Tuesday, January 1, 2019

Notes On The Chicago Fed’s Annual Forecasting Conference 2018

William V. Rapp, Martin Tuchman School of Management's Henry J. Leir Professor of International Trade and Business, and director of the Leir Center for Financial Bubble Research, attended and submitted his 2019 economic forecast at the Federal Reserve Bank of Chicago’s 32nd annual Economic Outlook Symposium held on November 30. His forecast is posted along with this brief summary of some of the highlights from the Conference which he also attended in 2017.

The Federal Reserve Bank of Chicago has provided the conference’s consensus outlook and later should provide slides from the various presentations on its website - https://www.chicagofed.org/events/2018/economic-outlook-symposium. The Fed’s median forecast results indicate that "the nation's economic growth rate is expected to be somewhat above its long-run average, the rate of inflation is predicted to tick down, and the unemployment rate is forecasted to be steady at a very low reading."

Additionally, real consumer spending is expected to "continue to grow at a moderate pace," while real business spending is predicted to "slow but remain solid." The expert consensus also points to growth in the housing market, a decrease in car and light-truck sales, and a slight drop in the price of oil. As for interest rates, the forecasters anticipate both the short-term and long-term interest rates to rise, by 56 and 35 basis points, respectively.

Professor Rapp was one of only two attendees noting a possible recession in 2019, a view that has subsequently gained more traction, though in his forecast he only predicted growth below the consensus.  

However, unlike the consensus, his forecast does predict actual declines not only for autos but housing starts too due to a likely greater increase in Federal Reserve tightening than the consensus view. This is because he was the only forecaster at the conference that noted the large discrepancy between the CPI [Consumer Price Index] on which the Fed usually focuses and the GDP deflater which actually measures US inflation without the impact of lower prices due to imports and a strong dollar. Between 2012 and 2017 the GDP deflator on average rose 1.6% per year, roughly in sync with the CPI. But in the first nine months of 2018 it jumped to over 3.2%, a percent or more above the CPI and the Fed's target inflation rate.

Some other observations from the Conference were:


  1. Conferees were much less optimistic about the economic outlook for 2019 than a they had been about 2018 at the 2017 Conference. Any over-optimism had definitely faded.
  2. Fed could not readily explain the sharp difference between the CPI numbers and the GDP deflator, though they emphasized the Fed's policy focus is on the CPI.
  3. One possible explanation of the low CPI increase is the combination of the Engle's curve and the tax cut. As most of the tax cut went to the wealthy, who have low marginal propensities to consume, either directly or via corporations that used it to buy stock, the inflationary pressures on the CPI were weak while rising incomes fed into the GDP figures.
  4. China's huge excess steel capacity of as much as 500 million metric tons will be both a trade and political issue for some time and is directly related to China's slowing economic growth.
  5. China's slower growth is reflected in excess capacity in several industries in addition to steel as well as in its trade accounts and plant shutdowns. Mexico, Vietnam and Thailand are emerging as viable alternative supply chain sources.
  6. Further its Belt and Road initiative is now experiencing pushback from some recipient countries concerned about debt, economic sovereignty, and local jobs.
  7. Japan and Germany are increasing their shares of the global car market.
  8. Dollar will get stronger and precious metals weaker during 2019.
  9. Finally, it was noted that given any increase in major bankruptcies that it would pay issuers of Credit Default Swaps to buy the underlying debt at a discount, which would be good for bondholders.

Saturday, December 8, 2018

Yale Program On Financial Stability Analyzes Sources And Consequences Great Recession

While many feel the Great Recession and the 2008-2009 Global Financial Crisis are well behind us. Yale University has launched an ambitious research program to better understand the crisis not only in terms of its origins but also its continued consequences in the strong belief that there is still much to learn now that we have more data and perspective. This greater appreciation of the crisis's importance in turn will lead to better policies to avoid future crises and the important social, economic and political reasons for doing so.

Wednesday, September 12, 2018

Bubbles For Fama

In this November 2016 paper, the authors - Robin Greenwood, Andrei Shleifer, & Yang You of Harvard University,
"[E]valuate Eugene Fama’s claim that stock prices do not exhibit price bubbles. Based on US industry returns 1926-2014 and international sector returns 1986-2014, we present four findings: (1) Fama is correct in that a sharp price increase of an industry portfolio does not, on average, predict unusually low returns going forward; (2) such sharp price increases do predict a substantially heightened probability of a crash; (3) attributes of the price run-up, including volatility, turnover, issuance, and the price path of the run-up can all help forecast an eventual crash; and (4) some of these characteristics can help investors earn superior returns by timing the bubble. Results hold similarly in US and international samples."
Download the complete paper here

Friday, March 23, 2018

2016 Leir Bubble Conference Proceedings

The severity of the 2008 crisis suggests that either the scope or nature of the regulations, or their implementation, failed. The US economy incurred the costs of regulations year in and year out for more than 50 years, and then, when a crisis occurred, several ad hoc initiatives were needed to forestall the implosion of asset values. Perhaps regulation reduced the cost of the crisis. Or perhaps the costs were larger because the regulation had led to a sense of security that proved unwarranted.

Various regulatory initiatives have been adopted to forestall the next crisis or reduce its severity, even though there does not appear to have been a systematic review of why regulation did not allay the 2008 crisis.

This leads to the primary questions addressed at the 2016 Leir Conference. What are the key issues and major trade-offs associated with the financial regulation initiatives prompted by the 2008 global financial crisis? Have the myriad of new regulations reduced the likelihood or severity of future crises?

Download the complete conference proceedings here.

Friday, February 2, 2018

Bracing Yourself for a Possible Near-Term Melt-Up

I think the attached analysis of whether we are in a bubble is worth close attention. Two points raised which I find particularly important are the concentration in a few large momentum stocks in a few industries, mostly technology and finance related. This reminds me of the auto sector bubble at the turn of the 20th Century where only auto stocks were involved. 

Secondly while there may not yet be euphoria from the Chicago Fed Forecasting Conference I can confirm that there is tremendous complacency and overoptimism along with willful blindness of anything economically negative such as the apparent weakness in the housing sector for both resale and new housing which the new tax law and higher interest rates can only have exacerbated. 

Indeed one critical question is what the non-deductibility of high property taxes for owners of those homes does to their cash flow coverage projections and whether all prime mortgages in those areas will remain prime.