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EconVue Spotlight

Dear R. Hunter,

As everyone knows, October has been a terrible month for equity markets.
Some market participants feel that this did not just coincide with
higher interest rates, but was caused by flawed Fed monetary policy and
comments on overshooting. Like the humming chorus in Madama Butterfly,
there has been a steady rise in the number of voices supporting a Fed
pause in December. These include members of the Federal Reserve Open
Market Committee itself, such as Neel Kashkari, and leading economists
such as Jason Furman.

Could the markets be right, that tightening has happened too fast? After
seven years of interest rates at 25 basis points, and a swift concurrent
rise in debt levels, interest rates today are nine times what they were
in 2008. Additional supporting arguments for a pause: scant evidence of
above-trend inflation, China's slowing economy, instability in the
Eurozone, trade sanctions, a job market with room to grow, a weak
housing market, stronger dollar, rising treasury yields, and emerging
market weakness reminiscent of the taper tantrum of 2013 when bond
markets panicked. The list goes on. In fact, EconVue expert Robert
Shapiro already sees signs of a recession as early as 12 months from
now.

Add geopolitical risk, the Nov 5 th deadline for the Iran oil sanctions,
and growing mid-term political turmoil within the US itself, and perhaps
the Fed should reconsider its announced path. Over the last month,
Bitcoin has been stable while the DJIA has lost almost 7% --equivalent
to 25bps of monetary tightening. The claim that the real economy is
separate from financial markets ignores the wealth effect on consumers,
half of whom own stock. US markets in turn influence global markets: the
Fed should no longer be naïve enough to think that it is making monetary
policy for the US alone.

My take is that the Fed Chair Jay Powell is not primarily concerned with
inflation, or global markets, but with resource utilization in the form
of employment rates (key Fed research paper below) and interest rates
that could lead to debt market distortions. Powell after all is not an
economist, but a lawyer who dealt directly with the consequences of Too
Big to Fail. At the same time, Vice-Chair Richard Clarida had some
interesting things to say about employment having room to grow. So with
both Fed mandates, inflation and employment in a state of post-crisis
theoretical flux, markets are right to be confused.

Last week two former Fed chairs, 92-year-old Alan Greenspan and 91-year
old Paul Volker jumped in and questioned the 2% inflation target. While
some deride President Trump for jawboning Powell, they both revealed
that they were subject to summons from the White House when interest
rates rose. You'll find a link to the Greenspan talk below. Volker's
book will be released this coming Tuesday.

Perhaps it is time to end forward guidance and pause to see which levers
are actually working to regulate the economy. The broader implications
could be that the story of US economic exceptionalism has run its
course, and data used to make monetary policy is subject to
overextrapolation and debate. If the Fed decides to err on the side of
caution in December, a pause could be seen both positively and
negatively. However, if they decide to go ahead with the rate hike as
communicated, the Fed might be seen as guilty of overconfidence - and
the Grinch who stole Christmas.

RESEARCH BY ECONVUE EXPERTS

Even at Full Employment, Expansion Has a Good Ways to Go

https://www.econvue.com/reports/michael-lewis/even-full-employment-expansion-has-good-ways-go

Michael Lewis

https://www.econvue.com/experts/michael-lewis

Why do we fear deflation? Japan has faced deflation for the past two
decades, and its economy has not fallen apart.

Data Round-Up: Inventory, Consumption Led Upside 18Q3 GDP Surprise

https://econvue.com/reports/michael-lewis/data-round-inventory-consumption-led-upside-18q3-gdp-surprise

Michael Lewis

https://econvue.com/experts/michael-lewis

Real GDP rose +3.5% in 18Q3, slightly stronger than consensus and FMI
estimates. The upside surprise was driven by inventories, consumption
(especially services/health care) and government. Payback in inventories
will likely subtract more than -0.5% from the 18Q4 topline. Still, FMI
is looking for +2.5% real growth for 18Q4, which would make +3% for the
year.

The Latest Outlook on the Economy: Another Canary Swoons

https://econvue.com/pulse/latest-outlook-economy-another-canary-swoons

Robert Shapiro

https://econvue.com/experts/robert-shapiro

For several months, I've written about growing signals of a possible
recession perhaps 10 to 15 months from now. The yield curve has
flattened dramatically, because global investors are nervous about our
near-term prospects. Investment growth after depreciation has slowed,
even with Trump's costly tax cuts. Inflation has picked up some steam,
and interest rates have risen accordingly. Most important, productivity
has been virtually flat for three years, and the inflation-adjusted
earnings of a typical household have fallen now for more than a year.

No Time to Waste: Revolutionizing Healthcare Data Collection, Curation
& Application

https://econvue.com/pulse/no-time-waste-revolutionizing-healthcare-data-collection-curation-application

David W. Johnson

https://econvue.com/experts/david-w-johnson

Healthcare data wants to be free, but it is oppressed. Entrenched
oligarchs trap information within closed, centralized systems that
prioritize revenue collection, misuse resources and tolerate medical
error. Data gasps for breath as it fights to break into curated systems
that produce insight.

STORIES IN OUR SPOTLIGHT

Fed Policy & The U.S. Economy

Pause interest-rate hikes to help the labor force grow

http://content.davidhaleweb.com/acton/ct/3037/s-0202-1810/Bct/l-sf-cl-701C0000000UEmJIAW-0024/l-sf-cl-701C0000000UEmJIAW-0024:15c/ct9_1/1?sid=TV2%3APrnZPR0r6

Neel Kashkari 10/25/2018 Wall Street Journal

The president of the Minneapolis Fed adds to the growing chorus asking
the Fed to pause in December. Kashkari however will not be a voting
member until 2020.

Y

http://content.davidhaleweb.com/acton/ct/3037/s-0202-1810/Bct/l-sf-cl-701C0000000UEmJIAW-0024/l-sf-cl-701C0000000UEmJIAW-0024:15c/ct10_1/1?sid=TV2%3APrnZPR0r6

es and yes to a Fed pause

http://content.davidhaleweb.com/acton/ct/3037/s-0202-1810/Bct/l-sf-cl-701C0000000UEmJIAW-0024/l-sf-cl-701C0000000UEmJIAW-0024:15c/ct11_1/1?sid=TV2%3APrnZPR0r6

10/27/2018 Twitter thread with Jared Bernstein and Jason Furman:

I was comfortable with the Fed hiking again in Dec. But the market just
did it for them: the 5% fall in the S&P and 10 bp rise in the 10 yr are
roughly equivalent to a 25 bp increase in the FFR. Also the fact that
inflation is surprising to the downside says hold off for now.

Outlook for the U.S. Economy and Monetary Policy

https://www.federalreserve.gov/newsevents/speech/clarida20181025a.htm

Vice Chairman Richard H. Clarida 10/25/2018 Board of Governors of the
Federal Reserve System

This outlook for the labor market also reflects my view that the
structural, or longer-run, rate of unemployment‑‑that is, the
unemployment rate consistent with stable inflation over the longer
run--may be somewhat lower than I would have thought several years ago.
What this means is that, even with today's very low unemployment rate,
the labor market might not be as tight‑‑and inflationary pressures not
as strong‑‑as I once would have thought.

Some Implications of Uncertainty and Misperception for Monetary Policy

https://www.federalreserve.gov/econres/feds/files/2018059pap.pdf

Christopher Erceg, James Hebden, Michael Kiley, David L´opez-Salido, and
Robert Tetlow 10/2018 Board of Governors of the Federal Reserve System

We find that a notable response to the unemployment gap is typically
beneficial, even if that gap is mismeasured. Even when the dynamics of
inflation are governed by a 1970s-style Phillips curve, meaningful
response to resource utilization is likely to turn out to be worthwhile,
particularly in environments where resource utilization is thought to be
tight to begin with and inflation is close to its target level.

The Fed could be wrong about inflation and rate hikes

http://content.davidhaleweb.com/acton/ct/3037/s-0202-1810/Bct/l-sf-cl-701C0000000UEmJIAW-0024/l-sf-cl-701C0000000UEmJIAW-0024:15c/ct14_1/1?sid=TV2%3APrnZPR0r6

Ed Yardeni 10/24/2018 Marketwatch.com

The Fed could be wrong about inflation and rate hikes - "Could it be
that Fed officials have too much free time on their hands, and that's
why they concoct all sorts of cockamamie theories?"

No bad economic data or earnings disappointments or excessive valuations
that would explain this market sell-off

http://content.davidhaleweb.com/acton/ct/3037/s-0202-1810/Bct/l-sf-cl-701C0000000UEmJIAW-0024/l-sf-cl-701C0000000UEmJIAW-0024:15c/ct15_1/1?sid=TV2%3APrnZPR0r6

Patrick Chovanec 10/24/2018 Twitter

I can see potential issues on the horizon, weak spots, vulnerabilities,
but nothing that spells impending recession.

Comments on monetary policy at the effective lower bound

http://content.davidhaleweb.com/acton/ct/3037/s-0202-1810/Bct/l-sf-cl-701C0000000UEmJIAW-0024/l-sf-cl-701C0000000UEmJIAW-0024:15c/ct16_1/1?sid=TV2%3APrnZPR0r6

Janet Yellen 9/14/2018 Brookings Institute

By keeping interest rates unusually low after the zero lower bound no
longer binds, the lower-for-longer approach promises, in effect, to
allow the economy to boom following a zero lower bound episode .

Lessons for the future: A history of capitalism in America

http://content.davidhaleweb.com/acton/ct/3037/s-0202-1810/Bct/l-sf-cl-701C0000000UEmJIAW-0024/l-sf-cl-701C0000000UEmJIAW-0024:15c/ct17_1/1?sid=TV2%3APrnZPR0r6

Alan Greenspan & Adrian Wooldridge 10/18/2018 Video by Council on
Foreign Relations

At about 40:00 Greenspan compares Bitcoin to the Continental dollar as a
fiat currency, talks about gold, questions inflation targets, and
reveals that more than one president yelled at him about raising
interest rates.

Housing market is raising serious red flags

http://content.davidhaleweb.com/acton/ct/3037/s-0202-1810/Bct/l-sf-cl-701C0000000UEmJIAW-0024/l-sf-cl-701C0000000UEmJIAW-0024:15c/ct18_1/1?sid=TV2%3APrnZPR0r6

Lakshman Achuthan 10/15/2018 Bloomberg

The Fed has downplayed falling home prices nationwide and overestimated
future inflation based on employment levels. Could something happen to
stop a December rate hike? The Fed should be reactive rather than
proactive, given so many uncertainties--stealth QE taper perhaps better.

FinTech

Fintech, inclusive growth and cyber risks: Focus on the MENAP and CCA
regions

http://content.davidhaleweb.com/acton/ct/3037/s-0202-1810/Bct/l-sf-cl-701C0000000UEmJIAW-0024/l-sf-cl-701C0000000UEmJIAW-0024:15c/ct19_1/1?sid=TV2%3APrnZPR0r6

Inutu Lukonga 9/2018 IMF Working Paper

In the Middle East, North Africa, and Eurasia, places that would benefit
most from Fintech, uptake is slow.

China

China's coming financial crisis and the national security connection

http://content.davidhaleweb.com/acton/ct/3037/s-0202-1810/Bct/l-sf-cl-701C0000000UEmJIAW-0024/l-sf-cl-701C0000000UEmJIAW-0024:15c/ct20_1/1?sid=TV2%3APrnZPR0r6

Stephen Joske 10/23/2018 War on the Rocks

Another (more sobering) view of China 2025.

nly 40 million people in China will pay income tax in 2019

http://content.davidhaleweb.com/acton/ct/3037/s-0202-1810/Bct/l-sf-cl-701C0000000UEmJIAW-0024/l-sf-cl-701C0000000UEmJIAW-0024:15c/ct21_1/1?sid=TV2%3APrnZPR0r6

Driehaus Capital 10/22/2018 Twitter

So income tax paying citizens will be less than 4% of China's total
population—vs 43% in the US. Long term unsustainable, but will increased
consumption become sticky behavior?

'Xi is killing China's private sector' narrative, this trend is worth
watching

http://content.davidhaleweb.com/acton/ct/3037/s-0202-1810/Bct/l-sf-cl-701C0000000UEmJIAW-0024/l-sf-cl-701C0000000UEmJIAW-0024:15c/ct22_1/1?sid=TV2%3APrnZPR0r6

Simon Rabinovitch 10/18/2018 The Economist via Twitter

State-owned enterprises in China are lagging behind the private sector.

An impressive, unnecessary, multi-city bridge

http://content.davidhaleweb.com/acton/ct/3037/s-0202-1810/Bct/l-sf-cl-701C0000000UEmJIAW-0024/l-sf-cl-701C0000000UEmJIAW-0024:15c/ct23_1/1?sid=TV2%3APrnZPR0r6

Erin Hale 8/18/2018 CityLab

The 34-mile Hong Kong-Zhuhai Bridge officially opened by Xi Jinping on
his southern tour (Yes, we are related.)

People's Daily's courageous attempt at using infographics to explain Xi
Jinping Thought. What does this look like to you

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?

Wang Xiangwei 10/17/2018 Twitter with link to original article in
Chinese:
https://app.peopleapp.com/Api/600/DetailApi/shareArticle?type=0&article_id=2667723

https://app.peopleapp.com/Api/600/DetailApi/shareArticle?type=0&article_id=2667723

China may have $5.8 trillion in hidden debt with ‘titanic' risks

http://content.davidhaleweb.com/acton/ct/3037/s-0202-1810/Bct/l-sf-cl-701C0000000UEmJIAW-0024/l-sf-cl-701C0000000UEmJIAW-0024:15c/ct26_1/1?sid=TV2%3APrnZPR0r6

Eric Lam 10/16/2018 Bloomberg

China waited too long to institute local property taxes due to internal
opposition from multiple property owners, many of whom are corrupt
officials and currently have zero holding costs.

China must release the renminbi

http://content.davidhaleweb.com/acton/ct/3037/s-0202-1810/Bct/l-sf-cl-701C0000000UEmJIAW-0024/l-sf-cl-701C0000000UEmJIAW-0024:15c/ct27_1/1?sid=TV2%3APrnZPR0r6

Yu Yongding 10/16/2018 East Asia Forum

Fear of floating-is the Chinese exchange rate mechanism about to change?
Rather than a managed devaluation, will the PBoC reembark on the
untethering first attempted in August 2015? Leading Chinese economist Yu
Yongding elucidates.

Trump, China, and Ah Q

http://content.davidhaleweb.com/acton/ct/3037/s-0202-1810/Bct/l-sf-cl-701C0000000UEmJIAW-0024/l-sf-cl-701C0000000UEmJIAW-0024:15c/ct28_1/1?sid=TV2%3APrnZPR0r6

Kerry Brown 10/12/2018 the Diplomat

Even the sinuous brilliance and calculating genius of Wang Qishan,
brought back as vice president last October despite being over the
customary retirement age, has seemingly, so far, not ratcheted tensions
down .

Happy Halloween!

Lyric Hughes Hale

Editor-in-Chief

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"What's Next? Unconventional Wisdom on the Future of the Global Economy"
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