Quick Question for Elizabeth Warren

Elizabeth Warren continues to refuse to say how much more middle class families would have to pay for her Medicare for All plan. She only says that the all-in costs won’t increase for those families compared to today’s insurance costs. However neither her primary opponents nor members of the press have yet to ask her to define the income levels for whom she perceives to be middle class. My guess is that it is lower than what most people think. Which means all-in costs will go up for those families above her definition of middle class.

Therefore her primary opponents and the press should press her on this point. Just do it!

My Amazon Review of Dennis Ross' and David Makovsky's "Be Strong and of Good Courage: How Israel's Most Important Leaders Shaped its Destiny"

A Plea for Israeli Pragmatism

Dennis Ross a seasoned American diplomat who spent the bulk of his career dealing with middle-eastern issues and David Makovsky a distinguished fellow at The Washington Institute have written an important book about the fundamental dilemma facing Israel. To them, both committed Zionists, Israel faces a choice: will it be a Jewish-democratic state without most of the occupied territories or will it be a larger democratic- binational state with all of the problems that entails? To them Israel can’t hold on to the bulk of the Palestinian population and remain a Jewish-democratic state.

The authors make a call for pragmatism on the part of the current Israeli leadership by invoking the memories of four prior prime ministers. They being David Ben Gurion who accepted the 1947 U.N. partition plan, Menachem Begin who returned the Sinai to Egypt in exchange for peace, Yitzhak Rabin who accepted the PLO as a negotiating partner and Ariel Sharon who told the settlers to give up their dreams in Gaza. All of these men were security conscious and it was their belief that pragmatism should dominate over ideology in exchange for what they believed to be a more secure Israel.

Now don’t get me wrong, Ross and Makovsky are not wild eyed peace at any price advocates. They are hard-headed realists who currently believe that very little can be accomplished over the near term in negotiating with the Palestinian Authority. Nevertheless when the time does come for negotiations they offer a series concrete proposals of what Israel, the Palestinian Authority and the U.S. can do to create an environment for an ultimate deal. These are too lengthy to go into here, but at its core the Israeli Right, which I am sort of a supporter, has to accept that the current situation is not stable in the long run if Israel is to be true to its Zionist and democratic character.

My main criticism of the book is that there are no maps. This is especially relevant to understand the geographic reality of the proposals they are making. Ross and Makovsky have made an important contribution to the Israeli-Palestinian dialogue making their book very relevant for today.

I received this book as a gift.

For the full amazon URL see: https://www.amazon.com/review/R2OBLHMQQWHY8L/ref=pe_1098610_137716200_cm_rv_eml_rv0_rv

Only the Beginning in the Trump/Ukraine Scandal

Triggered by a whistle-blower complaint, all hell has broken loose over the past two weeks as President Trump's extortion of Ukraine President Zelensky was revealed. Trust me this is only the beginning. My guess is that in the coming weeks we will hear from two very senior officials. The first one being the bane of liberals, fired national security adviser and uber-hawk John Bolton. Recall that Bolton has already been publicly critical of Trump's North Korea policy. My guess is that his lawyers are already in discussion with House Intelligence Committee staffers.

The second figure will be Fiona Hill, who recently resigned from the National Security Council staff. There she ran the "Russia Desk" and earlier wrote a biography on Vladimir Putin entitled "Operative in the Kremlin" that was previously reviewed on these pages. (https://shulmaven.blogspot.com/2019/07/my-amazon-review-of-fiona-hill-and.html) Bolton and Hill were in up to their eyeballs in Trump's dealings with both Russia and Ukraine. As they used to say in mob movies, they will sing arias before the congressional committees.

Their testimony will be important because if the House votes to impeach as it is likely to do, the Senate does not have to hold a trial. All it will take is 50 votes plus Vice President Mike Pence to acquit at the outset. Bolton, Hill and others will be necessary to make an air tight case that will force at least four Republican senators to vote with the Democrats to prevents an early acquittal.

My Amazon Review of Daniel Gordis' "We Stand Divided: The Rift Between American Jews and Israel"

Couple’s Therapy

Daniel Gordis a vice president at Israel’s Shalem College has written an important book about the growing divide between Israeli and American Jewry. Indeed both parties are in need of some very serious couple’s therapy if the longstanding relationship is to remain intact.

What distinguishes Gordis’ view is that the divide is not about what Israel does, but rather what Israel is. Simply put Israel is not a transplanted America on the eastern shore of the Mediterranean Sea. Further it is not quite the Ashkenazi culture of American Jewry, but rather it is a lot closer to the Sephardi/Arab culture of the greater Middle East.

While most American commentators focus on what Israel does with respect to the treatment of its own Palestinian population as well as its treatment of Palestinians within the territories and the rightist policies of the Netanyahu government, to Gordis the issues run far deeper. To put it bluntly, changing the Israeli government will not solve the core issues. Similarly Israeli’s view American Jews as to being completely clueless about the security situation they face.

The differences revolve around three issues:

1.     America is built on a universalist ideology (all are welcome) while Israel is built on a particularist ideology. (Zionism)

2.     America is a liberal democracy while Israel is an ethnic democracy.

3.     Many Jews in America view Judaism solely as religion while Israeli’s view Judaism as both a religion and a people.

To be sure many American Jews are very comfortable with the Israeli version of these three issues, but to those American Jews who worship at the altar of secular liberalism, these are very serious differences and it is to these Jews that Gordis has written his book.

With respect to the first two differences many liberal Jews are uncomfortable with nationalism in general and ethnic nationalism in particular. Hence no matter what Israel does, they will have a quarrel with it. These differences are exacerbated by the control Israel’s orthodox Rabbinate exercises over religious life in the country thereby estranging both reform and conservative Jews. However as long as they believe that there is peoplehood associated with Judaism the way will be open to reconciliation. Put bluntly they can agree to differ. After all demography has shifted the locus of post-Holocaust Jewry from America to Israel.

However for those Americans who view Judaism solely as a religion for which there is historical precedent (See the 1885 Pittsburgh Platform of Reform Judaism), then reconciliation becomes an extremely difficult task. To them Israel would just become another country where the Zionist project has little or no meaning. That result would be extraordinarily sad for the Jewish people.

Thus as in couple’s therapy the issue isn’t about taking out the garbage, but rather the fundamental nature of the relationship. Both Americans and Israeli’s are going to have to reconcile their competing visions of culture, democracy and religion in order to live under the same big tent. Further as an American Zionist I would say to my secular friends that there is no guarantee a secular society will remain hospitable to Jews; witness Europe. I guess they would rather support the cowering Jews of the eastern European shtetls rather than the more muscular Jew of today’s Israel.  And to my religious friends I agree that Israel should be “a light unto the nations,” but it is an imperfect state living in a very hostile neighborhood. Thus reading Gordis’ book would be a first step on the rode to a fruitful couple’s therapy.

for the full Amazon URL see: https://www.amazon.com/review/R3K6HJHKOOV2PE/ref=pe_1098610_137716200_cm_rv_eml_rv0_rv

"The Year of Living Dangerously," UCLA Anderson Forecast, September 2019

The Year of Living Dangerously[i]

David Shulman

Senior Economist, UCLA Anderson Forecast

September 2019

With his tweets of August President Trump escalated our trade war with China and attacked Federal Reserve Chairman Jerome Powell as an “enemy.” All of this occurring against a backdrop of near recessionary conditions in Europe with the potential for a Brexit disruption, Brazil and Mexico, a slowdown in China, rising geopolitical tensions in the Kashmir, the Middle-East, Hong Kong and the Korean Peninsula and a very real slowing in the U.S. economy. It seems that we are sleepwalking into a recession and perhaps quite a bit more geopolitically.

Although we are not calling for a recession over the forecast horizon, as we have noted for over a year it is very likely that economic growth will stall in the second half of 2020 as the effects of the 2017 tax cuts wane and as trade tensions exact their toll on corporate investment. On a fourth quarter to fourth quarter basis we are forecasting real GDP growth of 2.1% and 1.2% in 2019 and 2020, respectively. Indeed in the second half of 2020 growth is expected to decline to 0.4%, not quite a recession, but pretty close. (See Figure 1.) For 2021 we forecast growth to return to 2.1%.

Figure 1.Real GDP Growth, 2011Q1- 2021Q4, Percent Change, SAAR

Sources: U.S. Department of Commerce and UCLA Anderson Forecast

What are we Worried About?

We are worried about the following:

·        The escalating trade war with China.

·        The weakening of business investment in equipment and structures.

·        The negatively sloped yield curve.

·        The slowdown in employment growth.

·        The inability of housing activity to launch.

·        The stagnant stock market.

We will discuss each of these factors in turn.

Trade Shock

At the recent Federal Reserve conference in Jackson Hole, Wyoming Fed Chairman Jerome Powell noted:

   “Moreover, while monetary policy is a powerful tool that works to support

     consumer spending, business investment, and public confidence,

      it cannot provide a settled rulebook for international trade.” (Emphasis

      added)

The reason why there is no rulebook is that we haven’t experienced a trade shock since the imposition of the Smoot-Hawley tariffs of 1930. We know how that turned out. Just after Powell made those remarks, President Trump weighed in with a substantial increase in the planned tariffs on Chinese goods (Increased to 10% and 25%, valued at about $80 billion/year) that are scheduled to go into effect on September 1^st and December 15^th.  As we have argued for two years tariffs are analogous to putting grains of sands into the gears of commerce which work to reduce output and increase prices.  Indeed a recent Fed study noted that trade uncertainty lowered real GDP growth about 1% in 2019 and projected another equivalent drop in 2020.[ii] And make no mistake American businesses and consumers will bear the brunt of the tariffs. And despite all of the Administration’s heightened rhetoric the real trade deficit will continue to rise as it approaches one trillion dollars this year. (See Figure 2)

Figure 2. Real Net Exports, 2011Q1 -2021Q4, Annual Data, $Billions

                                      

Sources: U.S. Department of Commerce and UCLA Anderson Forecast

Further the introduction of President Trump’s tariffs has greatly increased the uncertainty about the durability of existing supply chains thereby dampening business investment, more on that below. The Trump uncertainty is having pretty much the same effect of the uncertainties introduced by President Obama earlier in the decade with a multitude of regulatory changes coming from the Environmental Protection Administration, the Department of Labor and the Department of Energy.[iii]

Weaker Business Investment in Equipment and Structures

In response to the rise uncertainty the growth in business investment in equipment has stalled. After increasing at a solid 6.8% in 2018 real investment in equipment is forecast to grow at somewhat less than 2% from 2019-2021 and there will be several negative quarters along the way. (See Figure 3) The 11% increase in the first quarter of 2020 is based on our assumption that Boeing will resume shipments of the now-grounded 737-MAX in that quarter. Concomitantly real business investment in structures is already in declining at a 3% annual rate and that trend is forecast to continue through 2021. (See Figure 4)  Much of the decline is due to weakness in energy related investment especially related to oil and gas development in response to a 25% decline in oil prices.

Figure 3. Real Business Investment in Equipment, 2011Q1-20121Q4F, Quarterly Data, Percent Change, SAAR

Sources: U.S. Department of Commerce and UCLA Anderson Forecast

Figure 4. Real Business Investment in Structures, 2011Q1-2021Q4F, Quarterly Data, Percent Change, SAAR

Sources: U.S. Department of Commerce and UCLA Anderson Forecast

The Negatively Sloped Yield Curve

One of the most widely used and accurate signals of an oncoming recession is a negatively sloped yield curve where the return on short-term money is higher than the return on longer term money. Not only is a negatively sloped yield curve a signal of an oncoming recession it is also a cause because it eliminates the maturity transformation arbitrage profits of the financial system thereby reducing the willingness to lend. The indicator that the Fed uses is the difference between the yield on three month U.S. Treasury Bills versus the yield on 10-Year U.S. Treasury Bonds. (See Figure 5) Yes folks, we have been there since May. (See Figure 5). Aficionados on Wall Street prefer to use the difference between the 2-Year U.S Treasury Note versus the 10-Year U.S. Treasury Bond. That too turned negative in August.

Figure 5. Slope of the Yield Curve, 10-Year U.S. Treasuries minus Three Month Treasury Bills, Apr 1982 – Aug 2019, Daily Data, Percent

Sources: Federal Reserve Board via FRED

Although we have great respect for the signal coming from the bond market, we believe that the negatively sloped yield curve this time may sending us a false positive signal. Why? In the past then the yield curve was negatively sloped there was over-building in the housing market. This cycle, if anything, there has been under-building. As a result this time we might just skate by and avoid a recession.

Another cause of the negatively slope yield curve is the pressure coming from the global bond market. As of late-August there were about $17 trillion of negative yielding sovereign debt concentrated in Europe and Japan. (See Figure 6) With limited growth prospects, low inflation and aggressive buying from the European Central Bank European investors have little choice than to pay sovereigns a storage fee for their money. After all it hard to store a trillion euros under the mattress. As a result of the gravity coming from Europe the 10- Year U.S. Treasury yield has collapsed to 1.5%, about half of what it was last fall.

Figure 6. Selected Sovereign Yields, 30Aug19, Percent

Country		2- Year		10 Year
United States		1.990		1.50
France		-0.850		-0.40
Germany		-0.900		-0.71
Italy		-0.170		1.03
Japan		-0.310		-0.28
UK		0.400		0.49

Source: CNBC

Because the Fed is very knowledgeable about the yield curve and the contractionary forces coming from the trade war and European weakness, we believe that Fed has entered a significant easing cycle. Where the Fed Funds rate peaked at 2.625% last December, we now believe that the rate will be 1.625% by this December and a very low 1.125% by December 2020. The drop in the Fed Funds rate in 2020 will be the result of the economic weakness we forecast for later that year. (See Figure 7) Of course by then the yield curve will be positively sloped.

Figure 7. Federal Funds vs. 10-Year U.S. Treasury Bonds, 2011Q1 – 2021Q4F, Percent

Sources: Federal Reserve Board and UCLA Anderson Forecast

The Fed will be able to be aggressive in lowering rates because, although running somewhat above their target, overall inflation will remain benign. (See Figure 8) However we would point out that the imposition of tariffs means that there is upside risk to our 2%+ inflation forecast.

Figure 8. Consumer Price Index vs. Core CPI, 2011Q1- 2021Q4F, Percent Change a Year Ago

Sources: U.S. Bureau of Labor Statistics and UCLA Anderson Forecast

Employment Growth Softening

In August the Bureau of Labor Statistics announced that the estimate for March 2019 payroll employment was overstated by 500,000 jobs. We will not how this preliminary estimate will translate in actual monthly job growth until we get the January 2020 data, but as a first approximation recent employment growth has been overstated by about 40,000 jobs a month. Our forecast for job growth is based on current data and therefore it should be viewed as high. Nevertheless instead the recent normal of job gains of 200,000 a month, we envision job growth in 2020 to be a tepid 70,000 a month. (See Figure 9)This eventuality will be a shock to those business that have relied on the recent history of job growth. We would also note that our forecast includes the temporary government hiring associated with the census, especially in the second quarter of 2020. Given our GDP forecast the unemployment rate will remain stable at around 3.6% through early 2020 and then rise to about 4% at the end of that year. (See Figure 10)

Figure 9. Payroll Employment, 2011Q1-2021Q4, Quarter to Quarter Change, In Thousands, SAAR

                                   

Sources: U.S. Bureau of Labor Statistics and UCLA Anderson Forecast

Figure 10. Unemployment Rate, 2011Q1-20121Q4F, Percent, SAAR

Sources: U.S. Bureau of Labor Statistic and UCLA Anderson Forecast

Housing Activity Remains Sluggish

As we have noted ad nausea, post the Great Recession housing activity has failed to recover to what historically has been a normalized level of housing starts of 1.4 million – 1.5 million units. Activity has stalled out in the 1.2 million – 1.3 million range and we forecast that it will remain sluggish throughout the forecast horizon. Specifically we are forecasting 1.25 million units for 2019 and for starts to average around 1.2 million units in 2020 and 2021. (See Figure 11) This sluggishness is especially noteworthy in light of the fact that mortgage interest rates have declined from 5% in late 2018 to around 3.75% today.   What this means is that unlike 2007 housing activity is really not in position to trigger a recession this time around.

Figure 11. Housing Starts, 2011Q1-2012Q4F, Thousands of Units, SAAR

Sources: U.S. Bureau of the Census and UCLA Anderson Forecast

Stock Market Has Gone Nowhere Since January 2018

Although the S&P 500 stock index remains very close to its all-time high, as a practical matter stock prices haven’t gone anywhere since January 2018. (See Figure 12) We would note that in January 2018 the Trump Administration got very serious about imposing tariffs and in March 2018 the first round of tariffs on steel and aluminum were put in place. As a result the wealth effect associated with rising stock prices is waning.

Figure 12. S&P 500 Stock Index, 1Sep2017 – 30Aug2019

Sources: Standard and Poor’s via BigCharts.com

What seems to be OK?

Although there is much to be worried about consumption, which accounts for about two thirds of GDP is chugging along, federal spending is advancing smartly in response to the recent budget deal and businesses continue to invest in intellectual property at a heady pace. Spurred on by low unemployment and higher wage income real consumer spending growth remains solid with gains of 2.5% this year and 2.1% in in 2020 and 2021, albeit with 1% growth in the second half of 2020. (See Figures 13 and 14) To be sure the pace is off from the 3% recorded in 2018, but still quite respectable for this stage of the business cycle.  As a result, if you are going to tell a story about a recession in 2020 you would have to have consumer spending far weaker than we now have it.

Figure 13. Employee Compensation, 2011Q1- 20121Q4F, Percent Change Year Ago

Sources: U.S. Bureau of Labor Statistics and UCLA Anderson Forecast

Figure 14. Real Personal Consumption Expenditures, 2011Q1- 2021Q4F, Percent Change, SAAR

Sources: U.S. Department of Commerce and UCLA Anderson Forecast

Unlike earlier in the decade federal spending is now increasing at a 3% annual rate. (See Figure 15) As a result of the recently approved budget deal that increases both defense and domestic purchases the 3% growth rate established in 2018 will continue this year and into 2020 before stalling out in 2021. However we might be low for 2021 as a new Congress might aggressively respond to the weakness we expect to occur in late 2020.

Figure 15. Real Federal Purchases, 2011 – 2021F, Annual Data, Percent Change

Sources: Office of Management and Budget and UCLA Anderson Forecast

The flipside of higher government spending will be the prospect of trillion dollar deficits thorough 2021 and beyond. (See Figure 16) Although both the administration and the Congress do not appear to be interested in the deficit today the day will come when the deficit is interested in them.

Figure 16. Federal Deficit, FY 2011-FY2021F, Annual Data, In $Billions

Sources: Office of Management and Budget and UCLA Anderson Forecast

The one bright spot in business investment is the continuing growth in spending on intellectual property. That category includes, among other things, computer software, research and development expenditures and filmed entertainment. Unlike equipment and structures this sector is being driven by technological imperatives that extend well beyond the business cycle. Despite the slowdown we are forecasting real intellectual property spending will continue to grow robustly, albeit off the heady 8.4% forecast for this year. Specifically we are forecasting growth of 5.5% and 4.1% in 2020 and 2021, respectively. (See Figure 17)

Figure 17. Real Spending on Intellectual Property, 2011Q1-2021Q4, Percent Change, SAAR

Sources: U.S. Department of Commerce and UCLA Anderson Forecast

Conclusion

Economic growth is dramatically slowing. The near 3% pace of over a year ago is now a memory with fourth quarter –fourth quarter real GDP growth for 2019 and 2020 now forecast to be 2.1% and 1.2% respectively. Further job growth will slow to below 70,000 a month, a far cry from the 200,000 plus we have been used to. The real risk is coming from the Administration’s high and erratic tariff policies and its potential impact on exports and business investment. As long has consumption remains firm we believe that the U.S. economy will avoid a recession next year, but nevertheless it will be “The Year of Living Dangerously.”

  

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[i] With apologies to Peter Weir and MGM(Released in the U.S. in 1983)

[ii] See Caldera, Dario et.al, “Does Trade Policy Uncertainty Affect Global Economic Activity?” Board of Governors of the Federal Reserve System, Sept 4, 2019.

[iii] See Shulman, David, “The Uncertain Economy,” UCLA Anderson Forecast, September 2010