Tag Archives: Monetary policy

04.11.25
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What Was The Purpose?

By: Russ Kamp, CEO, Ryan ALM, Inc.

I was introduced to the brilliance of Warren Mosler through my friend and former colleague, Chuck DuBois. It was Chuck who encouraged me to read Mosler’s book, “The 7 Deadly Innocent Frauds of Economic Policy”. I would highly recommend that you take a few hours to dive into what Mosler presents. As I mentioned, I think that his insights are brilliant.

The 7 frauds, innocent or not, cover a variety of subjects including trade, the federal deficit, Social Security, government spending, taxes, etc. Regarding trade and specifically the “deficit”, Mosler would tell you that a trade deficit inures to the benefit of the United States. The general perception is that a trade deficit takes away jobs and reduces output, but Mosler will tell you that imports are “real benefits and exports are real costs”.

Unlike what I was taught as a young Catholic that it is better to give than to receive, Mosler would tell you that in Economics, it is much better to receive than to give. According to Mosler, the “real wealth of a nation is all it produces and keeps for itself, plus all it imports, minus what it exports”. So, with that logic, running a trade deficit enhances the real wealth of the U.S.

Earlier this year, the Atlanta Fed was forecasting GDP annual growth in Q1’25 of 3.9%, today that forecast has plummeted to -2.4%. We had been enjoying near full employment, moderating yields, and inflation. So, what was the purpose of starting a trade war other than the fact that one of Mosler’s innocent frauds was fully embraced by this administration that clearly did not understand the potential ramifications. They should have understood that a tariff is a tax that would add cost to every item imported. Did they not understand that inflation would take a hit? In fact, a recent survey has consumers expecting a 6.7% price jump in goods and services during the next 12-months. This represents the highest level since 1981. Furthermore, Treasury yields, after initially falling in response to a flight to safety, have marched significantly higher.

Again, I ask, what was the purpose? Did they think that jobs would flow back to the U.S.? Sorry, but the folks who suffered job losses as a result of a shift in manufacturing aren’t getting those jobs back. Given the current employment picture, many have been employed in other industries. So, given our full-employment, where would we even get the workers to fill those jobs? Again, we continue to benefit from the trade “imbalance”, as we shipped inflation overseas for decades. Do we now want to import inflation?

It is through fiscal policy (tax cuts and government spending) that we can always sustain our workforce and domestic output. Our spending is not constrained by other countries sending us their goods. In fact, our quality of life is enhanced through this activity.

It is truly unfortunate that the tremendous uncertainty surrounding tariff policy is still impacting markets today. Trillions of $s in wealth have been eroded and long-standing trading alliances broken or severely damaged. All because an “innocent” fraud was allowed to drive a reckless policy initiative. I implore you to stay away from Social Security and Medicare, whose costs can always be met since U.S. federal spending is not constrained by taxes and borrowing. How would you tell the tens of millions of Americans that rely on them to survive that another innocent fraud was allowed to drive economic policy?

05.30.24
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A Little History Lesson is in Order

By: Russ Kamp, Managing Director, Ryan ALM, Inc.

I continue to be surprised by the constant droning that US interest rates are too high and financial conditions are too tight. Compared to what? If the reference point is Covid-19 induced levels then you are probably right, but if the comparison is to almost any other timeframe then those proclaiming that the sky is about to fall should refer to one of the greatest decades for equities in my lifetime – the 1990s. I think most investors would agree that the 1990s provided a nearly unprecedented investing environment. One in which the S&P 500 produced an 18.02% annualized performance.

Was the economic environment of the 1990s so much better than today’s? Heck no, but let’s take a closer look. The average 10-year Treasury note yield was 6.52% ranging from a peak of 8.06% at the end of 1990 to a low of 4.65% in 1998. Given that the current yield for the US 10-year Treasury note is 4.56%, I’d suggest that the present environment isn’t too constraining. Furthermore, let’s look at the employment picture from the ’90s. If US rates aren’t high by 1990 standards, unemployment must have been very low. You’d be wrong if that was your guess. In fact, unemployment in the US ranged from 7.5% at the end of 1992 to a low of 4.2% in 1999. For the decade, we had to deal with an average of 5.75% unemployment. Today, we sit with a 3.9% unemployment rate. That level doesn’t seem too constraining, and initial unemployment claims remain quite modest.

So, current US interest rates and unemployment look attractive versus what we experienced during the ’90s. It must be that economic growth was incredibly robust to support such strong equity markets. Well, again you’d be wrong. Sure economic growth averaged 3.2% during the decade, but the Atlanta Fed’s GDPNow model is forecasting a 3.5% growth rate currently for Q2’24. This comes on the heels of a rather surprising 2023 growth rate. What else could have contributed to the 1990’s successful equity market performance that isn’t evident today? How about fiscal deficits? Perhaps the US annual deficit during the ’90s contributed significant stimulus which would have led to enhanced demand for goods and services?

I don’t think that was the case either, as the cumulative US fiscal deficit of $1.336 trillion during the 1990s, including surpluses in 1998 and 1999, is roughly $400 billion less than that which occurred in fiscal 2023 and what is predicted for 2024. Oh, my. The largest fiscal deficit during the 1990s was only $290 billion. That’s equivalent to about 2 months-worth today.

I’m confused, the 1990s produced an incredible equity market despite higher rates, higher unemployment, lower GDP growth, and little to no fiscal stimulus provided by deficit spending, yet today’s environment is constraining? Come, on. Inflation remains sticky. The American worker is enjoying (finally) some real wage growth and is gainfully employed. Rates are not too high by almost any reasonable comparison. US GDP growth is forecasted to be >3%. Where is the recession? Fiscal stimulus continues to be in direct conflict with the Fed’s monetary policy. Something that those investing during the 1990s didn’t need to worry about. Taken all together, is 2024’s environment something to be concerned about, especially relative to what transpired in the 1990s? Should the Fed be looking to reduce rates? I’ll be quite surprised if they come to that conclusion anytime soon.

05.03.24
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He Said What?

By: Russ Kamp, Managing Director, Ryan ALM, Inc.

I’d like to thank Bill Gross for his honest assessment that he just provided on the likely failure of “Total Return” bond products going forward. Here are his thoughts that were summarized in a Bloomberg Business email:

Bill Gross says his “total return” strategy—the one that revolutionized the bond market— “is dead”! Instead of just picking up steady interest payments like his peers did at the time, the co-founder of Pacific Investment Management created the firm’s Total Return Fund in 1987 to take active positions in duration, credit risk and volatility. The idea is that, more than just clipping coupons, bond investors can also benefit from capital appreciation as bond prices rise and yields fall. But in an outlook published Thursday, Gross noted what’s different now is that yields are much lower than when he first coined the concept, leaving investors with less room for price appreciation. 

We’ve been stressing this point for a long time now. Bonds should be used for the certainty of cash flows that they produce of interest and principal. Those cash flows are known and can be modeled with certainty (barring no defaults) to meet the liability cash flows of a pension plan (benefits) or foundation (grants). As Gross rightly points out, given the current level of US interest rates and inflation, just how much appreciation can be achieved, if an investor is on the correct side of a duration bet.

Capital market participants benefited tremendously during the nearly four decades decline in rates from 1981 to 2021. That move down in rates was certainly great for “total return” bond programs, but it also acted as rocket fuel for risk assets. What most market participants have either forgotten or don’t know is the fact that US interest rates trended higher for 28 years prior to the peak achieved in 1981. They are used to the Fed stepping into the fray every time there was a wiggle or wobble in the markets. Well, those days might be behind us.

Yes, US employment came in light this morning with 175k jobs being created in April when the forecast was for 240k, but that is one data point. We certainly witnessed an aggressive move down in rates during 2023’s fourth quarter only to see most of that move reversed to start 2024. Was your bond program able to get both directions correct or did your portfolio get whipsawed? Wouldn’t it be more comforting to know that you can install a cash flow matching portfolio that will SECURE the promises that have been made to the plan participants without having to guess the direction of rates? Even if one were to guess correctly, just how far will rates fall given that inflation remains sticky? Are you likely to see negative real yields?

The US economy remains robust. Fiscal policy remains easy with excessive Government spending and in direct competition with monetary policy. The labor market continues to be strong, as is wage growth. The stock market’s performance continues to support the economy. Given these realities, why should US rates plummet, which is what it would take to create an investing horizon that would be supportive of “total return” fixed income products.