2016/10/01 Commentary: Dual Dystopia?
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COMMENTARY: Saturday, October 1, 2016
Dual Dystopia?
A ‘dystopia’ is the opposite of a utopia. Among quite a few definitions involving totalitarian machinations, a dystopia is a community or society that is undesirable or frightening. That is mostly the focus of writers who create fictional societies to make a statement about negative aspects of real world governments and social environments. Yet due to combined degradation of politics in many developed countries and the lack of courage of their central banks to focus on the most critical issues, the current situation is closer to dual dystopian conditions than many observers are inclined to allow.
This is a politico-economic assessment, as politics are coming ever closer to upsetting economic performance necessary to maintain faith in free market institutions. Addressing the political side first, the ‘informed citizens’ envisioned by the United States founding fathers as necessary to maintain the democratic process have mostly vanished into the digital age vortex. This is neither a surprise any more than it was avoidable.
In the mid-1960’s a Canadian media genius actually saw the prominence of digital media coming prior to most others. Marshal McLuhan asserted that new electronic visual media would destroy existing social structures. (We remain big fans.) He died in 1980. That is interesting in light of the World Wide Web not officially coming into existence until 1989. In fact, McLuhan was using his very advanced scholastic and artistic awareness of the nature of media (going all the way back to the invention of the phonetic alphabet) to anticipate extended impact of the still fledgling US cable television system.
Why is all of this important to the now dystopian (at least in the negative proclamations of the leading US presidential candidates) sense of American society? It is due to McLuhan’s prediction that the ability of different people in the same geographic area to select only the content which agreed with their views would destroy the sense of community which used to unite neighbors. One can only imagine what he would have thought about handheld devices that constantly bombarded people with only the content they preferred from the sources they considered credible. Goodbye social structure. Hello dystopian soundbite electioneering and tabloid-style quasi-news. And there’s more…
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NOTE: Back on the evening of December 8th we posted our major Extended Perspective Commentary. That reviews a broad array of factors to consider Will 2016 be 2007 Redux? For many who believe that the US economy is really strengthening and can once again lead the rest of the world to more extensive recoveries, this may seem a bit odd.
Yet there are combined factors from many areas we have been focused on since the early part of last year which are less than constructive for the global economy and equity markets. We suggest a read if you have not done so already.
We pointed out in December in the face of another likely Santa Claus Rally this was not an actionable view during the year-end equities rally. Yet it was (and remains) important background to utilize into 2016. This is much like our major late 2006 perspective on Smooth Rebalancing? …or… The Crash of ‘07? In that instance the economic factors built up, but the actual crash was deferred into 2008. It is starting to feel this one may be deferred as well.
…as this has been used, in many cases out of necessary counterattack, to promulgate very negative campaigns against electoral rivals. And the style and 24-hour nature of the electronic press has encouraged soundbite journalism and, as an extension, electioneering. Therefore in addition to the natural apolitical nature of the US electorate, what they actually see lacks any substance on the key issues. How much can any politician really say about tax reform, regulatory restraint, etc. in 30 seconds?
Agendas versus Reality
Of course, all of this means that US politicians (and those elsewhere) can get away with promoting their agenda through broad assertions with little attention to the details of their plans. That applies to both the implementation as well as the extended consequences. That is part of the dystopian nature of the US political landscape, and likely the reason each candidate can get away with a negative view of America that feeds their mutually outlandish promotion of less than credible issues and programs.
This is important because it goes to what each might do if actually elected. As we have already covered this at length in our Wednesday Advantage Clinton post, which also includes a significant policy analysis excerpt from our August 24th Fed-ticipation post, we will be brief. The Left-influenced (thank you Bernie Sanders) Hillary Clinton economic plan is nonsense. (Paraphrased) “We are going to raise tax rates, intensify regulation and create a lot of good jobs” is a massive non sequitur refuted by every previous cycle.
While the Left may despise the rich, unless you give them (often in the form of corporate boards and management teams) an incentive to invest, there will neither be new good jobs nor the essential productivity gains and wage increases the Left says it wants. And if Ms. Clinton prevails in November, that is a clear basis for a dystopian view of where the US economy is headed (more on that below.) It also indicates why the central bank landscape will also become a dark, dystopian scene (discussed further below as well.)
Kill the Unpalatable Messenger
Unfortunately the messenger on the free market side is so damaged and in his way despicably self-absorbed and unable to remain on message that it is impossible for many to vote for him… even the classically conservative constituency. There are many on the Right who will not vote for Trump due to his narcissism. It’s always all about him. Even if his structural reform message is indeed the more constructive way forward for the US (and global) economy, it doesn’t matter if he cannot get elected.
We purposely waited until Saturday to post this assessment, because we wanted to see the first of the reliable polls after Monday’s debate. They clearly reinforce what we knew when we posted Advantage Clinton on Wednesday. Rather than review the details here, please review that for the ways in which Donald Trump was baited into digressing from his obviously superior economic discussion. That was through attacks on this positions on women and his taxes and his support for the Obama ‘birther’ movement (questioning the President’s place of birth and thereby qualification to run for the office.)
Yet it gets worse. As part of the consideration on two key audiences, there is the issue of his criticism of 1996 Miss Universe Alicia Machado, even though he owned the pageant. Two considerations here. One major election key for Mr. Trump is the necessity of attracting more Latino votes and female votes. So here he is on Monday evening spending time not on his policies, but rather defending his criticism of the Latina Ms. Machado. And worse still, his criticism was on her weight gain after winning the title!!
OK, let’s appreciate the full scope of how well Team Clinton did baiting Trump on issues that are totally toxic for him instead of policy discussion. Even the highly-informed and well-respected female FOX News host and her guest (Megyn Kelly and Dana Perino) said Tuesday evening at the end of a more extensive discussion, (Perino) “Just stop talking about women’s weight altogether. Stop!” And further, (Kelly) “If you want to increase your numbers with women, stop telling us how fat we are…”
And it actually gets worse still!! On Friday morning Trump was still going on about this. And his surrogates were as well, either supporting him or explaining away what he said. It fully overshadowed and crowded out anything he might have had to say on policy for a full four days. And this is a mere 39 days before the election.
The Polls Show It
And the polls reflect the inability of Donald Trump to advance his fortunes with the extended electorate that he desperately needs to come over to his trailing campaign. He didn’t do a thing to advance his fortunes with the very important Latino community, and as far as women… Fuggeddaboutit! A total turnoff.
The national popularity polling saw Secretary Clinton move from a one point lead to a five point lead. As far as the debate, 61% thought Clinton won versus 21% for Trump. And in the ultimately critical electoral college (based on individual state success), it is all coming down to Florida again… shades of Bush versus Gore, yet with Clinton in the lead for now. In light of the nonsensical nature of Ms. Clinton’s plan for the US economy (that remains the key driver for the rest of the world), this is indeed a very dystopian future direction.
The Debate was Dystopian
The lack of any realistic and truly upbeat vision for America on either side was highlighted in a pointed Financial Times America’s dystopian presidential debate editorial (the inspiration for the title of this post) on Wednesday. (That is our marked-up version, and we once again encourage anyone who has not already done so to subscribe now at www.ft.com.) It delivered chapter and verse on both candidates’ views and plans being out of touch with reality and any constructive way forward.
Its summary conclusion begins, “Both Mr Trump and Mrs Clinton pander to the idea that comfortable mid-20th century factory-floor jobs can simply be willed back into existence. It is a myth. The blame for America’s labour force woes and the increasingly skewed distribution of the fruits of growth are to be found at home. It is Washington, and not Beijing, which sets US tax rates.” Well said. And that last bit is especially telling in light of we have known for a long time, and is now a key focus we have shared of late.
The more ‘electable’ Ms. Clinton also has a Left-wing economic plan that will sink America further into the low growth it has suffered through for the past eight years. While this does not exactly amount to a totalitarian threat to American democracy, it does entail the government coopting even more of the economy than the already extensive expansion under Barack Obama. On that basis many Americans see it as a dystopian future indeed; a society that is increasingly undesirable or frightening.
The Economy Also Likely Worsens
Many might consider that a bit too pessimistic. Yet US and global growth and especially international trade slipping to the degree they have through last year into 2016 is a very scary sign. Even as the US equities hold up, and may head higher in the near term, the economic trend is down. As we just updated the latest views on what has become a scary unexpected slump in US imports in our September 20th FOMC Won’t Hike post, please refer to that for more detail.
Yet the downward drift of international trade has been a consistent focal point for the major NGO’s like the IMF, World Bank and especially the OECD for some time. The consistent message is that world trade falling to current levels has led to a significant global growth contraction in each of the five instances since World War II. We even highlighted it in our Letter to the Editor of the Financial Times that they were kind enough to publish seven months ago. That was on the combined impact of weaker trade along with real (GAAP versus ‘pro forma’) US corporate earnings weakness.
The Status Quo Won’t Hold
And just this morning there was a chilling view of why and how the US (and we assume global) economy cannot merely slide along with the lackluster, below normal growth seen since the bottom of the last recession. It is the worst recovery since WWII, partially due to a lack of business investment incentives. And as noted above, Ms. Clinton is determined to place even more hurdles in front of businesses’ desire to invest and hire.
While not mentioning her explicitly, in his Friday Financial Times’ Opinion the estimable Mohamed El-Erian (chief economic adviser to Allianz) notes that Yet more years of low but stable growth is unsustainable (our marked-up version once again.) His conclusion is, “The ‘new normal’ is coming to an end. The reason is simple: it has lasted for so long that it is now breeding the causes of its own destruction.”
One of his key highlights that lays the foundation for this conclusion is that, “…monetary policy is insufficiently supported by better-suited structural reform, fiscal policy and international coordination.” Further, “If the political response continues to disappoint, low growth will give way to recession… …(and) disorder.” Fairly dystopian.
The Fed Fiddles
So why might the central banks become the second part of this ‘dual dystopian’ scenario? This once again gets back to the failure of the central banks (other than the ECB) to push the political class for the structural reforms that are the very essential complement to the central banks’ extreme interest rate accommodation and Brobdingnagian Quantitative Easing (QE) programs.
See last Friday’s Infuriatingly Academic post for more background on what the central banks should be doing instead of being so invested in their advanced theories, and endless patience to see if they will actually work. This could be a case of “The Fed fiddled while the US economy burned.” The same goes for many other central banks.
It’s why the outlook for central banks that do not push for more aggressive structural reform is also dystopian. Yet it need not be that way if the rest of the central banks outside of the more clearly assertive ECB can come out of their academic cocoons. They need to more actively engage the political class with the criticism and strong suggestions on the structural reforms still necessary to create sustained growth beyond the central bank stimulus, or ineffective sporadic fiscal loosening.
However, short of that real world effort the central banks are likely to come under increasing criticism for their low or negative interest rate programs. While there is absolutely no chance that the politicians have any better idea of what to, populist sentiment is being stoked on interfering with central bank independence. And Mr. Trump is one of the worst offenders.
Foundation of Central Bank Acquiescence
The most egregious phase of this central bank lack of aggressive engagement with the political class on key issues that the pols need to address did not start with Janet Yellen. It began with Hero of the Crisis Ben Bernanke evolving into a total wimp when it came to pressing Congress to do more on key reforms to reinforce all of the Fed activity. And that was back at his mid-2012 Congressional testimony.
Instead of taking his direction from successful businessman Senator Corker (R-TN) on Congress needing to act, he went with the marching orders from Senator Schumer (D-NY), “Get to work Mr. Chairman” based on the inability of the highly partisan Congress to compromise on reforms. The whole idea of a member of the legislative branch dictating policy to a Chairman of the Federal Reserve should have set off alarm bells… and a stark rebuke from Bernanke. Yet instead Bernanke proceeded with QE3, reinforcing the central bank as a multifaceted institution capable of reviving the economy, since proved wrong.
Mario Draghi Hits a Home Run
The one central banker rebelling against more political influence he knows will ultimately be counterproductive is Mario Draghi. Even on the previous (especially German) political class criticism of the effect of very low rates (and negative deposit rate) on banks, he has been willing to bite back in style on the political class’ failure to do its part.
At the April 21st press conference, when the deposit rate had already been down at -0.40% for a while, he addressed the increasingly strident criticism from the German political class regarding the pressure on German bank earnings and other issues. He noted, “With rare exceptions, monetary policy has been the only policy in the last four years to support growth.” He was also willing to further assert that higher growth and inflation were “…the necessary conditions for the return of interest rates to a higher level than today.”
He was essentially saying that he would rather be raising rates due to strong growth and higher wages than being forced to keep them very low due to a lack of economic strength. That shut up the politicians temporarily, especially on their bizarre assertions that the ECB’s very low rates were partially responsible for the rise of the rightwing eurosceptic Alternative for Germany party. Here’s a big heads up for the German political class: Your constituents lack of job opportunities and higher wages have nothing to do with the ECB.
This Week’s Speech
Yet this week was Mario Draghi’s finest hour in both defending the ECB and goading the German political class into the necessary action that they (and all of their international cohorts) have studiously avoided so far. He strode like Daniel into the lion’s den, in this case the German Bundestag (parliament), and delivered a tour de force defense of the ECB actions, results, and especially constructive criticism of the political class’ failure and their need to get with the program.
His Working together for growth in Europe (once again our marked-up version) begins with the defense of ECB actions having prevented a worse devolution of inflation expectations into ingrained dis-inflationary expectations. He proceeds into a clear explanation of the positive effects of the ECB policies on consumer interest payments that also applies to much lower government interest payments.
Yet the coup de gras was his final section on “The need for decisive action at the national and European level.” (Why can’t other central bankers demonstrate such force and clarity on this essential effort?) He opens with the assertion, “…policy-makers across the euro area need to seize on the opportunity to deliver reforms.”
He goes on to note how raising productivity and employment are part of necessary structural reforms to reinforce easy monetary policy gains, and remind them this is NOT news... he has been saying it in every ECB press conference since early 2015!! (We note the global lack of those structural reforms is the real driver behind populist movements in Europe and the US.)
At the end of his conclusion he clearly notes that “…in order to reap the full benefits of our monetary policy measures, other policy areas must contribute much more decisively both at the national and European level.” It is both encouraging to hear this from a central banker that is focused on the real issues preventing a more robust global economic recovery, and depressing that he is the only one doing so.
Dual Dystopia
So here we have a political process in the US where the lack of ‘informed citizens’ in what has become an almost apolitical culture has led to an untenable choice. It is either an unacceptably egotistical and over confident candidate that doesn’t understand how the Federal Reserve works, yet has the right plan for incentivizing business to reinvigorate the US economy. Or a more electable and ‘predictable’ candidate who comes with tons of incompetence (based on previous failures) and a sense of entitlement and corrupt practices, who also has exactly the wrong prescription for invigorating the US economy.
This is not just a weak point on the economy not improving. As Mr. El-Erian noted in his FT Opinion noted above, there is less chance for a ‘steady as she goes’ still weak US economy due to the degree to which the ‘new normal’ is now unacceptable to a major portion of the US working age population. Either the political ramifications of continued weakness, or the potential for a US annualized GDP that has weakened to little more than 1.0% slipping into a recession will bring about more pressure on the global economy.
That is the economic background if the more ‘predictable’ candidate ends up being the ‘comfortable’ choice that still leads to further economic weakness. The lack of any likelihood the Fed will challenge the political class (ala Draghi) to deliver the essential structural reform complement to monetary policy if it has not done so already is the other side of the equation that may contribute to a very negative overall perspective.
Once again, this is not a vision of a repressive totalitarian situation in the US, even if many on the Right are concerned about expanding government insertion into many aspects of business and life. Yet it is a dual dystopian vision of a highly divided partisan government that refuses that refuses to take essential actions to improve the economy on behalf of its citizens. If that continues, it might lead to more control over the previously independent central bank that has been required to take more responsibility for the economy, which it is not equipped to fully assist.
Consider this in light of the potential societal and political disruption which might ensue, compared to what was always the case when even previously divided Congresses found a way to implement essential reforms in previous cycles. The US could easily become a society that is undesirable or possibly even frightening, at least in its inability to lead global free market democracies and its further devolution into the politics of envy.
The previously well-structured political process devolving into purely populist opposition movements, while the central bank continues to be ineffective in a manner that leads to forfeiting a significant portion of its independence is nothing less than a potential…
…dual dystopia that has the potential to feed on itself with major negative economic and societal implications.
[The Evolutionary Trend View market indications remain the same as the Market Observations updated in Wednesday’s post.]
Thanks for your interest.
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