What is MMT?
Every so often, I survey audiences as I travel about a topic I am studying. This week in Ohio I commenced my survey, asking “What is MMT?” and the reply was “I don’t know.” The election season is about to commence in earnest and these Ohioans are worried. An advisor told me that one of his clients plans to sell all his equity holdings in early 2020. President Trump continues to complain about Federal Reserve policy, most recently calling it “our most difficult problem.” This was before Chair Powell’s testimony this week that all but assured a rate cut later this month. Now, the Fed will be (at least) a bit less of an outlier among global central banks, which thanks to their ramped-up accommodation, have helped put $13 trillion of negative-yielding sovereign bonds in the global marketplace. Bring on more, top Trump economic adviser Larry Kudlow seemed to say this week in praising U.S. Rep. Alexandria Ocasio-Cortez (AOC) and her suggestion during Powell’s appearance that the old standards of worrying about inflation, money supply and deficits no longer apply. Given the nominations of Christine Lagarde as Draghi’s successor at the European Central Bank and both Chris Waller and Judy Shelton to the Fed—Evercore ISI dubbed the choices, “the March of the Doves”—there’s little reason to expect this dovishness to end. All of this easing has the debt of many countries going up even as yields are negative, as if there is no problem in doing so. This in essence is what Modern Monetary Theory (MMT) is all about. The in-vogue populist policy at the heart of AOC’s Green New Deal says deficits don’t matter because governments can just print all the money they need. And the U.S. seems to be on that path, with the fiscal 2019 deficit projected to hit $1.1 trillion, the highest since 2012. Trillion-dollar deficits as far as the eye can see. (Now I understand Kudlow’s comment.) Who cares??!! MMT!
Powell mentioned the trade issue eight times in his testimony to Congress this week and, during Q&A, inadvertently suggested the Fed is facing an existential crisis. He expressed concern that if inflation gets too close to zero, the benchmark funds rate also will be too close to zero, leaving policymakers little room to ease during the next recession. That existential threat helps to explain why Fed officials continue to believe their easing policies will boost inflation. You would think policymakers by now would realize this hope may be unattainable amid demographics, technological disruption and other disinflationary forces. Fed “put” optimism is being driven by historical evidence that indicates Fed cuts in a non-recessionary environment tend to generate double-digit market gains. But this often disappears when earnings-per-share (EPS) growth falls below zero, as some think could happen in Q3. Others see an improving outlook based on recent earnings conference calls, so even if Q2 EPS growth comes in at consensus 1% year-over-year (y/y) growth, rising forward estimates could drive more market gains. Still, consensus favors odds of a near-term pause or consolidation amid signs that stocks are overbought and the seasonally weaker August-September period just weeks away.
Any conversation about the level of long rates, including discussions about the usefulness of the yield curve as a recession predictor, has to start with the question, why is the term premium so low? (Term premium is the extra yield investors seek above short-term Treasuries to offset the risk of locking money up in longer-term instruments.) Deutsche Bank can think of many reasons, including quantitative easing, a global savings glut and new rules requiring insurers, pensions and banks to hold more bonds. This may explain why bond-market pricing is playing a bigger role in driving policy decisions, raising the risk that monetary policy—in the words of former Chair Bernanke—“degenerates into a hall of mirrors” and takes the funds rate far away from the level justified by economic fundamentals. In discussing MMT, Strategas recalls a letter from President John Adams to John Taylor in 1814: “There never was a democracy yet that did not commit suicide.” While it is true we can spend money we don’t have, it also is true that if this were a reliable path to prosperity, no country would ever lose its reserve currency status. Civilizations based in Athens, Rome and elsewhere all learned this painful lesson the hard way. In this way, there’s nothing particularly modern about MMT. No one running for president in 2020 will tell you that, human nature being what it is, but Washington will overextend its exorbitant privilege too, some day. The question is when. Promising unlimited government spending without any concern for how we might pay for it will only hasten our loss of reserve currency status. Perhaps it will only be at that point, Strategas concludes, that some learn that “free” isn’t a policy—it’s a bribe.
- ‘What trade war,’ consumers ask Bloomberg said consumer comfort rebounded last week to its highest level since December 2000, while a Bank of America analysis found uncertainties posed by the U.S.-China trade war aren’t even showing up on consumers’ radars, even in farmland and manufacturing regions that have been impacted. This bodes well for spending in the second half, which based on a Redbook's weekly survey, got off to a good start in early July, with same-store sales up 6.2% y/y. Mortgage purchase applications also rose again and are up 6% y/y.
- The worst may be over Calling Q2’s slowdown a “pause that refreshes,’’ Cornerstone Macro says lower interest rates (importantly, including corporate bond yields), more dovish global central banks, the hook down in corporate bond spreads and the steady/slightly weaker dollar likely will help boost U.S. and global growth. The health of the U.S. economy is most clearly seen in the rebound in, and breadth of, job growth, it says. OECD composite leading indicators also suggest the second half could see stabilization as global economic fundamentals are in good shape.
- Boomers won’t let inflation become a problem One factor keeping wages from accelerating despite the tight labor market: aging boomers. The participation rate for the 65+ group is at a record 20%. There are well over 1.5 million more workers in the over-65 pool than just two years ago.
- Business optimism softens The National Federation of Independent Business (NFIB) monthly small business optimism survey declined in June for the first time in five months on weaker sales and earnings trends. Respondents said they curtailed plans for capital expenditures. Conference Board CEO Confidence held at its second-lowest level in 10 years amid “trade and traffic uncertainties and signs of slowing global economy.”
- Might the Fed be one and done? Selling prices in the NFIB report rocketed to their highest level since November 2006 and, if sustained, would be consistent with core CPI inflation reaching 2.7% by next spring, well above what the Fed has suggested it would tolerate to help lift inflation expectations. Core PPI and CPI rose more than expected in June, with the former up 2.3% y/y and the latter up 2.1% y/y, the most since January 2018.
- Contrarian negative Like the rallies that ended in October and April, this global stock market advance has produced excessive optimism. Up a fifth straight week, the bull/bear ratio is at a high for this year. Ned Davis’ proprietary measure of optimism is near its highest level on record.
FANGs on hold Despite ongoing buzz, FANG stocks—the acronym for tech giants Facebook, Amazon, Netflix and Google (and parent Alphabet)—haven’t outperformed the S&P 500 as a group since early 2018. At its peak last year, FANG represented 10.5% of S&P market cap vs. 9.9% now. FANG forward P/E is 16, vs. 17.2 for the entire S&P.
Gold is an MMT fan Gold is basing at its highest level in six years on good monthly momentum, suggesting it will work higher. Wolfe Research believes the metal will make a new all-time high in this central bank lunacy/negative interest-rate cycle.
I’m still going to recycle The world’s oceans would still be polluted even if U.S. residents became hyper-conscious recyclers. Why? Because 90% of the plastic found in the world’s oceans is traced to eight rivers in Asia and two in India, according to a 2017 study in Environmental Science & Technology.