Federal Reserve Chairman Jerome Powell testifies during a House Financial Services Committee hearing on “Monetary Policy and the State of the Economy” in Washington, July 10, 2019.
Erin Scott | Reuters
All eyes in the financial world turned to Capitol Hill this week as Federal Reserve Chair Jerome Powell gave his semi-annual testimony. In his opening statement Powell said, “It appears that uncertainties around trade tensions and concerns about the strength of the global economy continue to weigh on the U.S. economic outlook. Inflation pressures remain muted.”
What the markets heard was, “Ice cream for breakfast! Candy for everyone!”
The markets clearly believe a rate-cut regime is just around the corner, but is that, in the long-run, the best for the economy?
Pundits assert a rate cut is needed as “insurance” against a potential downturn in the economy foretold by the ongoing yield curve inversion. Although the widely watched 2- to 10-year part of the curve is still positive (though narrowing and now about 20 basis points) the 3-month T-bill has yielded more than the 10 year T-note for seven consecutive weeks after briefly inverting in March. The last nine recessions have been preceded by yield curve inversions. Yet over that time there have been ten yield curve inversions. In 1965/66 the yield curve inverted and there was not a recession immediately following.
History does not repeat itself, but there are similarities to today. Powell may be well advised to follow the path of his predecessor, William McChesney Martin, who stood firm against a president demanding monetary policy easing, and ultimately Chair Martin presided over the longest economic expansion in US history up to that time.
Presently, prices are stable and we are effectively at full employment: the dual mandate of the Fed. So why is Powell being accosted by the President and the markets demanding rate cuts? Shouldn’t we throw a parade and declare victory?
‘Crash and burn’
There are limits to monetary policy, as Powell noted when questioned by Rep. Hollingsworth this morning. Fiscal policy is needed to create growth and inflation. The president seems to measure the economy by the stock market, and the markets want low interest rates. When yield is scarce, there are no alternatives to stocks for investment, and as we all know, as demand increases, so do prices. Thus, lowering rates naturally leads to repricing the markets higher. The President has said that if Fed didn’t raise rates then the Dow would be up as much as 10,000 points. Honestly, that’s probably a pretty good guess – we would likely see a bubble develop and stocks trade at 25 times earnings. But bubbles burst. And as a long-term investor, I would much rather see slow and steady growth tied to earnings and balance sheet strength than a fast crash and burn.
History gives Powell one interesting precedent. In 1965, unemployment stood at 4.0% and inflation was 1.6%. In May of that year, then Fed Chair William McChesney Martin made a speech decrying a regime of “perpetual deficits and easy money” as creating an environment that could produce a bubble like that of the 1920s. President Johnson was furious, and in June asked his Attorney General Nicholas Katzenbach if he could fire Martin. (The answer, as repeated by Powell this week was “nope”.)
The yield curve inverted in December of 1965 with the 1-year T-note yielding more than the 10-year yield. The 90-day T-bill would soon follow. Faced with low unemployment, low inflation, and a hostile President who wanted lower rates, McChesney Martin advocated in December’s Fed meeting to raise rates. And the board voted 4-3 to do so.
Johnson’s anger reached a new level and on December 6, Martin flew to Texas to meet with the President. The often repeated and never denied legend is that when President Johnson and Chair Martin returned to Johnson’s ranch, the President physically assaulted Martin, pinning him up against the wall and demanding a change in policy.
Martin did not relent.
Creating a bubble
The yield curve remained inverted through 1966. A credit crunch ensued in August, leading to a decline in the Fed Funds rate, and at the end of the year, Martin’s Fed lowered the discount rate back to the mid-1965 levels. Yet the recession did not come. Indeed, inflation picked up to 2.6% and unemployment dropped to 3.8%. The yield curve moved positive in early 1967, and when a recession finally came (recessions will always come) in 1970, Chair Martin had presided over the longest economic expansion in U.S. history to date.
There are salient differences in the economy of 1966 to today, not the least that per capita GDP, in real terms, is roughly four times larger. Companies were aggressively expanding capital expenditures in 1966 in spite of rising rates then, while they are continuing to delay capex today in spite of declining rates. Yet, the central lesson of 1966 might be relevant: The Fed should remain independent, and regardless of pressure from the markets, from corporate America, from the President, and now from the punditry, follow the data for the best long-term interests of the economy and the country.
My concern (not prediction, but concern) is that a July rate cut in the face of a still healthy economy will create the exuberance and bubbles from which crashes, and crises, arise. Rather than expecting monetary stimulus to generate more business investment, it’s more realistic to think that interest-rate cuts will cause higher asset prices and more debt. Recessions are caused by financial imbalances and a rate cut could be the trigger for a recession rather than insurance against it.
We all want candy. But Uncle Jay might need to keep the jar locked up for our own good.
House passes Hong Kong rights bill amid Trump China trade talks
Pro-democracy supporters hold their phone’s flashlight in a rally to show support for students at The Hong Kong Poytechnic University on November 19, 2019 in Hong Kong, China.
Anthony Kwan | Getty Images
The House passed a pro-Hong Kong rights bill on Wednesday, putting President Donald Trump in a bind as he tries not to roil high-stakes trade talks with China.
The chamber approved a measure that aims to protect human rights in Hong Kong by a 417-1 margin amid efforts to crack down on months of pro-democracy protests. The House passed a second bill to bar the export of certain munitions to Hong Kong police by the same margin.
The Senate unanimously approved both pieces of legislation, so they head to Trump’s desk after House passage. The White House has not yet signaled where the president stands on the bills, but he could face a dilemma.
Chinese Foreign Ministry spokesman Geng Shuang said Beijing “condemns and firmly opposes” the first bill, known as the Hong Kong Human Rights and Democracy Act, according to Reuters. Trump aims not to anger the Chinese regime as he pushes for the elusive first piece of a U.S.-China trade agreement.
Congress’ move to pass the bills comes at a tricky time for Trump, who hopes to have a China trade victory to promote on the 2020 campaign trail. Major U.S. stock indexes fell on Wednesday following a Reuters report that the world’s two largest economies may not finish a “phase one” trade deal this year.
Trump did not answer shouted questions from reporters Wednesday about whether he would sign the bills. The legislation passed with near-unanimous support in both chambers, meaning Congress could override a Trump veto.
The government response to months of pro-democracy protests in Hong Kong, a semi-autonomous region, has grown increasingly violent. The demonstrations first started in response to a since scrapped bill that would have allowed extradition to mainland China.
Some members of the Trump administration such as Secretary of State Mike Pompeo have harshly criticized China’s response to the protests. Trump has said China should handle the situation itself, though he has warned harsh treatment of people in Hong Kong could derail the trade talks.
One bill passed this week would require Pompeo to say once a year that Hong Kong has enough autonomy to keep special U.S. trading consideration that helps its economy. It would also set up the potential for sanctions on people responsible for human rights abuse in Hong Kong.
The second measure would bar the sale of items such as tear gas and rubber bullets to Hong Kong police.
Asked about the trade talks earlier Wednesday, Trump said Beijing wants to strike a trade agreement more than he does. He added that he has not made a deal because “I don’t think they’re stepping up to the level that I want.”
Autonomous driving ‘hard’ when other factors are in play, Pony.ai CEO
Aerial view, view from above, drone view, or birds eye view of a highway at night.
Malorny | Moment | Getty Images
Autonomous driving in a “simple environment” is fairly easy but becomes hard to keep safe when other factors are in play, according to the CEO of self-driving start-up Pony.ai.
Echoing some of the comments he made earlier in the week, James Peng highlighted the challenges faced.
“The reason autonomous driving is so hard is because all of us, right, we are sharing the same road with AI (artificial intelligence) and we are irrational at a lot of times,” Peng, who was speaking on a panel discussion on Tuesday at the East Tech West conference in China, explained.
“So, this is the task: where autonomous driving in a simple environment is fairly easy, it can be easily done, but if you’re adding the irrationality of all the other vehicles, pedestrians, then it becomes very hard to keep it safe,” he added.
Around the world, the last few years have seen a range of tests and developments take place in the autonomous vehicle sector.
At the end of October, for example, the Volkswagen Group announced the creation of a subsidiary called Volkswagen Autonomy (VWAT), with the German car giant saying it planned to “make autonomous driving market-ready.”
With offices in Munich and Wolfsburg, Volkswagen said that VWAT would aim to “bring a self-driving system… to market maturity.” As well as its sites in Germany, Volkswagen said it also planned to establish companies in Silicon Valley and China in 2020 and 2021 respectively.
For its part, Pony.ai, which has offices in the U.S. and China, and Hyundai recently launched BotRide. Pony.ai has described BotRide as “a shared, on-demand, autonomous vehicle service operating on public roads in California.”
On the mass adoption of autonomous vehicles, Pony.ai’s Peng sought to add some perspective to the discussion, emphasizing that tests were already underway.
“I think people tend to be super optimistic at the beginning and suddenly become very pessimistic, but I think that shouldn’t be the case either,” he argued, explaining that his firm had almost 30 vehicles that were being tested in the Nansha area of Guangzhou, even during rush hour.
“You will see the vehicles actually being able to handle complex driving situations, very, very complex driving scenarios.”
Baby Yoda is the star but it’s not perfect
The Child, popularly known as “Baby Yoda,” is a character in the new Disney+ series, “The Mandalorian”
Episodic Photos, Disney
Disney+, the $6.99-a-month streaming video service from entertainment giant Disney, launched on Nov. 12.
I’ve been using it since then, and there’s a lot to like. But there are also a few areas where Disney+ can improve the experience for users, including through security and by adding new features that would improve controls and how users find content.
Here are some thoughts on Disney+, including what’s good and what can be improved.
What’s good: Great material at a fair price
A scene from “The Mandalorian,” an original Star Wars TV series that will stream on Disney+.
Disney+ has a ton of content, including a lot of movies and TV shows that millennials and GenX grew up with and haven’t watched in years. It offers a chance for us to rewatch that content and share it with a new generation of youngsters.
I love that I can easily pull up original Mickey Mouse films, popular animated films such as “Beauty and The Beast,” “Snow White and the Seven Dwarfs,” the original “Lady and the Tramp” and “Peter Pan.” Then there’s the whole “Star Wars” series and a bunch of earlier “Star Wars” TV shows, which I have yet to dive into. In all, there are about 7,000 TV episodes and 500 films from Disney, Pixar, Marvel Studios, Lucasfilm, 20th Century Fox and National Geographic.
My favorite, though, is “The Mandalorian,” Disney’s new “Star Wars” show. I’ve watched the first two episodes, and I’m hooked. If you haven’t watched it yet, you should. It’s fun and exciting and brings some of the magic of “Star Wars” films to the small screen. Plus, it’s got this little fella:
I love that you can download content in various quality settings (to save space) to your phone or tablet for watching on the go. And you can download either over Wi-Fi or cellular, so you can save a movie quickly on the plane before your flight takes off if you don’t have Wi-Fi.
Best of all, it works: I haven’t had any issues with dropped streams or loss of quality. I don’t have those problems with Netflix, Amazon Prime Video, Apple TV+ or Hulu, either, but I have sometimes run into problems with other streaming services.
Disney+ costs $6.99 a month or $69.99 a year. It’s more affordable than Netflix, which costs $8.99 per month for the basic plan but more if you want to watch on up to four screens at the same time, which is included in the Disney+ entry-level price. Also, Disney+ sells a bundle with Hulu and ESPN+ for $12.99 per month. You can save money if you buy all three, since ESPN+ normally costs $4.99/month and Hulu with ads costs $5.99/month.
My guess is Disney+ will raise the price in a year or two after people flock to it, but for now it’s still the best deal out there.
The Disney+ (Plus) logo is seen displayed on a smartphone.
Rafael Henrique | LightRocket | Getty Images
Finally: Disney+ is one of the easiest apps to set up on third-party devices such as Amazon Fire TV. Instead of having to jump through hoops to enter your username and password in a web browser or attempt to type it out with an on-screen keyboard on the Fire TV, you just open the Disney+ app and you’re logged in. It’s a breeze, and other apps should follow suit.
What could be better: Controls, security
In this photo illustration, the Disney + logo is displayed on the screen of an Apple MacBook Pro computer on November 08, 2019 in Paris, France.
Chesnot | Getty Images
Disney+ isn’t perfect. There are some areas where it can improve the user experience.
For one, there’s no option to dive in to shows or movies and continue watching where you left off. Instead, you need to search and find the show again. Disney+ should add an area called “Continue Watching” like other competitors, including Netflix. It’s just more user friendly.
Also, some of my colleagues have pointed out that, unlike other streaming services, you can’t simply pause the stream by tapping the space bar on a computer. Disney should add this, since it’s a pretty widespread use-case for people who stream on computers.
A bunch of Disney+ passwords were being sold on the dark web recently, but Disney says it wasn’t hacked. Instead, this is probably the result of people reusing passwords that were already compromised. Disney could reduce the chances of this by adding two-factor authentication, which would send you a code to a phone to verify that it’s actually you who is logging in.
There’s a reason this may not exist yet: Disney basically tolerates password-sharing today, as the service is new and it believes people who sample Disney+ will eventually pay for it, according to an interview with The Verge. Adding two-factor authentication would make password-sharing harder.
Should you sign up for Disney+?
SOPA Images | LightRocket | Getty Images
There’s a seven-day free trial, so it’s a no-brainer. It’s worth just checking out to see what’s available, especially if you — like me — enjoy all the old content that you might have once owned on VHS but lost long ago. I think it’s worth paying for once you get past the trial. Disney did a great job here with lots of content you can download, original shows such as “The Mandalorian” and simple setup. Plus, it’s one of the cheapest streaming services out there.
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