Against All Odds – An Open Letter To A Strong Leader

Welcome to the year of the crosscurrent. Expect for the ride to start out and stay bumpy, especially after landing.

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Federal Reserve Jeffery Lacker

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For the time being, happy days are still very much here. Average what the Atlanta Fed and New York Fed are forecasting for economic growth in the just-ended fourth quarter and we’re talking about full year growth of 2.7 percent. But it gets better. There’s an increasing chance we’ll have 12 months of GDP growth at a 3-percent rate by the time the books close on the first quarter. Any upside from here will make Republicans giddy with excitement.

Back on Wall Street, the markets have sniffed out the economy’s seeming resilience. Stocks continue to reach for records celebrating the manufacturing renaissance as much of the country continues to rebuild from the Year of the Natural Disaster and the dollar remains weak, a beautiful combination if there ever was one.

In the event the holidays distracted you, the Chicago Purchasing Manufacturing Index hit the highest level since March 2011. In fact, the whole of the Midwest factory sector was booming headed into the new year boding well for the economy as a whole…with one notable exception care of my compadre Dr. Gates. Manufacturing in the Hoosier State, it would seem, has fallen into negative territory. That bears watching as Indiana is a bell weather for the U.S. as a whole.

Speaking of signposts, households have grown increasingly comfortable with leverage to maintain their living standards, which of course economists cheer. That’s worked for 24 straight months as credit card spending growth has outrun that of income growth. But home prices continue to catapult upwards at more than twice the rate of income growth and rents refuse to provide the respite so many households desperately need.

Did someone mention cross currents?

Into this fray steps the Federal Reserve and a whole new cast of characters, most of whom are unknowns to us or should be (still maintaining that Powell is no Yellen clone). What will they ponder when they convene the last two days of this month? Perhaps they will angst over the smoking hot prices paid component in the just released ISM report. The 69-handle resulted from 17 out of 18 industries reporting higher prices. Couple that with a 69.4-read on new orders and you can bet your bottom line there are more supply chain disruptions to come.

Will PPI rather than CPI alone sway the new crew to err to the side of caution, committing to more rate hikes than the market has priced in? For those inclined to keep a running tally, it only takes two rate hikes to completely offset the tax law’s boost to 2018 GDP.

And then there’s the elephant in the room, the fact that 2018 is the year of tapered shrinkage. With a hat tip to Nicholas Glinsman who did some quick back-of-the-envelope math, from this day forth (actually yesterday forth), European Central Bank (ECB) purchases are hereby halved. Looking back to the last three months of 2017, combined ECB and Fed reinvestment summed to $60 billion. Starting in January, that rate collapses to $15 billion. By the end of the first quarter, we’re talking $5 billion, which is still positive.

But by September, the dueling duo central banks will be yanking $40 billion a quarter from a financial system we’ve been assured will nary blink an eye. 2017 = $2 trillion in global QE. 2018 = $1 trillion. No sweat?

In the meantime, the tax man commeth, and that’s a good thing for several states that could use a bit of good news on the revenue front. The question is, will a bold leader, one with foresight and vision, emerge with the wisdom to make use of the tax windfall no one is talking about? For more on this, please enjoy the new year’s first installment, AGAINST ALL ODDS: An Open Leader to a Strong Leader.

With hopes you steer clear of the storms and wishing you well,

Danielle



About the Author

Danielle DiMartino
Called "The Dallas Fed's Resident Soothsayer" by D Magazine, Danielle DiMartino Booth is sought after for her depth of knowledge on the economy and financial markets. She is a well-known speaker who can tailor her message to a myriad of audiences, once spending a week crossing the ocean to present to groups as diverse as the Portfolio Management Institute in Newport Beach, the Global Interdependence Center in London and the Four States Forestry Association in Texarkana. Danielle spent nine years as a Senior Financial Analyst with the Federal Reserve of Dallas and served as an Advisor on monetary policy to Dallas Federal Reserve President Richard W. Fisher until his retirement in March 2015. She researches, writes and speaks on the financial markets, focusing recently on the ramifications of credit issuance and how it has driven equity and real estate market valuations. Sounding an early warning about the housing bubble in the 2000s, Danielle makes bold predictions based on meticulous research and her unique perspective honed from years in central banking and on Wall Street. Danielle began her career in New York at Credit Suisse and Donaldson, Lufkin & Jenrette where she worked in the fixed income, public equity and private equity markets. Danielle earned her BBA as a College of Business Scholar at the University of Texas at San Antonio. She holds an MBA in Finance and International Business from the University of Texas at Austin and an MS in Journalism from Columbia University. Danielle resides in University Park, Texas, with her husband John and their four children. In addition to many volunteer hours spent at her children's schools, she serves on the Board of Management of the Park Cities YMCA.