Radio Day- 8 February 2018

A bit of a wonky discussion on the radio today with the guest host. Policy stances for both fiscal and monetary policy were the major topics, mostly with relations to stock price movements. I could talk policy all day, as I did for most of the hour on the radio.

By far my favorite point (that I made) was about the “sclerotic” state of fiscal policy. At some level it may be inappropriate to even call what we have currently a policy. We can leave that to the side for now.

Congress acts currently as if their tax and spending decisions are independent of each other from the perspective of fiscal balance. This is how you get to a deficit that will be more than 5% of GDP in the next year.

Recent good data in jobs reports like good jobs numbers and signs of wage growth are going to give the Fed cover to normalize the rate environment which is long overdue. Government revenue pressures and a complete unwillingness to admit that all spending needs to be evaluated and reviewed to address deficits means fiscal policy is expanding into an expansion. Cue inflation concerns and an increased likelihood of Fed action.

At that point the valuation issue takes hold and higher future rates discount future dividends and capital gains more and equity prices decline. We are not even close to panic mode. This is correction mode. The state of the world is changing and people are responding. Whether you believe it to be Keynes or Samuelson that said it, the point stands that when the facts change, people change their minds. That’s what we see happening in financial markets, especially the equity market, and it is a sign markets are working.

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