committee voted Sept. 17 not to raise its target for the federal funds interest rate (the interest rate banks borrow and lend reserves to each other), the tally was a lopsided 9-1. Yet I suspect that the debate was quite lively and the outcome a closer call than the final count suggests.

“Why? The fed-funds target rate typically moves in tandem with the discount rate (the rate the Fed lends reserves to commercial banks). In the two weeks before the FOMC meeting, eight of the 12 Reserve Bank boards, in consultation with their presidents, recommended an increase in the discount rate. Thus at least eight of the 17 participants in the FOMC meeting had a predilection to move forward with a rate increase. Of those eight, three were voting members.”

The point Plosser wanted to make is about a public image, or what he calls a “groupthink” projection. Note that Charles Plosser is very experienced. He was president of the Philadelphia Fed from 2006–2015 and sat on the FOMC during the entire financial crisis. Often there were actions that required board action, and there were only five voting board members because politics (both Democratic and Republican) kept the vacancies from being filled. Furthermore, as a president, Plosser used the discount window board action to convey his views, and he was fiercely independent in his voting decisions.

I asked Plosser about this when we emailed each other after the “Fed Appointees” piece. He said,

“This is evidenced by the block voting by governors (no dissents to speak of in over 20 years) and the tendency of the BoG to sometimes avoid presidential appointments that would likely challenge the prevailing views of the governors and staff. Preserving the diversity of views among presidents is important to preserving political independence and resisting group think. Politicization is bad, as I’ve argued many times; but groupthink and homogeneous governors can be as well and can reinforce the worse tendencies of each. It’s a tough task. Centralizing more power in the board promotes groupthink and makes politicization easier to implement. A dangerous brew.”

We thank Charles Plosser for giving us permission to quote from our discussion.

We are about to go to the second round of Trump’s attempts to appoint folks to the vacancies on the Fed Board of Governors. The scrutiny will be intense and the preliminary vetting much deeper than it was in the first round. As we suggested in our first commentary, we think there is room for business experience and for nonacademics. The twelve regional Federal Reserve banks benefit from that broad exposure on their respective boards.

There is a long road yet to travel in order to reach a full complement on the Board of Governors. The nation will be better off if we get there. And a little dissent and debate may help gain clarity and allow market agents to better assess the direction of Fed policy.

We do not expect the markets to move on the basis of a prospective nominee or even two of them. We saw that with the Cain and Moore episodes. Once the Board is confirmed and the discussion about policy is articulated with a newly composed Fed, market reaction could change. For now, the financial markets will watch as Fed politics unfold.

In what will likely be an intense examination in the US Senate, we expect the newest prospective Fed Governor to be strongly vetted and to achieve success during her confirmation process. Such is our new system. We don’t know Judy Shelton and only can read her writing and public credentials. We wish her well as she moves into the fishbowl of national public life.




This Is a Serious Confrontation Between World’s Biggest Economies, Says Cumberland’s Kotok

This Is a Serious Confrontation Between World’s Biggest Economies, Says Cumberland’s Kotok

Bloomberg Daybreak Asia
May 9th, 2019, 9:10 PM EDT
Bloomberg-This Is a Serious Confrontation Between World’s Biggest Economies, Says Kotok

David Kotok, chairman and chief investment officer at Cumberland Advisors, discusses the U.S.-China trade negotiations and their impact on markets. He speaks on “Bloomberg Daybreak: Asia.” (Source: Bloomberg)

Watch at on Bloomberg.




Bloomberg Daybreak Asia: Wear a Helmet When Doing Falconry With These Hawks (Radio)

David Kotok, Chief Investment Officer/Co-Founder, Cumberland Advisors, joined Doug Krizner and Rishaad Salamat on Daybreak Asia. He says markets have been thrown a curveball by President Trump’s threats on tariffs. He goes on to discuss how China may react.

Running time 04:25

Cumberland's David Kotok on Bloomberg Radio

This is a Bloomberg podcast.

LISTEN HERE: Bloomberg Audio

NOTE: Links to other websites or electronic media controlled or offered by Third-Parties (non-affiliates of Cumberland Advisors) are provided only as a reference and courtesy to our users. Cumberland Advisors has no control over such websites, does not recommend or endorse any opinions, ideas, products, information, or content of such sites, and makes no warranties as to the accuracy, completeness, reliability or suitability of their content. Cumberland Advisors hereby disclaims liability for any information, materials, products or services posted or offered at any of the Third-Party websites. The Third-Party may have a privacy and/or security policy different from that of Cumberland Advisors. Therefore, please refer to the specific privacy and security policies of the Third-Party when accessing their websites.


If you like podcasts, check out this one from 2015 featuring David Kotok talking about his background and Camp Kotok with Barry Ritholtz. They also talk about the history of Cumberland Advisors since its founding, and delve into fundamental principles of investing and valuation.


Links here
https://itunes.apple.com/us/podcast/masters-in-business/id730188152?mt=2

And here
http://www.bloomberg.com/podcasts/masters-in-business/




Fed Appointees

“If the Fed had done its job properly, which it has not, the Stock Market would have been up 5000 to 10,000 additional points, and GDP would have been well over 4% instead of 3%…with almost no inflation. Quantitative tightening was a killer, should have done the exact opposite!” – President Donald Trump, April 14, 2019, 7:14 AM (source: Twitter, https://twitter.com/realdonaldtrump/status/1117428291227533312)

Market Commentary - Cumberland Advisors - Fed Appointees

“We’re strictly nonpartisan. We check our political identification at the door.” – Federal Reserve Chair Jerome Powell, April 11, 2019 (source: Washington Post, https://www.washingtonpost.com/politics/powell-maintains-his-distance-from-trump-in-speech-to-house-democrats/2019/04/11/d37ed30c-5cc7-11e9-b8e3-b03311fbbbfe_story.html?utm_term=.6e03fb627e71).

In response to President Trump’s stated desire to appoint Stephen Moore and Herman Cain to vacant seats on the Board of Governors of the Federal Reserve, on April 15, Steve Cecchetti and Kim Schoenholtz published a thorough, extremely well-reasoned piece rebutting the president, entitled “Qualifying for the Fed” (https://www.moneyandbanking.com/commentary/2019/4/14/qualifying-for-the-fed). (Cecchetti and Shoenholtz are highly respected, deeply qualified economists whose biographies may be reviewed here: https://www.moneyandbanking.com/the-authors. They are the coauthors of Money, Banking and Financial Markets (available from your local indie bookstore or Amazon https://www.amazon.com/Banking-Financial-Markets-Stephen-Cecchetti/dp/007802174X.)

The authors assert, “Monetary economists of nearly all persuasions are overwhelming in their condemnation of President Trump’s desire to appoint [Moore and Cain],” and they cite “the full-throated case for a high-quality Board offered by Greg Mankiw – former Chief of the Council of Economic Advisers under President George W. Bush.”

Mankiw published his thoughts in The New York Times on April 11, under the title “Keep the Federal Reserve I Love Alive” (https://www.nytimes.com/2019/04/11/business/mankiw-moore-cain-federal-reserve.html). Mankiw opens with this:

“I have a confession to make: I love the Federal Reserve. And I suspect that, in their heart of hearts, most other economists love the Federal Reserve, too. But I fear our love may be in peril.

“We live in a time when many public institutions seem to be failing us. The White House is in constant turmoil, with extraordinarily high turnover among top staff members. Congress is as polarized as ever, not having done much over the past two years other than pass the mess of the 2017 tax bill. Even the Supreme Court appears less dispassionate and more partisan than it should be.”

Herman Cain has now withdrawn his candidacy, because, he said, “I could not run my business; I could not pursue my business interest [if] I had to be politically correct in anything or be nonpartisan” (source: https://www.foxbusiness.com/politics/herman-cain-says-he-declined-trumps-fed-board-nomination-over-political-correctness).

Stephen Moore stated to The Wall Street Journal that he would withdraw from consideration if he became a political liability for the White House and Senate Republicans (source: https://www.wsj.com/articles/moore-hopeful-for-fed-post-but-says-he-would-bow-out-if-he-becomes-liability-11556143736).

Thoughtful readers are asked to take a few minutes to read the linked comments above and the essays and comments by Mankiw. Now let me get to my own thoughts on the Fed and politics.

Jay Powell states the Fed’s viewpoint nearly perfectly. As chairman, he has scrupulously avoided political combat with Trump’s Twitter assertions. His colleagues on the Board of Governors and his FOMC colleagues who are regional presidents (12 of them) follow the same protocol. To summarize it: The Fed is an independent policy-making institution and is above political partisanship.  That is usually true but not always.

Let’s start by reviewing a key moment in Federal Reserve history: the Treasury-Fed Accord of March 1951.  Inflation ran rampant in the US in the postwar era. By February 1951, CPI had reached an annualized rate of 21 percent; and with the Korean War heating up, the Fed faced the possibility of having to monetize a considerable portion of new government debt. But the Truman administration was committed to maintaining a low-interest-rate peg in order to protect the value of war bonds – a position the FOMC found increasingly untenable.

The website Federal Reserve History explains what unfolded next:

“The conflict came to a head when Truman invited the entire FOMC to a meeting at the White House. After the meeting, he issued a statement saying that the FOMC had ‘pledged its support to President Truman to maintain the stability of Government securities as long as the emergency lasts.’ But in fact the FOMC had made no such pledge. With conflicting stories about the dispute appearing in the press, Eccles decided to release the FOMC’s own account of the meeting with the president–without consulting the rest of the committee. As Eccles wrote in his memoir, ‘The fat was in the fire….’

“Shortly after that meeting, the Fed informed the Treasury that as of February 19, 1951, it would no longer ‘maintain the existing situation.’ Needing to refund existing debt and possibly issue new debt, the Treasury knew it had to put an end to the uncertainty and public dispute.” (source: https://www.federalreservehistory.org/essays/treasury_fed_accord)

A compromise was negotiated between the Treasury and Fed, by which the Fed would continue to support the price of five-year notes for a short time, but after that the bond market would be on its own. Then, on March 4, 1951, the Treasury and the Fed issued a joint statement saying they had “reached full accord with respect to debt management and monetary policies to be pursued in furthering their common purpose and to assure the successful financing of the government’s requirements and, at the same time, to minimize monetization of the public debt.”

This accord “marked the start of the development of a strong free market in government securities, which continues today. In addition, the debate over the consequences of interest rate pegging marked a shift in thinking at the Fed. Monetary policymakers began focusing actively on bank reserves and the control of money creation in order to stabilize the purchasing power of the dollar. But most important, by establishing the central bank’s independence from fiscal concerns, the accord set the stage for the development of modern monetary policy.” (source: https://www.federalreservehistory.org/essays/treasury_fed_accord)

Rarely has a sitting FOMC member violated the Fed’s apolitical stance. One exception is existing Fed governor Lael Brainard, who made a political contribution to Hillary Clinton’s presidential campaign. (See https://www.wsj.com/articles/feds-brainard-made-recent-donations-to-clinton-campaign-1457456261 and https://www.washingtonpost.com/news/wonk/wp/2016/04/21/top-federal-reserve-official-donates-to-hillary-clintons-campaign/.)  Brainard’s action was greeted with silence by some in the economic and finance community who were fearful of criticizing a Fed governor. Others were openly critical. I was one of the latter, as I believe a political declaration by a sitting Fed official undermines the Fed’s claim to full independence.

Retired Fed officials, on the other hand, are freely acting citizens and are openly political on all sides of issues. Many are not afraid to constructively criticize the actions of their former institution and colleagues past or present.

What about proposed Fed officials?

Here we have a different construct. It is clear that presidents use Fed appointments for political purposes, and furthermore most presidents try to appoint those who favor their own views. History reveals plenty of bias here.

Nearly all presidents favor lower interest rates and easier monetary policy. Not one president has said “Raise rates” or “Tighten credit conditions” or “Please trigger a recession.”

At the same time, presidents want the Fed to fight inflation in periods when that action is needed (for instance in the 1970s and 1980s). But during wartime, presidents want help from the Fed to finance the war. In the 1940s, Franklin Roosevelt’s Fed followed a patriotic path for years, with low interest rates and nearly unlimited financial assistance to America’s war effort (a path that then led to postwar inflation and the Treasury-Fed crisis).

So prospective Fed appointees have political baggage in most cases. And many had previously served in the federal government or in advisory roles to the president. By itself, such service is not an impediment since the political process in the Senate around appointments to the Board of Governors is intense.  Most appointees have academic credentials in economics and finance.

Some appointees are from the business community. Elizabeth Duke was a banker who was well respected by her peers. (See https://money.cnn.com/2013/07/11/news/economy/elizabeth-duke-fed/index.html.) G. William Miller was a businessman and Carter political appointee who has been viewed unfavorably by historians. (See https://en.wikipedia.org/wiki/G._William_Miller.)

So Cain is now out, and Moore seems to be having trouble making it to the Senate confirmation process. (See https://qz.com/1579975/stephen-moore-a-federal-reserve-nominee-may-not-make-it-to-the-senate/.)

What happens next, then, with Fed appointees if both Cain and Moore have been rejected?

Probably nothing. That would allow President Trump to continue his Fed bashing whenever it suits his political convenience. It would also remove an item of distraction from a US Senate that has its hands full.

The Fed board now operates with five of seven governors’ seats filled. And the FOMC operates with ten voting instead of twelve: Five presidents and five governors decide interest-rate policy.  Politics has created the five governor pattern for over a decade.  A full seven member seated Board of Governors is now the anomaly.

The Fed is now on hold with rates and is tenaciously data-driven in word and deed. For guidance, we can now discern some probabilities in the distribution of dots in the Fed’s dot plots. We don’t get exact forecasts, just guidance. We also see Taylor rule models being used as guidance tools for Fed action rather than Phillips Curve models, which are now out of favor.

Our best guess is that the next Fed rate move will be up and is a year away. Closing output gaps suggest that outcome. Months of nuanced upward inflation may gradually allow the Fed to resume hiking.

We think futures forecasts of Fed cuts are overdone. And the same is true for the monster bond market rally. The Cumberland bond team has become more defensive, with weight added to the short end of the barbell.

As for politics and the Fed, Powell is to be applauded for his carefully scripted comments. With regard to Trump’s Twitter rages and Fed bashing, many market agents seem to ignore the president.  Trump moves markets on some issues but not on Fed bashing.

David R. Kotok
Chairman and Chief Investment Officer
Email | Bio


Links to other websites or electronic media controlled or offered by Third-Parties (non-affiliates of Cumberland Advisors) are provided only as a reference and courtesy to our users. Cumberland Advisors has no control over such websites, does not recommend or endorse any opinions, ideas, products, information, or content of such sites, and makes no warranties as to the accuracy, completeness, reliability or suitability of their content. Cumberland Advisors hereby disclaims liability for any information, materials, products or services posted or offered at any of the Third-Party websites. The Third-Party may have a privacy and/or security policy different from that of Cumberland Advisors. Therefore, please refer to the specific privacy and security policies of the Third-Party when accessing their websites.

Sign up for our FREE Cumberland Market Commentaries

Cumberland Advisors Market Commentaries offer insights and analysis on upcoming, important economic issues that potentially impact global financial markets. Our team shares their thinking on global economic developments, market news and other factors that often influence investment opportunities and strategies.




Cumberland Advisors Market Commentary –  Deficit About to Worsen

The Bloomberg Close ended its April 22 daily report with the following:

“What retirement? For the first time in 57 years, the participation rate in the U.S. labor force of retirement-age workers has cracked the 20% mark, according to a new report. As of February, the ranks of people 65 or older who are working or seeking paid work doubled from a low of 10% back in early 1985. Rickety social safety nets, inadequate savings and sky-high health costs are all conspiring to make the concept of leaving the workforce something to be more feared than desired.” (source: https://www.bloomberg.com/news/articles/2019-04-22/america-s-elderly-are-twice-as-likely-to-work-now-than-in-1985)

Cumberland Advisors Market Commentary

Why worry? According to the April 22 Wall Street Journal,

“The Social Security program’s costs will exceed its income in 2020 for the first time since 1982, forcing the program to dip into its nearly $3 trillion trust fund to cover benefits. The shortfall comes two years later than projected last year – when the program was expected to dip into the fund, but ended up in the black. But by 2035, those reserves will be depleted and Social Security will no longer be able to pay its full scheduled benefits.” (source, WSJ {Subscription req.}: https://www.wsj.com/articles/social-security-trust-fund-to-be-depleted-in-2035-trustees-say-11555946113)

In one year, this watershed moment for the Social Security trust fund will begin to have a small negative impact on the US Treasury market. At first, the impact will not really be noticed in bond pricing, but it is destined to worsen each and every year. When will the market start to anticipate the trend? What will the change in pricing be? Will it affect the FX rates between the US dollar and other world currencies? Is there a period ahead when higher taxes will be necessary to try to stem the damage?

The Committee for a Responsible Federal Budget (CRFB) has just published a paper that summarizes and comments on the looming issues with Social Security. Called “Analysis of the 2019 Social Security Trustees’ Report,” the April 22, 2019, paper pulls no punches – I suggest readers have two stiff shots of scotch or vodka with this one. Maya MacGuineas, CRFB president, has kindly given us permission to share the entire report with our readers. The report is here: http://www.crfb.org/papers/analysis-2019-social-security-trustees-report.

Remember, there is an arbitrary and politically driven budget accounting method that has allowed the Social Security and other trust funds to dampen the size of publicly stated deficits. Politically motivated financial legerdemain is ending and the reverse negative effect is about to commence.

David R. Kotok
Chairman and Chief Investment Officer
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Cumberland Advisors Market Commentaries offer insights and analysis on upcoming, important economic issues that potentially impact global financial markets. Our team shares their thinking on global economic developments, market news and other factors that often influence investment opportunities and strategies.