Dudley Sticks His Neck Out

Doug Nolan


What a fascinating environment; each week brings something extraordinary.

Yet there is this dreadful feeling that things are advancing toward some type of cataclysm.

“U.S. President Donald Trump’s trade war with China keeps undermining the confidence of businesses and consumers, worsening the economic outlook. This manufactured disaster-in-the-making presents the Federal Reserve with a dilemma: Should it mitigate the damage by providing offsetting stimulus, or refuse to play along? If the ultimate goal is a healthy economy, the Fed should seriously consider the latter approach… There’s even an argument that the election itself falls within the Fed’s purview. After all, Trump’s reelection arguably presents a threat to the U.S. and global economy, to the Fed’s independence and its ability to achieve its employment and inflation objectives. If the goal of monetary policy is to achieve the best long-term economic outcome, then Fed officials should consider how their decisions will affect the political outcome in 2020.” Bill Dudley, Bloomberg op-ed, August 27, 2019

The former president of the Federal Reserve Bank of New York’s piece galvanized an overwhelmingly negative response. Virtually everyone agrees it would be an outrage for the Fed to take such a plunge into the political maelstrom.

A Federal Reserve spokeswoman responded: “The Federal Reserve's policy decisions are guided solely by its congressional mandate to maintain price stability and maximum employment. Political considerations play absolutely no role.”

Former Treasury official Larry Summers weighed in (from CNBC interview): “The Fed’s job is to stay out of politics. The Fed’s job is to respond to the best assessment they can make of economic conditions and adjust the economy – interest rates - appropriately… But for a trusted former official of the Fed, whose thinking is inevitably going to be tied to the Fed, to recommend that they raise interest rates so as to subvert the economy and influence a presidential election is grossly irresponsible – is an abuse of the privilege of being a former Fed official… It is not the job of non-elected appointed officials to a technocratic role to decide how they’re going to act so as to constrain and influence the behavior the President of the United States – and the behavior of the remainder of the government of the United States. That is to misunderstand entirely the role of appointed officials in a democracy.”

Summers’ view is certainly well-founded, at least in theory. But it’s an especially complex world in which we live. Is it the job of non-elected appointed officials to a technocratic role to decide the performance of securities markets, hence the distribution of wealth throughout society? Asking for trouble…

Dudley’s bold op-ed requires context. It followed the previous Friday’s disturbing presidential tweets and the S&P500’s resulting 2.6% drop. “…Who is our bigger enemy, Jay Powell or Chairman Xi?” “Our great American companies are hereby ordered to immediately start looking for an alternative to China…” And contrary to Larry Summers’ comments, the former head of the New York Fed made no suggestion to “raise interest rates so as subvert the economy.”

The critical issue is instead whether the Fed should respond with additional monetary stimulus to ill-advised tweets and policy dictum that risk deflating market confidence. This faux outrage at the thought of the Fed becoming “political” is illusory. The Fed began its insidious venture into the murky political realm under Greenspan’s reign in the nineties.

It has been long accepted that the Federal Reserve should refrain from activities that amount to Credit allocation. Picking winners and losers within the economy should be outside of the Fed’s purview and risks political backlash and a loss of institutional credibility.

The notion that the Federal Reserve would not respond to declining stock prices – under any circumstance – has become heresy. There was no outrage when the Greenspan Fed manipulated the yield curve and adopted an asymmetrical policy approach to underpin the securities markets. Where was the outrage when Bill Dudley (while a Goldman Sachs) and others specifically called for the Fed to adopt policies to spur mortgage Credit expansion for the purpose of systemic reflation after the collapse of the “tech” Bubble? There was even minimal debate when the Bernanke Fed employed unprecedented post-mortgage finance Bubble Credit allocation and reflationary measures. And it was as if I was the only analyst that had an issue when Bernanke later stated the Fed would “push back” against a tightening of financial conditions, essentially signaling the Federal Reserve would not tolerate a market correction.

I am again reminded of the late Dr. Richebacher’s key insight that asset inflation is the most dangerous type of inflation, certainly riskier than consumer price inflation. There is (or, at least, was) general agreement that more than a modest increase in consumer prices is undesirable and would provoke tightening measures from responsible central bankers. But with rising asset prices almost universally viewed as constructive (while confirming the soundness of policies), there is no constituency motivated to rise up and demand measures to contain inflating asset prices and Bubbles.

It is now universally accepted the Federal Reserve (and global central bankers) should backstop financial markets to promote economic growth and wealth creation. The Fed, market participants and most pundits prefer to ignore that such a doctrine places the central bankers at the epicenter of Credit, resource and wealth allocation. Such a position ensures the Fed now wades chest deep in the political muck. It’s been a slippery slope I’ve been chronicling now for over 20 years.

The Fed’s market-centric and interventionist approach has essentially supported incumbent Presidents and Washington politicians. From this perspective, it is clearly “establishment” and susceptible to “deep state” innuendo. This regime is today challenged by President Trump, with his penchant for tariffs, confrontation, and scathing attacks on the Fed and its Chairman. The President is essentially blackmailing the Fed: Play ball or you’ll be blamed, ridiculed and targeted, with clear risk of losing your jobs along with the institution’s coveted independence.

What Dudley is really questioning is whether the Fed needs to make a departure from its regime in response to the market, economic, institutional and geopolitical risks posed by an unorthodox President increasingly considered unstable and pursuing a dangerously ill-advised policy course. Should the Fed continue to backstop the financial markets when the marketplace is responding rationally to increasingly high-risk financial, economic and geopolitical backdrops? With the administration clearly pursuing a risky strategy while placing a gun to Powell’s head, should the Federal Reserve continue to enable such a policy course when it is deemed to put so many things at great risk?

Crazy like a fox. A clear flaw in the Fed’s interventionist regime is now being exploited, while Dudley’s “outrageous” op-ed is only making public what must be an area of intense discussion within the Marriner S. Eccles Federal Reserve Board Building.

Politico (Victoria Guida): “Peter Conti-Brown, a professor at the University of Pennsylvania's Wharton School who specializes in Fed history, noted that Fed watchers have long debated whether the central bank should be used as an insurance policy against bad economic policy decisions. But ‘in today’s climate, an op-ed from the former vice chairman of the [Federal Open Market Committee] arguing that the Fed should be transparently reactive to Donald Trump is a little bit dangerous,’ he said. ‘Where Dudley completely jumps the shark is by saying we should have a republic with central bankers who pick winners and losers… ‘If Powell follows Dudley’s advice … then we’ll mark that as the end of independent central banking,’ he said.”

A central bank beholden to securities market Bubbles has already forsaken independence.

After accommodating the mortgage finance Bubble with years of loose monetary policy, the Fed has been completely hamstrung for that past decade. Our central bank waited too long to commence the process of normalizing policy. In the end, it found itself unwilling to impose any semblance of a tightening of financial conditions, despite securities markets signaling dangerous monetary excess. Still, the Fed is now condemned for excessive tightening that has put U.S. markets and economic prospects at significant risk. This is the narrative the President is using as he fashions a scapegoat while hammering the Fed into submission.

And from Slate (Jordan Weissmann): “It is hard to overstate what a tremendously dangerous concept this is. Dudley is not talking about a conflict between two equal branches of government. If the economy crashes and Democrats don’t want to pass a stimulus because it might help Trump, that would be crappy and inhumane, but it’d also fundamentally be politics. Voters could decide who to hold accountable. Here, Dudley is effectively talking about an economic coup staged by a group of unelected technocrats. He doesn’t seem to be worried about the implications of this idea, because he feels the president has already politicized the central bank… The best way for the Fed to show it is not a political institution is to not act like a political institution, and intervene to help the economy when circumstances obviously dictate it.”

The problem: circumstances don’t obviously dictate that the Fed should be intervening. The unemployment rate is 3.7%, near a 50-year low. Stock prices are within 3% of all-time highs, while all varieties of bonds are priced at unprecedented lofty levels. And after declining to near zero in March, the Atlanta Fed’s GDPNow Forecast now has growth maintaining a reasonable late-cycle 2% pace.

August 28 – Bloomberg (Rich Miller and Christopher Condon): “A Republican member of the Senate Banking Committee called for the panel to hold a hearing on what he termed the danger that the Federal Reserve will meddle in the 2020 presidential election, a day after a former top central bank official suggested that the Fed resist interest-rate cuts that would aid Donald Trump. Senator Thom Tillis… said… he was ‘very disappointed’ that… Bill Dudley appeared to be ‘lobbying the Fed to use its authority as a political weapon against President Trump,’… ‘The president is standing up for America against China after 30 years of our country and our workers being ripped off and there is now an effort to get the Fed to try to sabotage the president’s efforts,’ Tillis said.”

The Fed’s political problem will not end with Donald Trump or Chinese trade negotiations.

Going forward, our central bank will be under unrelenting pressure to support the markets and boost the economy - and will be a target for the party on the losing side of election outcomes.

As the Fed policy regime evolved, it failed to articulate a sound framework for explaining the factors driving monetary policy decisions. A view took hold that there is little risk of aggressive stimulus so long as consumer price inflation stays within its 2% target. As things turn dicey, the Fed will struggle to push back against calls for aggressive rate cuts and restarting QE. For years now, loose monetary policy has accommodated egregious financial excess, including fiscal deficits approaching 5% of GDP during peacetime economic expansion. Deficits don’t matter; speculative excess and asset Bubbles don’t matter.

I expect Trump attacks are the first salvo in what will be only more intense political pressure directed at the Fed to employ aggressive stimulus measures.

August 30 – Wall Street Journal (David Harrison and Maureen Linke): “The decadelong economic expansion has showered the U.S. with staggering new wealth driven by a booming stock market and rising house prices. But that windfall has passed by many Americans. The bottom half of all U.S. households, as measured by wealth, have only recently regained the wealth lost in the 2007-2009 recession and still have 32% less wealth, adjusted for inflation, than in 2003… The top 1% of households have more than twice as much as they did in 2003. This points to a potentially worrisome side of the expansion, now the longest on record. If another recession comes, it could be devastating for people who have only just recovered from the last one.”

The rise of populism is in its initial stage. The situation turns much more serious when the current Bubble deflates. There are major costs associated with the Fed’s loss of independence – independence from politics as well as from market pressure. For now, however, markets are trading on the prospect of aggressive global monetary stimulus (rate cuts and QE).

Risk markets this week rallied on a more conciliatory tone from President Trump reciprocated by Beijing. The S&P500 rose 2.8%, and the Nasdaq100 jumped 3.0%. The German DAX gained 2.8%, with France’s CAC40 up 2.9%. Mexican stocks surged 6.9% and Brazilian equities rose 3.5%.

Once again, the safe havens completely dismissed the risk market rally. Ten-year Treasury yields fell four bps to 1.50%, with the 30-year long bond yield down six bps to a record low 1.96%. German bund yields were down another two bps to negative 0.70%, and Swiss yields dropped eight bps to negative 1.09%.

But perhaps the most amazing market moves were at Europe’s periphery. Italian yields sank 32 bps this week, trading below 1.0% for the first time while taking the 2019 yield collapse to 174 bps. Led by a 5.1% rally in bank shares, Italian stocks recovered 4.1% this week. Meanwhile, Greek 10-year yields dropped 33 bps to a record low 1.61% (down 279bps y-t-d). Portuguese yields ended the week at 0.13%, with Spanish yields down to 0.11%.

What a difference a currency makes. Argentina these days must wish it was a member of the euro zone. Argentine 30-year yields surged another 365 bps to 18.383%, while Argentina’s 100-year dollar-denominated bond traded down to 40 cents on the dollar. The Argentine peso sank another 7.3% this week, pushing y-t-d losses versus the dollar to 37%.

August 29 – Reuters (Cassandra Garrison and Walter Bianchi): “Standard & Poors announced… that it was slashing Argentina’s long-term credit rating another three notches into the deepest area of junk debt, saying the government’s plan to ‘unilaterally’ extend maturities had triggered a brief default. The ratings agency said it would consider Argentina’s long-term foreign and local currency issue ratings as CCC- ‘vulnerable to nonpayment’ - starting on Friday following the government’s Wednesday announcement that it wants to ‘re-profile’ some $100 billion in debt.”

What a month! After beginning the month at $14.115 TN, negative-yielding global bonds ended August at $16.838 TN (from Bloomberg). The safe haven Japanese yen gained 2.4% and the Swiss franc increased 0.4%. Gold bullion surged $107 to a six-year high. On the downside, the Argentine peso collapsed 26.25%, with the Brazilian real down 8.0%, the South African rand 5.6%, the Colombian peso 4.7%, the Russian ruble 4.7%, the Mexican peso 4.6% and the Turkish lira 4.3%. China’s renminbi dropped 3.80% for the month, slicing through the 7.0 level to the low versus the dollar going back to early 2008.

With ominous developments in global bonds and currencies, global equities bent but didn’t break. After a summer of discontent, expect a tumultuous autumn.


China’s renminbi and the global ring of fire

The next international debt crisis is an accident waiting to happen

Paul Hodges

 China’s property bubble puts it at the epicentre of the ring of fire
China’s property bubble puts it at the epicentre of the ring of fire © Reuters


August has often seen the start of major debt crises. The Latin American crisis began on August 12, 1982. The Asian crisis began with Thailand’s IMF rescue on August 11, 1997. The Russian crisis began on August 17, 1998.

We fear that the renminbi’s fall below Rmb7 per dollar on August 5 will act as just such a catalyst — this time, for the onset of a global debt crisis that has long been in the category of an accident waiting to happen.

The risk is summarised in the chart below from the Institute of International Finance, showing the seemingly inexorable rise in global debt over the past 20 years.

Central banks came to believe that business cycles could be abolished by the use of stimulus, first through subprime and then through quantitative easing. This would encourage the return of the legendary “animal spirits” and allow the debt created to be wiped out by a combination of growth and inflation.


© Institute of International Finance


Unfortunately, as we have argued here before, this belief took no account of demographics or the impact of today’s ageing populations in slowing demand growth.

The baby boomers, who created the growth supercycle when they moved into the wealth creator 25-54 generation, have now joined the cohort of perennials aged 55 and above. They already own most of what they need. The focus on stimulus means that policymakers have failed to develop the new social/economic policies needed to maintain soundly-based growth in a world of increasing life expectancy and falling fertility. Instead, stimulus policies have created overcapacity and today’s record levels of debt.

As William White, a former chief economist of the Bank for International Settlements, warned at Davos in 2016: “It will become obvious in the next recession that many of these debts will never be serviced or repaid, and this will be uncomfortable for a lot of people who think they own assets that are worth something.” Presciently, he suggested that the trigger for the crisis could be a Chinese devaluation.

Central banks have created a debt-fuelled 'ring of fire' with multiple fault-lines
Central banks have created a debt-fuelled 'ring of fire' with multiple fault-lines


The risk, outlined in our second chart, is that central banks have created a debt-fuelled global “ring of fire”. China has undertaken around half of all global stimulus since 2008, in effect creating subprime on steroids. As we noted here last year, its tier 1 cities boast some of the highest house-price-to-earnings ratios in the world, while profits from property speculation allowed car sales to rise fourfold from 500,000 a month in 2008 to 2m a month in 2017.

As the FT reported in April, investors have already been spooked by rising levels of dollar debt in China’s property sector. This debt is set to open the global ring of fire, as US president Donald Trump raises the stakes in his trade war. The president and his advisers seem to have chosen to ignore the very real risk of currency devaluation, as markets respond to the impact of tariffs on the economy:

- China’s property bubble puts it at the epicentre of the ring of fire

- This is now spreading out across Asia, impacting other Asian currencies and economies

- The Bank of Japan is about to become the largest owner of Japanese stocks

- The end of the property bubble is causing the end of the commodity bubble

- In turn, this is impacting Australia, South Africa, Brazil, Russia and the Middle East

- ECB stimulus means eurozone government bonds have negative interest rates

- Banks cannot make a profit and savers have no income

- President Trump’s China trade war risks connecting all the dots

- The UK’s potential no-deal Brexit in October further threatens global supply chains


The issue is the risk of contagion from one market to another. Risks in individual silos can be bad enough, but if they spread across boundaries it quickly becomes hard to know who is holding the risk. As US Federal Reserve chairman Jay Powell warned in May while discussing potential problems in the market for collateralised loan obligations:

“Regulators, investors, and market participants around the world would benefit greatly from more information on who is bearing the ultimate risk associated with CLOs. We know that the US CLO market spans the globe . . . But right now, we mainly know where the CLOs are not — only $90bn of the $700bn in total CLOs are held by the largest US banks . . . In a downturn institutions anywhere could find themselves under pressure, especially those with inadequate loss-absorbing capacity or runnable short-term financing.”

The CLO market is just one part of the problem. As S&P Global reported recently, more than $3tn of US corporate debt is rated triple B, with $1tn rated triple B minus, the lowest level of investment grade. US companies account for 54 per cent of the world’s $7tn total triple B debt.

The risk of contagion in any sell-off is clear, as many institutions would have to sell if recession forced rating agencies into downgrades, taking debt below investment grade.

In turn, this would add to the risks in US equity markets, which are already at extreme valuations. Pension funds would be most at risk as they have been major investors in corporate debt and in recent years have entered markets such as the Asian offshore US dollar market in their search for higher yields. A downturn in their returns would risk creating a vicious circle, forcing companies to increase their pension contributions just at the moment when their earnings are already under pressure as the trade war slows the global economy.

Mr Trump may come to regret his comment that “trade wars are good and easy to win”. We envisage a testing time ahead, particularly as only those over 60 have personal experience of even the “normal” business cycles seen before the boomer supercycle began.


Paul Hodges and Daniël de Blocq van Scheltinga publish The pH Report.beyondbrics is a forum on emerging markets for contributors from the worlds of business, finance, politics, academia and the third sector. All views expressed are those of the author(s) and should not be taken as reflecting the views of the Financial Times.

Europe’s banks warned on ending interest rate benchmark

Call to speed up preparations for start of new €STR benchmark in October

Martin Arnold in Frankfurt and Philip Stafford in London


© AP


European banks and other financial institutions need to speed up their preparations for the phasing out of a key interest rate benchmark which is used to price more than €24tn of derivatives, loans and bonds, a body advising the European Central Bank has warned.

Financial markets are heading for confusion and legal disputes unless more is done to shift away from the Eonia interest rate benchmark, the head of the ECB’s working group overseeing the transition told the FT.

Eonia will be replaced by the €STR benchmark in early October, after a series of market manipulation scandals eroded confidence in the way the existing benchmark is calculated.

Steven van Rijswijk, the steering group head and chief risk officer at Dutch bank ING, told the FT: “I am worried about complacency among market participants, especially as regards the change in the timing of the publication of Eonia, which takes place already on October 2 and creates very significant operational challenges.”

Eonia is used to price about €22bn of interest rate derivatives, €2tn of cash market transactions — such as current accounts and overdrafts — and about €4.4bn of debt securities.

In a report to be published on Monday the ECB’s working group will recommend that existing contracts should be switched over from Eonia to €STR as soon as possible.

“Millions of contracts need to be changed,” said Mr van Rijswijk. “That will cost quite a bit of money.” He added that institutions need to adapt their IT systems and review documentation, procedures and product structures.

The new system is designed to be more robust as it is based on the price of interbank transactions submitted daily by 50 banks, while Eonia has been set using estimates from a narrower group of lenders.

Mr van Rijswijk said he was worried that if market participants were not ready for the start of the transition away from Eonia it would lead to “uncertainty and confusion around the pricing and valuation of financial products and instruments”.

“This could give rise to financial and risk reporting issues and could also lead to disputes among market participants,” he said. “This can all be avoided if all market participants are adequately prepared.”

In the wake of the financial crisis banks were fined billions of dollars and some former employees were jailed for manipulating interest rate benchmarks including Libor, Euribor and Eonia. Most of these benchmarks are being replaced or radically overhauled.

Europe has already delayed the Eonia replacement process by a couple of years and lags other jurisdictions like the US and UK in making the transition.

As well as switching to the new €STR standard, Mr van Rijswijk said market participants would need to adjust to a timing change, with the new transition rate being published by the ECB at 9:15am UK time rather than the prior evening.

For more than two years both €STR and the transition Eonia rate will be published until the latter is removed completely from usage at the start of 2022. The transition rate will be priced at an 8.5 basis point discount to Eonia.

The transition could have an impact on the way financial institutions account for the value of derivatives and other products, Mr van Rijswijk said, adding that the working group had contacted the International Accounting Standards Board, which is expected to rule on the matter in the coming months.


The problems of the global monetary order go deeper than Trump

By: Claire Jones


One of the things we remember most from our days as an economics student is something we heard during our first macroeconomics lecture.

We were shown a chart of world GDP over the past 150 years. It was meant to serve as a reminder of the fantastic advances in growth in a global economy powered by industrialisation, but there was one big blip in this line of progress: the end of the 1920s and the beginning of the 1930s.

After pointing it out, the lecturer said confidently: “But don’t worry, we know how to solve that problem, it won’t happen again.”

The feeling in 2000 when we heard that lecture was that Robert Lucas and the macroeconomic brotherhood had made a shortage of aggregate demand a thing of the past. We knew how to fight another Great Depression.

It was an era where central banks around the world were gaining independence to set interest rates as they saw fit, buffered by doctrine that said for as long as inflation was kept at a low level and exchange rates were flexible, global growth would remain stable. Fiscal policy largely disappeared from the scene, the feeling being that it would need to provide automatic stabilisers to temper booms and busts but not much besides that. As for the banks? Well, they would be held in check by the theory that markets are efficient and that in a monetary stabilised world a financial panic simply would not happen.

The hubris of that world was revealed clearly by the 2008 crisis. And yet, when future economic historians try to pinpoint at what point the hubris became insufferable, they might well choose the Jackson Hole conference during the dying days of the summer of 2019 as a marker of the final nail in the coffin of the old way of thinking.

When we first read Jay Powell’s speech on Friday night, we thought it said little because it did not offer any new information on what the Fed might do next. In fact, that the policy path of the world’s most important central bank is so uncertain spoke volumes about policymakers’ anxiety.

Their angst stems from two overlapping sources.

The first is that in many parts of the world inflation targets haven’t been hit in years and most central bankers understand there is a limited amount of ammunition left to address this. You can (if you are lucky) do a few normal rate cuts. Failing that you can go below the zero bound into negative territory, you can buy more bonds, but at some point your actions become either extremely controversial or are subject to diminishing returns. Or both -- so uncharted is the territory that we don’t really know how things play out next.

The second is that they are spooked by the sheer unpredictability of Donald Trump’s behaviour. Central banking is a global club whose members are followers of an academic discipline that often requires its practitioners to suspend disbelief and act as though people and markets are rational. They cannot understand why Trump would impose trade tariffs and challenge central bank independence -- both policies which they view not as a zero-sum game, but as destructive to everyone involved. To them he is not only maddening, but simply mad.

Mark Carney’s speech at the forum spoke to both of these problems, and made clear that they both are symptomatic of a far deeper issue: an over-reliance on the dollar that inflation targets and flexible exchange rates can no longer keep in check.


20 years ago, the theme of this symposium was “New Challenges for Monetary Policy”, and my predecessor, Mervyn King, was one of the speakers. His reflections were on the merits of inflation targeting and flexible exchange rates. The applications of his insights have contributed greatly to improved economic outcomes around the world in the intervening years.

But during that same period, the deficiencies of the [International Monetary and Financial System] have become increasingly potent. Even a passing acquaintance with monetary history suggests that this centre won’t hold. We need to recognise the short, medium and long term challenges this system creates for the institutional frameworks and conduct of monetary policy across the world.


The dollar’s dominance of the global economy was a disaster waiting to happen long before Trump, or even the global financial crisis. Its use in trade and finance has for decades massively outweighed the contribution the US makes to global GDP -- as illustrated by this chart lifted from Carney’s speech.



When the US is out of sync with the rest of the global economy, the Fed sets interest rates which are inappropriate for borrowers outside the country -- but which nevertheless are affected by them. This, in turn, weakens the US economy, further weighing on global growth and so on.

As Carney continued:


There are relatively few fundamental imbalances in terms of capacity constraints or indebtedness that would of themselves portend a recession. However, the combination of structural imbalances at the heart of the [International Monetary and Financial System] itself and protectionism are threatening global momentum. The amplification of spillovers by the IMFS matters less when the global expansions are relatively synchronised or when the US economy is relatively weak. But when US conditions warrant tighter policy there than elsewhere, the strains in the system become evident.

That the system would become as irremediably broken as it has today is definitely not something that our economics professor ever thought was going to happen. Jackson Hole has shown the old certainties have now all but disappeared.

But the new paradigm is far from clear.

China’s grip on the international role of the renminbi has loosened but not to the extent that the currency is widely used in global markets or world trade. The euro does not have afixed-income asset marketas deep and liquid enough as US Treasuries, and a common bond is unlikely to happen anytime soon. Some have mooted a global central banking body to police these overspills and coordinate monetary policy.

But we can’t see Trump handing the power to set US interest rates over to a bunch of technocrats in Basel -- though if he did, then ironically he might get his wish of lower US borrowing costs. Others, such as Robert Pringle who has written about central banks from more than 40 years, call for a world currency linked to the value of global stocks. Carney wants a digital currency tied to a basket of global currencies -- either something like Libra coin, or something issued by global central banks. From his speech:


History shows that the rise of a reserve currency is founded on its usefulness as a medium of exchange, by reducing the cost and increasing the convenience of international payments.

The additional functions of money – as a unit of account and store of wealth – come later, and reinforce the payments motive. Technology has the potential to disrupt the network externalities that prevent the incumbent global reserve currency from being displaced. Retail transactions are taking place increasingly online rather than on the high street, and through electronic payments over cash.

And the relatively high costs of domestic and cross border electronic payments are encouraging innovation, with new entrants applying new technologies to offer lower cost, more convenient retail payment services. The most high profile of these has been Libra – a new payments infrastructure based on an international stablecoin fully backed by reserve assets in a basket of currencies including the US dollar, the euro, and sterling. It could be exchanged between users on messaging platforms and with participating retailers.

There are a host of fundamental issues that Libra must address, ranging from privacy to AML/CFT and operational resilience. In addition, depending on its design, it could have substantial implications for both monetary and financial stability.

The Bank of England and other regulators have been clear that unlike in social media, for which standards and regulations are only now being developed after the technologies have been adopted by billions of users, the terms of engagement for any new systemic private payments system must be in force well in advance of any launch. As a consequence, it is an open question whether such a new Synthetic Hegemonic Currency (SHC) would be best provided by the public sector, perhaps through a network of central bank digital currencies.

We will write again on whether or not a central bank digital currency is a good idea. But relying on the private sector to plug the gap seems a non-starter. Libra’s launch has been a disaster (we hear a lot of the participants at Jackson Hole were rather miffed as to why Carney suggested Facebook’s stable coin as a viable alternative to the dollar), the white paper begging more questions than it answers.

Perhaps we are also looking for answers in the wrong place too.

Since the Greenspan era, the onus was primarily on monetary policy to boost growth to the extent that since the financial crisis the central banks have in economies such as the eurozone become the only game in town. Even in places such as the US, where there was a post-crisis fiscal stimulus and government-sponsored bank recapitalisations, the Fed has been the dominant player.

In a sense, Alphaville’s lecturer was right. This generation’s central bankers did learn the lessons of the Great Depression, with Ben Bernanke -- a scholar of the period -- adamant that the Fed under his stewardship would keep liquidity cheap and plentiful. This has, however, also led to monetary easing papering over deep cracks in national economies and the global monetary and financial order.

Our inkling is that fiscal stimulus should once again become the main focus for economic policymaking. Not only in boosting growth but in addressing the problems that central banks, with their blunt tools and narrow inflation-focused worldview, cannot. Think inequality, or climate change.

But, to paraphrase the POTUS, “....WHERE IS THE LEADERSHIP?”

Will the Fed’s ‘beige book’ data ease growth concerns?

Market Questions is the FT’s guide to the week ahead

Robin Wigglesworth


Jay Powell, the Federal Reserve chairman, has given strong indications of an imminent rate cut



Will the Fed’s beige book data ease growth concerns?

A new batch of data from the US Federal Reserve on Wednesday will offer investors a clearer picture of economic growth after a volatile August and rising tensions between Washington and Beijing over trade.

The Fed will release its monthly “beige book” of data on the domestic economy from across the central bank’s 12 districts on Wednesday. Poor data will indicate that a string of evidence pointing to a weakening global outlook has reached the US, the world’s biggest economy.

Last month, the beige book showed modest economic growth, easing concerns that companies were cutting spending. Recent indications are less positive. Last week, preliminary August data showed the IHS Markit manufacturing purchasing managers’ index falling below the neutral 50 points mark to 49.9, the first contraction since September 2009 and below economists’ forecasts.

The long stand-off between the US and China has also cast a shadow over growth. Earlier this month president Donald Trump increased the levies on previously announced tariffs on Chinese goods and warned US companies to find alternatives to China.“

I don’t foresee a recession on the horizon, but there are scenarios where the economic picture could deteriorate more quickly,” said Steve Chiavarone, a portfolio manager with Federated Investors in New York. “It’s hard for us to predict …because we don’t know what 2020 corporate earnings will look like and there is a ton of uncertainty over trade.”

Richard Henderson


Will US bond supply rev up again after Labour Day?

US Labour Day, the first Monday of September, typically signals the end of the summer doldrums for America’s capital markets, with companies readying sales of stock and bonds in what is usually the busiest month of the year. This one could be even more hectic than usual.

Investment-grade debt issuance totalled just $84bn in August, and together with a sluggish July it was the slowest summer for bond sales since 2014, according to Bank of America. But Yunyi Zhang, a BofA analyst, predicts that issuance will jump back to the five-year average of about $130bn in September.

This amount of supply could lead to some market indigestion, but there is ravenous appetite for high-grade corporate debt at the moment, given the swelling mountain of negative-yielding bonds.

Investment-grade bonds had their best August since 1982, according to Bloomberg data, as fund managers loaded up on higher-quality debt that could offer significantly higher returns than the US government. That suggests that corporate treasurers are likely to find plenty of willing investors in September.

Mr Zhang predicts that supply could hit as much as $45bn this week “as the pace typically accelerates right out of the gates after Labour Day, especially after some of the August pipeline was delayed due to recent market volatility.”

Robin Wigglesworth


Can Hong Kong stocks avoid another nosedive?

It is already the only developed market bourse in the red this year, and Hong Kong’s stock market could be headed for further falls. A key reading on economic activity in the Chinese territory is set for release on Wednesday, and investors will be watching closely for ill-effects from the long protests against an extradition law with China that have rocked the city this summer.

The last reading for IHS Markit’s Hong Kong purchasing managers’ index, which tracks all private sector business activity in the financial hub, came in at 43.8 for July, far below the 50-point level separating contraction and expansion and marking the sharpest fall in a decade. Bernard Aw, economist at Markit, said business demand had been hit by a one-two punch of protests and the US-China trade war.

But the benchmark Hang Seng index did not begin diverging from other global stock benchmarks until August, as violence escalated and as Carrie Lam, the territory’s leader, refused to meet any of the protestors’ key demands. Indeed, instead of steadying markets, Ms Lam’s press conferences have tended to correlate with sharpening falls on the Hang Seng, which finished the month more than 7 per cent lower.

The index pared some of its losses last week before levelling off, but could take another hit if the PMI is weak. Yet business activity in Hong Kong was falling long before large-scale protests kicked off in June – it has been shrinking since April 2018. Ms Lam, who has pledged to lead a recovery for the territory that would reassure investors, may have her work cut out to achieve it.

Hudson Lockett

A graphic with no description

When the Stock Market Is This Crazy, You Should Just Invest Lazy

By Randall W. Forsyth 


Photograph by Shane Stroud



Lazy, hazy, crazy days of summer?

August certainly was crazy for the global financial markets, and the outlook is unquestionably hazy as the season unofficially ends with Monday’s Labor Day holiday. Lazy might have been the best investment strategy, however, if that meant setting and forgetting a diversified stock-and-bond portfolio.

August saw wild swings in the U.S. markets, buffeted by the three Ts: tweets, trade, and Treasuries. Through Thursday, the SPDR S&P 500 exchange-traded fund (ticker: SPY), which tracks the U.S. large-capitalization market, had a total return for August of minus 2.85%, according to Morningstar data. That surely stings most readers.

The iShares Core U.S. Aggregate BondETF (AGG), which tracks the benchmark for the taxable-bond market, returned a positive 2.73% in the month, as U.S. bonds slid in reaction to the jump in negative-yielding global bonds to $17 trillion, an increase of $3 trillion in the month.

But a traditional 60% stock, 40% bond portfolio, using these ETFs, would be down just 0.62%—not bad, given the recent volatility.

For the year through Thursday, a 60 SPY/40 AGG portfolio would show a sparkling return of 14.45%, consisting of 18.16% from the equity side and 8.89% from the debt portion. But for the past 12 months, the 60/40 portfolio returned 5.53%, better than the 2.37% from the stock side, benefiting from 10.26% from the fixed-income side. Score one for old-fashioned diversification.

Whether that will work quite as well as the markets head into their most treacherous time of the year is another matter.

History shows that, since 1950, September has been the worst month for the Dow Jones Industrial Average and the S&P 500, according to the Stock Trader’s Almanac, and the worst for the Nasdaq Composite since its inception in 1971. If anything, the history has been even worse in years preceding presidential elections.

The conundrum facing investors is that bonds that have rallied in price (and fallen in yield) may provide less protection now to equity portfolios.

The collapse in Treasury yields, to about 1.5% for notes due in 10 years and below 2% for 30-year bonds, already incorporates expectations that the Federal Reserve will lower its benchmark rate three times, in one-quarter-percentage-point increments by next spring, from the current 2% to 2.25%.

The headlong dive in global bond yields has prompted calls that U.S. Treasuries could also be headed to zero yields. That would mark an apt contrast to predictions that bond yields could only rise further as they peaked at 15% in 1981, as Jim Grant points out in his column this week.

Never say never, but Evercore ISI’s capital markets maven, Stan Shipley, notes that technical and fundamental factors suggest a reversal of the bond rally—assuming that the U.S. doesn’t fall into a recession, which he sees as having just a 30% probability.

The inverted yield curve—with the two-year Treasury note outyielding the 10-year—is sending the strongest warning signal. But consumer spending, which accounts for upward of 70% of the U.S. economy, remains robust. That reflects the employment situation, certainly something to celebrate this Labor Day weekend.

As Wall Street heads back to work, the main event will be the August jobs report, due out on Friday morning. The consensus call is for a virtual replay of the previous month’s numbers, which showed a 164,000 rise in nonfarm payrolls, with 148,000 in the private sector; a 3.7% jobless rate; and average hourly earnings up 3.2% from the level a year ago.

Those numbers wouldn’t stand in the way of a rate cut at the Sept. 17-18 Federal Open Market Committee meeting, and Fed Chairman Jerome Powell may provide further hints in a speech scheduled later on Friday in Switzerland.

The twists and turns of the trade fight, meanwhile, will keep everybody on edge.


Who you gonna call?

How Parliament can stop Boris Johnson’s no-deal Brexit

The prime minister has sidelined Parliament and set a course for no-deal. MPs must act now to stop him




ONE BY ONE, the principles on which the Brexit campaign was fought have been exposed as hollow. Before the referendum, Leavers argued that victory would enable them to negotiate a brilliant deal with the European Union. Now they advocate leaving with no deal at all. Before the vote they said that Brexit would allow Britain to strike more free-trade agreements.

Now they say that trading on the bare-bones terms of the World Trade Organisation would be fine. Loudest of all they talked of taking back control and restoring sovereignty to Parliament. Yet on August 28th Boris Johnson, a leading Leaver who is now prime minister, announced that in the run-up to Brexit Parliament would be suspended altogether.

His utterly cynical ploy is designed to stop MPs steering the country off the reckless course he has set to leave the EU with or without a deal on October 31st. His actions are technically legal, but they stretch the conventions of the constitution to their limits. Because he is too weak to carry Parliament in a vote, he means to silence it. In Britain’s representative democracy, that sets a dangerous precedent.

But it is still not too late for MPs to thwart his plans—if they get organised. The sense of inevitability about no-deal, cultivated by the hardliners advising Mr Johnson, is bogus. The EU is against such an outcome; most Britons oppose it; Parliament has already voted against the idea. Those MPs determined to stop no-deal have been divided and unfocused. When they return to work next week after their uneasy summer recess, they will have a fleeting chance to avert this unwanted national calamity. Mr Johnson’s actions this week have made clear why they must seize it.

Of all her mistakes as prime minister, perhaps Theresa May’s gravest was to plant the idea that Britain might do well to leave the EU without any exit agreement. Her slogan that “no deal is better than a bad deal” was supposed to persuade the Europeans to make concessions. It didn’t—but it did persuade many British voters and MPs that if the EU offered less than perfect terms, Britain should walk away.

In fact the government’s own analysis suggests that no-deal would make the economy 9% smaller after 15 years than if Britain had remained. Mr Johnson says preparations for the immediate disruption are “colossal and extensive and fantastic”. Yet civil servants expect shortages of food, medicine and petrol, and a “meltdown” at ports.

A growing number of voters seem to think that a few bumpy months and a lasting hit to incomes might be worth it to get the whole tedious business out of the way. This is the greatest myth of all. If Britain leaves with no deal it will face an even more urgent need to reach terms with the EU, which will demand the same concessions as before—and perhaps greater ones, given that Britain’s hand will be weaker.

Mr Johnson insists that his intention is to get a new, better agreement before October 31st, and that to do so he needs to threaten the EU with the credible prospect of no-deal. Despite the fact that Mrs May got nowhere with this tactic, many Tory MPs still see it as a good one. The EU wants a deal, after all. And whereas it became clear that Mrs May was bluffing about walking out, Mr Johnson might just be serious (the fanatics who do his thinking certainly are).

Angela Merkel, Germany’s chancellor, said recently that Britain should come up with a plan in the next 30 days if it wants to replace the Irish backstop, the most contentious part of the withdrawal agreement. Many moderate Tories, even those who oppose no-deal, would like to give their new prime minister a chance to prove his mettle.

They are mistaken. First, the effect of the no-deal threat on Brussels continues to be overestimated in London. The EU’s position—that it is open to plausible British suggestions—is the same as it has always been. The EU’s priority is to keep the rules of its club intact, to avoid other members angling for special treatment. With or without the threat of no-deal, it will make no more than marginal changes to the existing agreement.

Second, even if the EU were to drop the backstop altogether, the resulting deal might well be rejected by “Spartan” Tory Brexiteers, so intoxicated by the idea of leaving without a deal that they seem ready to vote against any agreement. And third, even if an all-new deal were offered by the EU and then passed by Parliament, ratifying it in Europe and passing the necessary laws in Britain would require an extension well beyond October 31st. Mr Johnson’s vow to leave on that date, “do or die”, makes it impossible to leave with any new deal. It also reveals that he is fundamentally unserious about negotiating one.

That is why Parliament must act now to take no-deal off the table, by passing a law requiring the prime minister to ask the EU for an extension. Even before Mr Johnson poleaxed Parliament, this was not going to be easy. The House of Commons’ agenda is controlled by Downing Street, which will allow no time for such a bill. MPs showed in the spring that they could take temporary control of the agenda, when they passed a law forcing Mrs May to request an extension beyond the first Brexit deadline of March 29th.

This time there is no current legislation to act as a “hook” for an amendment mandating an extension, so the Speaker of the House would have to go against precedent by allowing MPs to attach a binding vote to an emergency debate. All that may be possible. But with Parliament suspended for almost five weeks there will be desperately little time.

So, if rebel MPs cannot pass a law, they must be ready to use their weapon of last resort: kicking Mr Johnson out of office with a vote of no confidence. He has a working majority of just one. The trouble is that attempts to find a caretaker prime minister, to request a Brexit extension before calling an election, have foundered on whether it should be Jeremy Corbyn, the far-left Labour leader whom most Tories despise, or a more neutral figure.

If the various factions opposed to no-deal cannot agree, Mr Johnson will win. But if they needed a reason to put aside their differences, he has just given them one. The prime minister was already steering Britain towards a no-deal Brexit that would hit the economy, wrench at the union and cause a lasting rift with international allies. Now he has shown himself willing to stifle parliamentary democracy to achieve his aims. Wavering MPs must ask themselves: if not now, when?

The End of “Peak Germany” and the Return of France

Europe works best, as the old quip has it, with the Russians out, the Germans down, and the Americans in. Today’s new European order has the Russians up, the Germans on the way down, the Americans potentially bowing out, Britons struggling toward Brexit – and France rising.

Jacek Rostowski , Arnab Das

das1_GettyImages_germanflaginfrontofsun


LONDON – At first blush, the result of the European Parliament election in May, and the subsequent nomination of the European Union’s new leadership team, augur continuity and not disruption for the bloc. Nationalist parties failed to make any significant gains in the election, and then large Western European status quo powers hand-picked federalists for the top EU jobs. In particular, the choice of Ursula von der Leyen to be the next president of the European Commission – making her the first German to hold the post in a half-century – seemed to confirm Germany’s continued dominance in Europe.

Yet undercurrents frequently diverge from the surface flow. History suggests that hegemons often assume formal leadership as their power wanes, not when it is strengthening. Today, several factors threaten Germany’s status as the EU top dog – and France stands to be the main beneficiary.

Until now, German dominance has rested on two main pillars: seemingly permanent American defense guarantees, and the country’s world-leading manufacturing firms and massive net-creditor position. But as these foundations start to crumble, the era of “peak Germany” may be passing.

One reason for this is the prevalence of ultra-low interest rates globally, and particularly in the eurozone, reflected by the fact that Italian and even Greek ten-year bonds have recently been yielding less than their US equivalents. Such shrinking risk premia imply that the risk of another eurozone sovereign-debt crisis is receding. This, in turn, is weakening the “semi-soft” sway that Germany has held over the eurozone by offering financial support in exchange for fiscal austerity and structural reform.

In addition, the balance of political power within the EU is once again shifting. Most important, Brexit – although it has yet to occur – is helping France to reprise its pre-1990 role as the bloc’s swing voter.

In those days, West Germany, Italy, and Spain generally favored more EU integration; Britain was against; and France had the deciding vote. This explains the modus operandi of the Franco-German “locomotive”: because major EU initiatives hinged on agreement between the two countries, France could choose a path of European integration that best suited its national interests.

German reunification and the eurozone crisis changed this. Britain became ever more Euroskeptic, rejecting the political and fiscal union that it saw as essential for the euro, yet politically unacceptable for itself. France, meanwhile, now pursued a federalist “gouvernement économique.” As a result, Germany became the swing voter and often opposed deeper EU integration, ostensibly to avoid a split between eurozone and non-eurozone member states (including the UK). In fact, Germany’s main concern was often to protect its own financial interests and those of other northern European creditor states. Brexit, however, will restore the old pre-1990 order, with France at the center.

Furthermore, trade frictions, the shift to green energy, the so-called Fourth Industrial Revolution, and rising geopolitical tensions all threaten to disrupt Germany’s export-led growth model. In fact, the German economy could face recession this year as its manufacturing exports and investment weaken.

German industry faces numerous challenges, in addition to the ongoing diesel-emissions debacle. The growth of electric and autonomous vehicles, gig-economy car usage, data-heavy activity, and 3D printing will profoundly disrupt an economy whose competitive advantage lies in craftsmanship and precision engineering.

Matters are even worse for Germany when it comes to hard power. These days, EU members with strong military capabilities wield a “power premium,” owing to Russian President Vladimir Putin’s serial foreign interventions and growing doubts about US President Donald Trump’s commitment to collective European (and thus German) security. This is particularly true of France, which has efficient conventional and nuclear forces, and an advantageous strategic location, with both Poland and Germany separating it and Russia.

In the EU context, each of these factors represents an important shift; in combination, they could be transformative. France is now set to become the fulcrum on which EU integration – and thus any future geopolitical or economic renaissance for the bloc – will hinge. Currently, the French government is finding ways to balance domestic issues with eurozone integration, climate policy (including managing the “yellow vests” (gilets jaunes)backlash), and reining in the power of US tech giants.

In addition, the country is “semi-core” – politically positioned between “core” creditors (especially Germany and the Netherlands) who demand greater fiscal adjustment, reform, and repayment, and the so-called Club Med debtors (Portugal, Italy, Greece, and Spain), who want fiscal transfers. This means that France is central to the banking, capital markets, and other “unions” on the agenda for eurozone reform.

Finally, France has a long history of statist policy, and does not have a massive trade surplus with the rest of the world. As such, it may be able to defend its own and the EU’s interests better than Germany can in a world of trade wars and investment barriers, where market forces are subordinate to the power of governments.

Europe works best, as the old quip has it, with the Russians out, the Germans down, and the Americans in. Today’s new European order has the Russians up, the Germans on the way down, the Americans potentially bowing out, Britons struggling toward Brexit – and France rising. With the world in flux, the latter development should be good news for the stability and cohesion of the eurozone, and thus of Europe and the world as a whole.


Arnab Das is Global Market Strategist at a London-based asset management firm.

Jacek Rostowski was Poland’s Minister of Finance and Deputy Prime Minister from 2007 to 2013.

How the Recession of 2020 Could Happen

The freeze-up in business confidence, caused in part by the trade war, could wind up affecting consumer confidence.

By Neil Irwin


A welder at a factory in Nantong in China’s eastern Jiangsu province. China’s industrial output has been slowing.CreditCreditAgence France-Presse — Getty Images



These three things are all true: The United States almost certainly isn’t in a recession right now. It may well avoid one for the foreseeable future. But the chances that the nation will fall into recession have increased sharply in the last two weeks.

That is the unmistakable message that global investors in the bond market are sending.

Longer-term interest rates have plunged since the end of July — a shift that historically tends to predict slower growth, interest rate cuts from the Federal Reserve, and a heightened risk that the economy slips into outright contraction.

This is happening in an economy that, by most indicators, is solid. The United States economy is growing at a roughly 2 percent rate and keeps adding jobs at a healthy clip. There is no sign of the kind of huge, obvious bubbles that triggered the last two recessions, the equivalent of dot-com stocks in 2000 or housing in 2007.

So if there’s going to be a recession in 2020 — if the pessimistic signals in the financial markets prove correct — how would it happen? There are plenty of clues, in the details of recent economic reports, in signals from the markets, and in the recent history of recessions and near recessions.

President Trump’s on-again-off-again execution of the trade war with China and other countries has fed uncertainty into businesses’ decision-making. Corporate investment spending is softening, despite the big tax cut that Mr. Trump said would boost it. And the combination of central banks that are at the outer limits of their ability to stimulate growth, and an inward turn by many countries, could make governments less effective at responding to a downturn.

“It is potentially a self-inflicted-wound type of recession,” said Tara Sinclair, an economist who studies business cycles at George Washington University. “But how deep that gash goes depends on many other characteristics of the economy and the policy response thereafter.”

There are parallels to the past. Often, a recession results when some widely held belief about the world turns out to be false. In 2001, it was that a technology boom would fuel the economy and the stock market indefinitely; in 2007, it was that the housing market would never melt down across all regions at once.

This time around, the belief in doubt is that the world will only become more stable and interconnected over time, and that trade, currency and diplomatic relationships can be counted upon.

Recessions result not just when something bad happens in the economy; bad things happen all the time. Recessions occur when those initial shocks are multiplied, in ways that reverberate worldwide. The dot-com crash was accentuated by the Sept. 11 terrorist attacks in 2001 and a rash of corporate scandals. The 2007 housing bust in the United States became a global financial crisis in 2008 only because banks worldwide took huge losses on mortgage debt.

The starting point for the international tensions that could lead to a recession in the United States is business investment spending, especially in the industrial sector. As corporate C.E.O.s look around the world and make their plans for investment and hiring in the year ahead, they aren’t liking what they see.



A steel plant in Salzgitter, Germany. Europe has faced slow growth for years but so far has avoided recession. CreditFabian Bimmer/Reuters


The economies in China and many of its Asian neighbors are getting weaker, partly as a result of the trade war with the United States. The European economy, which has muddled along for years with low growth, may be tumbling into a recession, and if Britain crashes out of the European Union with no exit deal on Oct. 31, Europe could face still deeper challenges.

Already, a key measure of business capital spending in the United States, “fixed nonresidential investment,” was in negative territory in the second quarter. And in the nation’s factories, the rate of growth has slowed for five consecutive months, according to the Institute for Supply Management’s index. Although this measure still showed growth, the July reading was the weakest since August 2016.

The trade war between China and the United States is a big part of the reason. The conflict has made it difficult for many global firms to plan their operations — and in some cases, it may lead them to sit on their hands rather than invest. The American strategy has been more successful at escalating trade tensions than in resolving them, so companies do not know whether tariffs will go away soon or will be a continuing cost of doing business.

“The president says we’re going to get a great deal and a great deal soon, but he’s been saying that for over a year,” said Phil Levy, a former trade official in the George W. Bush administration and a chief economist at Flexport, a freight forwarder that works with many companies involved in international trade. “You end up paralyzed. You have to make plans, but there is risk all over the place, so businesses get cautious and hold back on investment.”

It’s not just companies directly involved in trade with China that may see reason to hold back on investment. The turmoil in financial markets spurred by the trade war could make businesses of all sorts more cautious.
Still, if the downturn remains confined to business spending, it will be hard — just as a matter of arithmetic — for an overall contraction to result. Consumer spending accounts for more than two-thirds of the American economy, versus about 14 percent for business investment.

So far, American consumers are spending enthusiastically, driving overall growth. But there are a few ways the freeze-up in business confidence could change that.

Turbulence in global markets — and the news reports attached to that turbulence — could reduce consumer confidence, and lead Americans to pull back on their buying. The University of Michigan survey of consumer sentiment fell sharply in its August reading, announced Friday.

Or more directly, if businesses pull back on investment spending, they may also make moves that reduce consumers’ incomes, including layoffs, hiring freezes and cuts to overtime.

If that’s the worst of it — trade wars, slower business spending and weaker overseas economies — the United States could probably weather it without falling into contraction. But there are risks out there that could multiply those shocks.

One is the buildup of corporate debt. Businesses have taken on more debt in an era of low interest rates, which leaves them more vulnerable to failure if the economy were to soften or interest rates were to rise. A pullback because of trade wars could cause a wave of bankruptcies that turns a mild slowdown into something worse.

“A highly leveraged business sector could amplify any economic downturn as companies are forced to lay off workers and cut back on investments,” the Federal Reserve chair, Jerome Powell, said in a May speech.
But the biggest risk multiplier may come out of the policy world. In past recessions, the Fed had plenty of room to cut interest rates as a stimulus measure, and fiscal policymakers have been willing to pour money into weaker economies.

The Fed’s main target interest rate is just over 2 percent now, compared with 5.25 percent heading into the last recession in 2007. Other global central banks have even less wiggle room.

And a polarizing president and a divided Congress are unlikely to find much common ground in stimulating the economy. In early 2008, for example, as a recession took hold, the George W. Bush administration negotiated a $152 billion stimulus package with a Democratic Congress to try to lessen the damage.

It seems unlikely that President Trump, heading into a re-election battle, would find the same harmony with Democrats today.

“You could get a widespread fiscal response to a recession,” said Megan Greene, a senior fellow at Harvard’s Kennedy School. “That would be really nice, but I’d also like a unicorn for my birthday.”

International coordination would be even harder in the current geopolitical moment. In the fall of 2008, finance ministers and central bankers of the Group of 20 major economies released a joint statement pledging to work together to end the financial crisis. With many nations facing inward, it is hard to imagine that today.

How would a 2020 recession happen?

The trade wars and a breakdown in international economic diplomacy cause businesses around the world to pull back. This leads to further tumbles in markets and job losses, prompting American consumers to become more cautious. High corporate debt loads create a wave of bankruptcies. And central bank policy proves impotent, combined with fiscal policy that is nonexistent.

Chances of a near-term recession are only about one in three, in the view of most forecasters. But if it does develop, the big question will be whether the usual tools to fight it are up to the task.



Neil Irwin is a senior economics correspondent for The Upshot. He is the author of “How to Win in a Winner-Take-All-World,” a guide to navigating a career in the modern economy.

Bright Horizons Straddles the Juggle

Day-care giant’s shares should continue to soar as parents balance child care, work and budgets

By Laura Forman


A preschool teacher works with children on creating patterns at a Bright Horizons center in Lincoln, Neb. The company has a $9.3 billion market capitalization. Photo: Kristin Streff/Associated Press


Much like paying up for child care makes sense, it may be worth paying up for it in your portfolio.

Following competitor Care.com’s 48% year-to-date selloff, Bright Horizons Family Solutions BFAM 1.53%▲ is looking relatively expensive. Its shares are now trading at 2019 highs of 40 times price to forward earnings. In light of its rival’s recent issues, though, the day-care giant’s record of helping working parents justifies an even richer premium, given its vast growth potential.



The company is relatively unknown to those without children and even to investors. Despite its $9.3 billion market capitalization, only seven brokers tracked by FactSet cover the stock. By comparison, 26 cover Domino’s Pizza, which has similar market value.

One possible explanation could be that Bright Horizons doesn’t neatly fit into any one sector. Chief ExecutiveStephen Kramercalls it a care organization first, enabled by technology. And far more people order pizza than book child care.

That could be changing, though. It is becoming more common for women to outearn their spouses and some 65% of mothers with children under six were in the U.S. labor force last year, according to the Bureau of Labor Statistics, underscoring the acute need for quality child care.

In the U.S., interest around child-care policy has surged in the political sphere ahead of the 2020 election. Companies are paying attention too. Bright Horizons said it has seen a 70% increase in companies offering backup-care benefits over the last five years. That still made for just 9% of large U.S. employers in 2016, according to the Society for Human Resource Management, suggesting a large runway for growth.

Essential to the Bright Horizons’ business model are yearslong partnerships with employers such as Microsoft and Home Depot. Bright Horizons says that it is the largest provider of employer-sponsored child care in the U.S. and that up to 98% of its contracts are renewed in any given year.



While the majority of its operations are domestic, the company is also actively pursuing business overseas, including a new partnership recently unveiled in Germany. Mr. Kramer says his company is focused on areas where there is both government and employer-based support of child care.

Offering further validation to Bright Horizons model, which vets and employs the majority of its caregivers, Care.com has been growing its competing Care@Work platform, where it also vets and employs caregivers.

In March, a Wall Street Journal investigation showed Care.com provided limited vetting of its caregivers on its U.S. consumer platform, sometimes with tragic results. The company now has an activist investor who is calling for management to explore a sale, citing loss of consumer trust in the brand.

Bright Horizons, meanwhile, hasn’t missed a step. Management has projected more rapid sales and profit growth in the third quarter.

The juggle is real for working parents. That spells a long-term opportunity for this established day-care provider.