The Fed has seen a wild ride over the last 12 years—a crisis, QE, rate tightening, but after all the turbulence, it is effectively right back in the same pickle in which it found itself in ~2005-2006. That pickle is how to handle a very late cycle, high valuation environment, when the economy looks likely to overheat. 12 years ago the yield curve inverted, and could do so again next year as the Fed continues to tighten.
FINSUM: The Fed did not do very well in managing the last cycle, obviously, so there is no formula to handle this. Additionally, the big worry is that short-term rates got to 5%+ before the crash last time around, giving the Fed a lofty position from which to cut during the recession. That seems unlikely this time.
The SEC seems to have decidedly changed its approach of late. Under new chief Jay Clayton, the SEC has greatly cut back on fines and disgorgements. Over the last fiscal year, penalties have fallen by 15.5% to a four-year low of $3.5 bn. The total number of cases taken up by the SEC dropped 17%. Clayton has made boosting capital raisings his priority, and has indicated that fining companies may simply hurt shareholders.
FINSUM: In the years leading up to Clayton’s appointment, regulatory over-reach did seem to be hitting extremes. Though, one hopes a pullback in enforcement won’t lead to increased bad behavior.
Here is an eye-opener. While the majority of Americans support capitalism, the opposite is true of Millennials. 42% of the generation that came of age during the Financial Crisis supports capitalism, while 51% say they oppose it. This is in contrast to average Americans, 60% of whom say they support capitalism. The results are from a Harvard University Poll conducted in 2016.
FINSUM: Millennials definitely hold a very jaded view of capitalism, not only because of the Financial Crisis (which so shaped them), but because we live in an era of escalating corporate power, unreachable home prices, and the threat of automation of all sorts of jobs.
Well, for the first time in weeks, the direction of the Fed looks clear. President Trump has passed over “excellent” Yellen after a term and will name Jerome Powell to be the next head of the Fed. His views on the economy and rates are that a gradual normalization should continue so long as the economy stays on its current track. In terms of the Fed’s balance sheet, “The shrinkage of the Fed’s balance sheet is also expected to proceed quite gradually”. He also says low inflation is a “mystery” and that it is what will allow the Fed to be patient with rate increases.
FINSUM:To be totally honest, Powell sounds almost exactly like Yellen, so we expect more of the same.
The market is on the hunt for signs that trouble may be ahead, and today they have one. In a worrying sign for the future direction of the economy, new economic data show that the US savings rate has just hit a fresh low of 3.1%. It is now very near the 3.0% level it hit just before the peak in 2007. The analogue for spending right now is not so much for the pre-Crisis era, but more to the 1990s, as instead of drawing out money from home equity, Americans just feel richer from share gains.
FINSUM: Well, this certainly helps one understand why the economy has been doing well. However, it makes us worry about low inflation (shouldn’t it be more elevated with high spending levels?) and how the economy could continue to grow if this number looks bound to contract.
While it is not entirely final, reports the Wall Street Journal, President Trump has reportedly decided on the next Fed chief. It will not be Janet Yellen, but rather Jerome Powell. The president said he would make an announcement about his choice this week. Powell currently serves as a governor on the Fed board, but he would be the first Fed chief in thirty years without a PhD in economics. He was formerly an investment banker and is now a lawyer, and seems likely to continue Yellen’s approach to rates, but take a less aggressive role on financial regulation. The decision is not written in stone, and Trump could still change his mind.
FINSUM: Trump made it pretty clear last week that he was not going to re-nominate Yellen, since he said he wanted to make his own mark. Powell seems like the natural choice for Trump.