Archive for May 2020


One cheer for yield curve control

Here’s Bloomberg:

Federal Reserve Bank of New York President John Williams said policy makers are “thinking very hard” about targeting specific yields on Treasury securities as a way of ensuring borrowing costs stay at rock-bottom levels beyond keeping the benchmark interest rate near zero.

It’s a mistake for the Fed to try to reduce long-term interest rates. In the vast majority of cases, falling long-term interest rates are associated with slower expected NGDP growth. Lower interest rates are not, by themselves, expansionary.

So why do I give one cheer for yield curve control? Two reasons:

1. The policy might fail to reduce long-term rates.

2. The technique used by the Fed is likely to be expansionary. Thus the Fed will try to reduce long-term rates by purchasing assets with newly created money. The newly created money has an expansionary effect, and if the policy is successful it will raise long-term interest rates.

Some people say Trump wants it both ways

A reporter recently asked Trump if he regrets ordering a lockdown. Trump said he thought it was a mistake, and then in the very next paragraph he responded to a follow-up question saying he thought it was the right decision.

We’ve all seen Trump say he supports the lockdowns, then a day later suggest he supports the protesters, and then a day later warn Georgia not to re-open too fast, and then a day later say he supports the protesters, etc., etc.

Trump’s most devious method of playing both sides is to carefully word his statements in a way that allows for deniability, something to which reporters are catching on:

Trump was asked by a reporter: “With your tweets today, are you concerned that you might be stoking more racial violence or more racial discord?”

“No no, not at all,” Trump answered. “MAGA says make America great again. These are people that love our country.”

Trump then played his phony plausible deniability card, adding, “I have no idea if they’re going to be here. I was just asking.”

One of Trump’s favorite techniques is to say “some people say blah blah blah”. As in, there are reports that hydroxychloroquine is effective, or that he personally was taking hydroxychloroquine. Then, if it turns out to be effective he can take all the credit, and if it doesn’t he can say “I never recommended anyone else take the drug.”

In an administration full of surprising developments, a few days ago he achieved a new milestone with a series of tweets (assisted by his son):

Notice that he doesn’t directly accuse Joe Scarborough of murder. Rather “some people think” he got away with murder. What does Trump think? “Isn’t it obvious?”

Let’s play armchair detective and think about why Joe Scarborough would have murdered a young woman who worked for him when he was a congressman in DC. What does Trump want you to think?

Trump’s twitter followers don’t know much about nuclear disarmament or monetary policy, but they sure as heck know a lot about powerful men murdering young women who are close acquaintances. We’ve all seen dozens of films with this theme. These powerful men generally do not murder young women in order to steal their wallet.

I’m not going to insinuate anything about Joe Scarborough, or anything about what Trump is trying to do here, but “some people say” that police have found almost all murders of young women to be crimes of passion, and a boyfriend is often the guilty party.

Some people say that even victims of crimes of passion have their reputations dragged through the mud. The unfortunate Lori Klausutis’s widower certainly felt that way, as he was quite upset about Trump’s tweets.

I have mourned my wife every day since her passing. I have tried to honor her memory and our marriage. As her husband, I feel that one of my marital obligations is to protect her memory as I would have protected her in life. There has been a constant barrage of falsehoods, half-truths, innuendo and conspiracy theories since the day she died. . . .

The frequency, intensity, ugliness, and promulgation of these horrifying lies ever increases on the internet.

Some people say that Mr. Klausutis was remarkably restrained, given that Trump’s tweets seemed like the despicable act of a deranged madman:

Timothy Klausutis, Lori’s widower, wrote a remarkably restrained, poignant letter to Jack Dorsey, the head of Twitter, citing the pain that Mr. Trump’s “horrifying lies” about his wife’s death have caused him and the family, and asking Mr. Dorsey to remove Mr. Trump’s tweet. 

What do I think about all of this? Like Trump, I’m not offering any opinion. If you disagree with anything in this post then please respond to the people that I have cited. Don’t leave a comment.

I will make a prediction, however. Stage one was pre-impeachment Trump, when he had to worry about various investigations as well as keeping the GOP in line. Now we are in stage two Trump, when he knows he can do anything he wants and the GOP won’t dare impeach him. But he does still have to worry about re-election in November, and thus doesn’t want to turn off swing voters.

In 2021 we will see stage three Trump, a man with literally nothing to constrain him.

Some people say we have never seen the real Trump. That he has a taste for revenge against those that slight him, even entire countries that slight him, which is almost unbounded. That he has an unstable personality that gets worse with age. Some people say that we’ll only see that Trump emerge in 2021, after he is re-elected.

Others say the real Trump has the courage and modesty and unselfishness and integrity of George Washington, and that we’ll see that Trump emerge in 2021.

Who’s right? “Isn’t it obvious?”

PS. More than 100,000 dead from a preventable plague, unemployment at 14.7% (probably 20%), our cities engulfed in flames, the rest of the world hates us. I think I’ll take a long nap—wake me up when America’s “great again”.

PPS. In case you are wondering, the riots of the 1960s did not affect the macroeconomy.

Why are stocks doing well?

This post is not about forecasting the stock market, something I doubt that anyone can do with a high level of consistency. Rather I’d like to consider some possible reasons why stocks have rallied to relatively high levels by historical standards, despite an economy that appears headed for 20% unemployment.

1.Perhaps the economy will recover quickly, as Lars Christensen predicts. I certainly think this is possible, but note that TIPS spreads remain quite depressed:

Overall, I’m a bit skeptical of the claim that the unemployment rate will fall below 6% by November. I hope I’m wrong.

2. Another possibility is that we’ll see a shift of national income from labor to capital. The NASDAQ index is especially strong, reflecting the profitability of (capital intensive) internet companies that benefit from social distancing. But how long with the pandemic last?

3. Another possibility is that the now almost 40-year downward trend in real interest rates is still underway, with no sign of a reversal. Look at 30-year real interest rates on Treasury debt:

If future cash flows are being discounted at a much lower real interest rate, then you’d expect stocks to be doing better than what one would expect during a period of high unemployment. The counterargument is that real interest rates often fall during slumps.

Bloomberg has a new article on the bull case for stocks:

The Really Big Stock Bull Case Says Fed Stimulus Doesn’t Go Away

You and I know that monetary policy is not currently stimulative, indeed it’s disinflationary. But recall that average people ascertain the stance of monetary policy by looking at interest rates. If the markets are signaling near-zero rates for as far as the eye can see, most people (including Bloomberg reporters) would consider that “easy money”.

Thus Bloomberg is saying that the “bull case” for stocks is due to easy money, which I translate as the bull case is due to a relatively permanent fall in the equilibrium real interest rate.

I’d put at least a little bit of weight on all three of the factors above. But in my view the fall in real interest rates is the biggest factor.

If the S&P500 can reach 3000 at a time of 15% (more likely 20%) unemployment, then it seems increasingly likely that the Robert Shiller model of the stock market is simply wrong. It’s dead as that parrot in the Monty Python sketch.

Was it ever true? Probably not, at least not in the sense of being useful. But hey, he’s got a Nobel Prize and I don’t, so what do I know?

Heaven is high and the emperor is far away

A long time ago, there were two great kingdoms. The Kingdom of the East was ruled by a cruel emperor. One day, wise men in the center of his great country noticed a threat to the kingdom. They tried to warn the emperor of evil spirits, but local officials stopped them. The threat was not addressed in time and caused great destruction.

The Eastern emperor was unhappy about not receiving the warning, but in reality he was to blame for his misfortune. He had allowed local officials to silence the speech of wise men, and this is why he failed to receive the warning in time to stop the threat.

The Kingdom of the West was ruled by a silly emperor. One day, wise men noticed a threat from afar. Evil spirits were spreading in the Eastern Kingdom, and threatening to invade the West. They tried to warn the emperor, but officials in the emperor’s court and their pet Fox blocked their way. The threat was not addressed in time, and caused even greater damage than in the East.

The Western emperor was unhappy about not receiving the warning, but in reality he was to blame for his misfortune. He had told his officials that he did not like to receive bad news, as he was convinced that he was a great ruler who presided over a happy kingdom.

PS.  Good article on Japan:

The other big lesson from Japan is that masks work. Face coverings have been universal there for months, in large part because “Japanese people [already] feel comfortable wearing masks on a daily basis,” as Shigeru Omi, vice chairman of the Japanese government’s expert coronavirus panel, recently explained.

Also the Japanese wash hands often, and don’t hug or shake hands.

And this made me laugh:

But like everything else in the U.S., mask wearing is already becoming politicized and polarized. According to the latest Yahoo News/YouGov poll, a full 87 percent of Americans who voted for Hillary Clinton in 2016 say they will continue to wear a cloth mask in public after lockdown ends; fewer than half as many Trump voters (42 percent) say the same.

Mask wearing is now a political issue?  Yup, we’re a banana republic.

Manned space exploration–the comments

I asked for some reasons why we might want to send men into space. I’ve read the comment section and am a bit disappointed. Surely there must be better arguments out there?

Even the most plausible argument was extremely dubious. Perhaps the strongest was the idea of catastrophe insurance. What if something horrible happened to Earth? But there’s a much cheaper way of providing insurance. Put a few dozen humans (who rotate to avoid boredom) into deep underground bunkers spaced far apart on Earth. That would insure that at least some humans survived even a massive asteroid strike. (Actually, even some humans on the surface would have survived the 65 million year BCE asteroid without bunkers, as some mammals, birds and reptiles did survive that dinosaur killer.) The cost of those bunkers would be trivial compared to the cost of a sustainable Moon base with an ability to bring enough men and women back to Earth to repopulate the planet after a catastrophe.

People spoke of “experiments” in space that only humans can do, without providing any plausible examples. And why haven’t they already been done?

People suggested that manned space flights are still inspiring in 2020, without explaining why.

Mars colonies were mentioned, even though the idea is a pipe dream. If you really want to go to Mars, then manned space flight is the very last thing you should be proposing. Rather you should encourage NASA to divert manned space flight funds to research on technologies that would make a Mars colony feasible. Until we have such technology there is no realistic prospect of a Mars colony. And that research must be done on Earth. Don’t confuse sci-fi with reality.

Perhaps the funniest is the fellow who compared manned space flight to the ocean explorers of the 1400s, as if Neil Armstrong had “discovered” the Moon. Voyager did “discover” some neat stuff, but of course it was unmanned.

The comment section was a master class in motivated reasoning. I suspect that some commenters were guys who like sci-fi movies and were desperately looking for any excuse, no matter how far-fetched, to justify sending people into space. I doubt whether manned space flight will play an important role in the 21st or 22nd centuries. There’s no point in mucking around in space until we invent propulsion systems that are orders of magnitude better than chemical rockets. There’s also no point in continually sending lots of people down 10,000 meters deep in the ocean, once we’ve shown it can be done.

I suspect that Elon Musk is just a rich guy playing with toys. (Nothing against Musk, I like Tesla cars and Paypal.)

PS. If you are a conservative that is generally opposed to big government, then you really should oppose manned space flight. If you make an exception for manned space flight because you find it “inspiring”, or that it promotes “national greatness”, then you need to look long and hard in the mirror. Why don’t you find progressive programs aimed at helping the poor to be inspiring? You don’t see any hard evidence that they are effective? Fine, but where’s your “hard evidence” that manned space flight is more effective than unmanned flights? Maybe you need to re-evaluate your values.

PS. Both Iceland and NZ are down to one active case. Predict who gets to zero first.

PPS. Please don’t bore me with your comments that there’s nothing surprising about the following data, because of blah blah blah. I know all of the reasons. But a nearly 200 to 1 ratio is still pretty mind-boggling:

Off topic (unrelated to the data above), both sides of the “Sweden debate” miss the point. Sweden blew it, but not because of its failure to institute lockdowns.

PPPS: New York was obviously hit extremely hard, but now they are doing much better:

What has caused the number of deaths to drop so significantly, according to physicians, health-care executives, epidemiologists and state officials, are two well-known measures: social-distancing and the use of face coverings.

I wonder if even a modest amount of herd immunity is also helping NYC. California is not seeing a drop in either new cases or deaths. We have almost no herd immunity.

PPPPS: The following is just part of the deep Chinese conspiracy. There are playing 4 dimensional chess:

Initially, authorities in Wuhan, China — where the first cases were reported— thought that jump happened at a local wet market.

Now, the Chinese CDC has ruled out the market as a possible origin site for the outbreak. Instead, it may have been the site of an early super-spreader event.

Update: I see that Trump caved into the CCP on Hong Kong in order to boost the US stock market. He should have punished the CCP by allowing free immigration from China to the US, thus stealing much of their intellectual talent.