Whom (or What) Do You Trust?

November 11, 2019
Whom (or What) Do You Trust, Market Commentary

Whom or what do you trust? The answer to this question is probably a strong clue as to your philosophy of life. Whom and what a person trusts centers that person’s thoughts on the role of government and his or her relationship with others. From an economic standpoint, there are likely only two answers to this question. Either you trust market forces or various government-driven systems to provide solace as to how the world should work.

If you believe market-driven forces at their core to be unfair, then you probably turn to the government for answers to social needs. If, on the other hand, you believe people, left to their own devices and decisions, will on the whole provide the best possible outcome for society, you turn to market forces for social control systems. Frankly, I believe neither solution is the single answer to social and economic issues. I stand with some good company in that view. Consider:

If men were angels, there would be no need for government. – James Madison

Since men aren’t angels, he implies that governmental control systems need to be present. On the other hand: 

Turn the Sahara Desert over to the federal government and in five years there would be a shortage of sand. – Milton Friedman 

There is wisdom in both statements. The decision as to what you trust to control people’s actions is probably both the government and market forces. The real question for most of us comes down to the balance between governmental and market-based influences. A favorite quote of one of my good friends is “Life is a careful seeking of balance.” If only our leaders in Washington accepted this mature, wise view of the world.

By my thinking, centralized, governmental control over economic decisions is at times appropriate. At other times, market forces should provide the answer to economic control. Market forces, left unfettered, is too blunt an approach for most people to accept to appropriately meet social needs.  However, a fully controlled, government-centered economic system ignores the efficiencies and growth power only market-based forces can bring forth. Don’t believe me? Ask China. Economically China was a backwater, third-world country where people were starving on the streets, until Deng Xiaoping’s market-based economic policies were enacted in the 1970s. The resulting economic growth in China is now history. So even in the case of a dictatorial, centrally controlled national economy, the inclusion of a more balanced approach toward economic bias led to an improvement in people’s lives.

With the above, our country has entered what I call the silly season, a one-year period that occurs every four years. This is the 12-month period leading up to a national election where we pick our next president and the representatives who will work in the nation’s capital. During the silly season, most politicians attempt to paint the world in black and white. I guess the reason they do this is to help people understand where they stand on the issues at hand. Most of us understand the careful seeking of balance and know the world is neither black nor white…it is grey. Very seldom is something completely good or completely bad. Like all people, politicians aren’t all good or all bad, but they tend to act in an unbalanced fashion because they are attempting to make a point by taking extreme positions. 

I believe most politicians underestimate people’s capabilities to weigh positions, to look at the world through a grey lens, rather than a black or white lens. Consequently, we as a country are oftentimes faced with extremism on the political front. Perhaps we deserve this because many of us are unwilling to consider the other person’s opinion or to walk a mile in another’s shoes.

In the past, for example, if someone disagreed with a position you take on a life issue, they considered you to be “wrong-footed” or mistaken on your view. Today, if you don’t agree with someone’s opinion, you may not consider that person’s view to be wrong. Instead, you may actually believe the person to be evil. The inability to hear and consider other opinions is, in my opinion, a sign of immaturity and ignorance. We are living through a graceless age, an age that is being fostered and nurtured by politicians on both sides of the aisle. I think there are many factors that have led to our current graceless age, but politicians and a number of media outlets have as much blame in this national malaise as anything else.

Getting back to the original question asked in the title of this piece “Whom Do You Trust?” Remember, life is a careful seeking of balance. The ability to put yourself in another’s shoes and consider another point of view, in an effort to seek balance and truth, is a sign of maturity, tolerance and wisdom.

Even as we enter this season, the economy continues to roll along. Most of the data we’ve been reviewing over during the last few months confirms our overall view that an outright economic recession is likely a ways off. As we’ve been forecasting, U.S. economic growth has been slowing all year and will probably continue to do so. 

Growth Projections

The International Monetary Fund (IMF) has lowered its expected global growth rate to 3 percent. It is instructive to understand that past global recessions have been associated with global growth rates of approximately 2.5 percent (see chart above). The world is now growing at a rate that is very close to recessionary times. The folks at the IMF believe we will see a slight upswing in economic growth next year. We will see. While we haven’t issued our official gross domestic product (GDP) growth expectation for 2020, I don’t expect the U.S. economy to show a significant uptick in growth during 2020. At the same time, I don’t expect we will see an outright contraction. Stay tuned.

The economy grew slowly during the third quarter. The trends we’ve seen during the last year or so continued during the quarter, as consumer spending was strong, while business spending was weak. Overall, the U.S. economy grew at an annual 1.9 percent clip as the economy continues to slow from the 3 percent-type growth we saw earlier.  

Dot Plot Poll courtesy of TrendMacro

Source: Dot plot poll courtesy of TrendMacro 

As economic growth continues to slow, the Federal Reserve has been busy reducing interest rates. Most remember that until December 2018, the Fed had been raising interest rates for more than two years. Then, concerns about slowing domestic and global growth overwhelmed the markets. The Fed responded by starting the current interest rate reduction cycle.

The Fed polls its own voting members by asking them where they think the federal funds rate is going to be at future year-end periods. The results of this poll are insightful, because the people voting are the same people who control the rate itself. Some say this is akin to inside information, but things change. Above find the results of the latest “dot plot” poll, which shows where the voting members believe the fed funds rate will be at year-end periods going forward.

Some quick notes from the chart:

  • How quickly they change their minds. A year ago, the average of the survey suggested the federal funds rate would be at 3.28 percent as of the end of 2020. Now, the fed funds rate at the end of 2020 is expected to be 1.88 percent. While the fed funds rate has declined by .75 percent, the changed result suggests the interest rate will be a full 1.4 percent lower than anticipated this time last year, at the end of next year—a notable change.
  • With fed funds now trading in the 1.5 – 1.75 percent range, the poll suggests that short-term interest rates won’t show a significant upward shift through the end of 2021. Apparently, the Fed members think that U.S. growth isn’t going to show a significant upward shift over the next two-year period, and likewise don’t think we will see a significant upward move in inflationary pressure.

We don’t expect to see the Fed lower rates again this year. We will see how the economy responds next year as we work our way through the silly season.  

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