1 Big Idea: US monetary policy is no longer accommodative
The Federal Reserve releases one of its eight statements following a Federal Open Market Committee meeting. And the wide expectation is for no change in interest rates. But there are some hints to look for in monetary policy in the statement and subsequent press conference. The most important one is a signal that the Fed recognizes US monetary policy is no longer accommodative.
Pedro da Costa started this idea, writing:
Federal Reserve officials meeting this week are grappling with an important milestone in their effort to raise interest rates gradually without derailing the economy: When to tell the world that interest rates are no longer all that low — or more accurately, that monetary policy is no longer “loose.”
Economists don’t necessarily expect the Fed to move away from its statement that “monetary policy remains accommodative” in this particular release. But Ward McCarthy, Jefferies chief financial economist, sees September as likely.
Why this matters: The Fed tries to shape expectations of future policy through its statements. And one way of doing so is signalling how accommodative or restrictive it thinks present policy is.
In this rate hike sequence, the Fed has consistently messaged to markets that, while it may be raising base rates, interest rate levels still reflect monetary accommodation. When the Fed moves away from that phrasing, that would signal greater caution about future Fed policy
Deeper analysis: Right now, I am expecting the Fed to signal a solid move in favor of four rate hikes in 2018, rather than the marginal preference for four signalled in June. In that sense, the Fed is getting more aggressive. So I don’t expect it to signal greater caution.
However, look for the language in the Fed statement and watch for how Fed Chairman Powell talks about how accommodative the Fed is being. The conventional view is that looser bank lending standards and higher asset prices are signs of looser financial conditions against which monetary policy acts. But, to the degree lending standards are looser due to debtors locking in payments before rates go higher, an increase in lending would signal tighter financial conditions.
2. Apple earnings were less robust than meets the eye
The market was pleased with what Apple delivered in its latest earnings report released after the close of trade yesterday. Revenue was up 17% and earnings per share increased a whopping 40% on the back of prodigious share buybacks by Apple. Non-US sales volume is now 60% of Apple revenue. All of these numbers are stellar.
But, unnoticed by the market, Apple has lost its position as the second largest handset maker to China’s Huawei. IHS and Strategy Analytics believes that Huawei sold more than 15% of global smartphone market in the second quarter, overtaking Apple, which sold 12%. Samsung is still top dog with a near 20% share.
Why this matters: Apple is relying on price instead of volume to maintain revenue growth. Earnings growth is boosted even more by share buybacks. But the underlying growth in handset sales is over for Apple. And the company will need to find growth in new ways. Given the budding trade war between the US and China and Apple’s need to better penetrate the Chinese market, this puts the company in a more delicate position than commonly recognized.
I will have a separate post on Apple later today.
3. Are stock buybacks hurting the US economy?
Speaking of buybacks, Annie Lowrey has a piece up over at the Atlantic asking whether stock buybacks are good for growth. Here’s what she’s looking at:
Stock buybacks are eating the world. The once illegal practice of companies purchasing their own shares is pulling money away from employee compensation, research and development, and other corporate priorities—with potentially sweeping effects on business dynamism, income and wealth inequality, working-class economic stagnation, and the country’s growth rate. Evidence for that conclusion comes from a new report by Irene Tung of the National Employment Law Project (NELP) and Katy Milani of the Roosevelt Institute, who looked at share buybacks in the restaurant, retail, and food industries from 2015 to 2017.
Their new paper contributes to a growing body of research that might help explain why economic growth is so sluggish, productivity so low, and increases in worker compensation so piddling, even as the stock market is surging and corporate profits are at historical highs. Companies are working overtime to make their owners richer in the short term, more so than to improve their longer-term competitiveness or to invest in their workers.
Why this matters: we still haven’t ended the debate about so-called secular stagnation, despite the 4%+ growth the US economy delivered last quarter. The Fed, for one, still sees long-term potential output growth around the 2% mark. And that’s a downshift from years gone by. The question, especially given Trump’s claims we can have 3% growth, is what is holding us back.
Deeper analysis: The Trump Administration’s view seems to be that lower taxes are the panacea. We saw a huge tax cuts skewed heavily toward corporations and the rich in December. And now, despite the Republican Congress worried about optics during midterm elections, Treasury Secretary Steve Mnuchin is studying ways to increase capital gains by adjusting them for inflation. 97% of the gains from doing so would accrue to the top 10% because they are the ones with capital gains.
Increasing stock buybacks fit neatly into this worldview because it distributes money to shareholders, who can are now taxed less and can then go and invest that money back into the economy. But the Roosevelt Institute analysis suggests this is the wrong way to increase growth. It delivers over the short-term, but it fails to boost growth longer term.
4. Some figures thoughts on student debt
Yesterday I tweeted the headline from a CNBC article published on Friday that claimed that 1 in 8 divorces was “caused” by student debt.
1 in 8 divorces is caused by student loans – CNBC https://t.co/dZLqlWnOT9
— Edward Harrison (@edwardnh) July 31, 2018
This is a highly contentious framing. Calling student debt a contributing factor to divorce makes more sense to me. I see the survey showing student debt as a factor in divorce as a signpost for how debt and finances stress relationships, contributing to conflict. In fact, the way the article frames this makes more sense:
More than a third of borrowers said college loans and other money factors contributed to their divorce, according to a recent report from Student Loan Hero, a website for managing education debt.
Why this matters: People talk about millennials as being uniquely challenged by high student debt burdens. In this narrative, it not only creates marital stress but also prevents them from owning a home.
So I looked the numbers up. What I saw was a more nuanced picture. For example, while the average student loan debt per borrower came in at $32,731 for 2018, there is a lot of variation. 2017 figures I saw showed the median figure to be $17,000 in 2016, with those holding less than a Bachelor’s degree owing a median of $10,000. Those with a Bachelor’s degree had a median of $25,000. And those with a post-grad degree had a median of $45,000.
Deeper dive: So the student loan situation is tied to how much education one gets, and presumably to how much income one can earn. Student debt is one area I would watch as we hit the next downturn. The question is: how big of a problem is it? We know the aggregate figure is $1.5 trillion. But what will that mean regarding financial stress when the economy turns down?
If you’re interested, say so in the comments and I might take a deeper dive on this.
5. Koch vs Trump
The New York Times is making the Trump-Koch battle for the soul of the Republican Party out to be a lot more acrimonious than I did yesterday. I wrote that “if you read the accounts of the criticism, you can see they are measured, with some praise in other areas of policy.”
The New York Times has a starker version of events:
The Koch political network remains generally opposed to many Democratic policies and does not want to see leaders like Nancy Pelosi, the House minority leader, return to power if the Democrats triumph in the midterms. But those who know Mr. Koch’s thinking said that his criticism of Mr. Trump reflects the vast political and personal gulf between the two men. They also echo the widely held beliefs of many conservatives who worry that Mr. Trump is inflicting long-term damage on their cause, and on the country…
Mr. Koch’s unease is a reflection of the wider discomfort and disorientation inside the Republican Party since Mr. Trump stormed the presidential primaries in 2016 and knocked out every candidate the Koch network had supported.
Why this matters: The Times’ portrayal does highlight my view that if Trump “can successfully move the Party away from their free trade agenda, then consider the Republican’s to be Trump’s Party because he will be able to lord over it without any dissent.”
We are definitely seeing a fight for the soul of the Republican Party. Trump was less stark in his deviation from mainstream Republican goals in 2017. But now he is taking an unbridled move toward the populist and protectionist rhetoric that won him the presidency.
Deeper dive: Just last night, Bloomberg reported that the Trump administration will propose raising to 25% its planned 10% tariffs on $200 billion in Chinese imports. This would be a significant escalation in the trade war with China. For their part, the Chinese are saying that Trump is “blackmailing and pressuring” them. A spokesman warned:
If the U.S. takes measures to further escalate the situation, we will surely take countermeasures to uphold our legitimate rights and interests
This will be a key issue in the mid-term elections.