Fed View: Freshly Squeezed or Concentrate?

 If the orange Florida man is smart – a dubious proposition that – he’ll take a page from Ronald Reagan’s tenure and leave monetary policy to the sous chefs  at the Fed, who, under chairman Paul Volcker, squeezed the stagflation orange dry, tipping the economy into recession at the beginning of Reagan’s first term and unemployment reached double digits. Your correspondent remembers the increasing appearance of Michigan license plates dotting the roads of the Sunbelt capital he resided in then.

The Volcker grip on the money supply did its job, though. Economic health followed and Reagan reaped the hosannas that prosperity evokes.  So could Trump.

But if this orange isn’t exactly plump with juicy irony (much too generous a description for unintended consequences that follow from obtuseness), it does sit pretty much in the bowl of damned-if-you-squeeze, damned-if-you-don’t after Friday’s employment data dump from the Bureau of Labor Statistics and the dumping of its Cassandra, BLS director Erika McEnrtarfer, who Trump accused of rigging the numbers.

The report surprised analysts with weaker than expected job growth in July and sharp downward revisions to May and June job market descriptions, ostensibly setting up the Federal Open Market Committee to deliver on Trump’s artless demand of Fed Chariman Jay Powell that interest rates be cut.

But hold on.  Trump says the jobs data were cooked to embarrass him and that the real statistics should show a robust labor market, which would, of course, call for the Fed to stick to its current stance. What to make of future employment reports, easily the most closely followed of government economic statistics, if  you can’t trust whoever Trump installs?  How can bond vigilantes punish or reward in real time if the time isn’t real?  For the record, U.S. government securities yields were marginally higher early Monday.

Now, the Fed was already behind the eight ball because inflation, which had declined but leveled off in recent months, could be lurking in the tariff declarations of Mr. Trump accompanied by near stall speed economic growth – the stagflation backdrop that Volcker faced in the 1980s.

We suspect the stock market will care little for now, its participants apparently believing that Trump’s vicissitudes matter little in the real world. But that real world also includes valuations that are exceedingly rich, whether measured by market cap to GDP or forward price-to-earnings ratios.  This more than Trump’s antics could dim enthusiasm.

 

(Note to our readers:  We have been silent for far too long and though the pleas for the return of The Donovan Report have been less than deafening, we intend to weigh in on a more less frequent basis in these interesting times.)