OMG! What a wonderful lunch. Nine people total in a private room at a restaurant in Punta Gorda. Martin Barnes organized it, and Danny Blanchflower seeded the idea. Joining were Tim Dalton, Ned Davis, Bob Eisenbeis, Jeff Saut, and a certain ancient one who must remain anonymous but who calls himself “economist 63,” and another one who calls himself the “Swiss Gnome,” and, lastly, me. Travel was all by car. Punta Gorda was the selected as the halfway point between Naples and Tampa. Three others couldn’t make it. We decided to give them another chance at a dirty dozen luncheon next year.
We agreed to publish takeaways if we would be careful about attributions. We laughed about how that was like the dot plots where Feddies contribute but don’t reveal who is the producer of the dot.
Takeaways:
1. The talk about the Fed was really driven by the two former central bankers in the room: Blanchflower and Eisenbeis. But no one could recall any time in history when the Fed presidents outvoted the governors on the FOMC. Also noted was the lack of sitting governors’ experience in challenging staff projections. Fed policymaking by staff forecasts is dangerous when the driver is a Phillips curve model. Most agreed that there are well-trained regional bank presidents who can challenge the staff, but there are not enough governors in place to do it. The fact that the Board of Governors is so vacant and that the politics are so nasty, hampers the ability of the Fed. Congressional and presidential politics are hurting the central banking functions of the United States. This was a nearly unanimous view.
2. There was also talk at the table about the sequence that had Williams in play for a governor spot and now as the new president of the NY Fed. There was lots of talk about why Trump hasn’t filled the vacant governors seats and why the Goodfriend appointment is trapped or blocked in the Senate. The conclusion is that Williams at the NY Fed is in an even stronger position than as a governor when it comes to policymaking. NY has a special standing on the FOMC. Some were silent on this issue, so it was not clear there was unanimity.
3. Politics were discussed, of course, and the views ranged widely, but all were polite. The bottom line was a real mix. Many wished that Trump would behave in a better way and felt that his antics hurt him. Others said they like his policies even as they dislike him. Some worried about the consequences of extremes in behavior, including risk of a war. Others said that they wouldn’t vote for an old-line Democrat, and they thought that sentiment was the reason why the country rejected HC and picked DT. What would happen at the midterm if the Dems took the House? Mixed opinions again. A few thought the Repubs would hold the House. Others said it was still early and there are a lot of things that could change the outcome.
4. The Senate was seen as much more problematic, and there wasn’t much support for the notion that the Senate will swing to a Democrat majority.
5. Jeff was decidedly the most bullish among the group and argued that another 7 years or so remain in this bull market. He noted how so many investors do not remember the long bull market cycles of the past. The most pessimistic in the group see a recession in less than two years; that would hurt the earnings growth story. Most think that a recession is a few years away. The common view was that repatriation (which fuels buybacks), the fiscal stimulus (tax cuts), and gradualism by the central banks mean a few more years of higher stock prices, with inflation and much higher interest rates a future worry, if they come at all. Estimates of S&P 500 earnings for 2019 were centered at $170, with a band of maybe $5 on either side. All agreed that if the earnings momentum growth slows, the stock market will stumble. Few expect it to slow.
6. The gold bug in the room was bullish on gold prices for next year. There was little enthusiasm for the gold discussion. Hmmm… Maybe it’s time to own more gold?
7. Lots of opinions about trade and trade wars and whether this is a new “cold war” – or is it just lots of bluster? Many remember the stories of Smoot–Hawley in the Depression era. A few cited data. Clearly, the folks in the group have been diving deeply into the trade issues. And this group knows how dangerous a trade war can be. One said that Smoot in the ’30s had the ultimate effect of cutting both exports and imports in half in only four years. No one disputed that.
8. There was a really mixed analysis of banking systems around the world. The US’s is strongest. Europe will reveal how weak their banking system is when they have the next recession. China has a troubled system, and several argued that you don’t become a world reserve currency as a communist country with a troubled banking system.
9. Ned talked about the low savings rate and produced a chart to back up his argument. There was mixed opinion about how much dissaving is taking place when the deficit is heading for a $1 trillion number.
In the end this was a sobering gathering, notwithstanding the diverse and lively opinions. It was a welcome gathering of old and new friends for candid conversation and exchange of views. Sort of reminds me of one of our fishing trips. I looked around and saw that half the group had been to Camp K, with several planning to attend this year.
Thank you to Martin and Danny for the idea. In good health let’s do it again in 2019. BTW, the collective age of the nine-person group is about 675 years.
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