​There is both good and bad news regarding the coronavirus.  The good news is it is not as dangerous as the SARs virus.  The death toll with SARs was 6.6% of those infected.  With coronavirus the death rate so far is 2.2%.  Those in the US and other countries appear to be recovering.  In China, those dying are primarily older people with compromised immune systems.
The bad news is the incubation period for coronavirus could be as long as 14 days.  Apparently, infected individuals can transmit the disease to others for up to 2 weeks without showing symptoms.  It is highly contagious.  A bus driver in Japan who carried persons from Wuhan contacted the virus as did others who had never visited China.  The virus has already infected more people, over 6,000 at latest count, compared to 5,327 total cases of SARs.  It would not be surprising to see the final toll of infections reach ten times the current amount with deaths amounting to 1,500.
The implications of what we know so far suggests the main threat is to those in China and its immediate vicinity.  As a result, it will take a serious one-time toll on the Chinese economy and businesses that rely on China. 
The impact on the US is likely to be similar to what happened when Trump imposed tariffs.  This means businesses will quickly work readjusting their supply chains from China to other sources.  With what we know at this time, I expect the real growth rate in the US will slow by less than ½% this spring from what it would have been.  This should still allow for a growth rate close to 2½% in the months immediately ahead.   

Is the “apolitical” Fed determined to get of rid of President Trump by creating a recession in 2020?
 
As a long-time critic of the Federal Reserve and its policies, I have consistently resisted conspiracy theories.  I have viewed Fed members as honorable people intent on doing their best to promote a stable monetary policy.  I am no longer certain this is true.
 
Former Fed Vice-Chair William Dudley removed the veil of innocence with his recent comments urging Fed members to undermine Trump’s reelection.  Dudley claims that “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.”
 
He defends his message by claiming Trump’s tariffs are the major threat.  Dudley is wrong.  Trump’s tax cuts and deregulation have overwhelmed any damage from his tariffs.  The real threat to the economy and Trump’s reelection is an errant Fed policy.
 
Can the Fed actually create a recession and destroy Trump’s reelection?  Yes.
 
Here’s how. The economy needs money to function.  If the economy fails to get enough money business activity slows or even declines.  One of the most effective ways for the Fed to limit the amount money is to sell securities.  Selling securities or “quantitative tightening” is the opposite of buying securities or “quantitative easing.”  When the Fed buys securities, the Fed adds money to the economy, and when sells securities it subtracts money.
 
When the Fed sells securities it threatens the economy.  It happened before. In 2008 the Fed mysteriously changed its policy and decided to sell securities prior to the upcoming Presidential election.  Despite accurately warning about serious problems with the economy, the Fed nonetheless sold 39% of its entire portfolio of securities (at the time $300 billion) leading up to the worst financial collapse since the 1930s.
 
The Great Recession of 2008-09 made it virtually impossible for a Republican to be elected president. As a result, an unknown Senator Barrack Obama, with no track record, defeated John McCain, a well-known war hero with a track record.
 
Why did the Fed depart from orthodoxy in 2007-08?  Could this departure have represented a deliberate attempt to cripple the economy and affect the 2008 fall election? Or was the change in operations simply a foolish, innocent, ill-timed experiment that contributed to the financial collapse and the defeat of a Republican Presidential candidate?  
 
Prior to William Dudley’s recent statements I accepted the Fed’s explanation the policy change came at the behest of a Fed economist.  Which economist might have been instrumental in urging a change in the Fed’s operating procedure at this particular time and why?
 
In 2007, the most powerful economist at the Fed was none other than William Dudley.
 
Dudley received his economic training at the University of California, Berkley.  He was Chief Economist for Goldman Sachs when the Fed hired him in 2007 to oversee the department in charge of buying and selling government securities.  Dudley was hired by Timothy Geithner, President of the New York Fed, who would soon be named Treasury Secretary under President Obama.  As soon as Geithner became Treasury Secretary, Dudley replaced him as President of the New York Fed and Vice-Chairman of the Fed.
 
We may never know why the Fed abruptly changed its normal operating procedures prior to the financial crisis and the election of 2008.  We do know that the economy was in the midst of a financial crisis in 2008, a crisis that no doubt played a role in the outcome of the election.  We also know that in 2008 the Fed failed in the primary reason it was created—to maintain liquidity and avoid a financial collapse.  And we know the election of President Obama played a major role in advancing the careers of both Geithner and Dudley.
 
We now also know that one of the chief architects of its policy change, William Dudley, believes the Fed should do everything it can to prevent a Republican from remaining in the White House.
 
Fast forward to 2019.  The Fed has been aggressively selling securities for the past year and a half.  They sold almost $400 billion in the year ending in the fourth quarter 2018.  In December, when financial markets signaled the need to reduce interest rates, the Fed actually increased interest rates and reaffirmed plans for additional rate increases.  Only after a collapse in stock prices did the Fed agree to halt its planned increases in interest rates.  However, in spite of claiming its policy had turned neutral, the Fed sold over $300 billion in securities from the fourth quarter of last year until the end of July.
 
The Fed says it will no longer sell securities and indicates it will cut interest rates.  These statements provide scant comfort for the economy.  Traditionally, the Fed would buy securities to lower interest rates.  Due to still another policy change the Fed can now lower interest rates without putting additional money into the economy.  Hence, current Fed policy enables the Fed to “pretend” to ease monetary policy by lowering interest rates while failing to place more money into the economy.
 
William Dudley left the Fed last year.  He no doubt personally had to approve most of those who now hold key positions at the Fed.  Dudley’s claim that Trump’s reelection is “a threat to the US, and global economy, and to the Fed’s independence” shows the type of animosity towards the President that can lead policymakers to do everything in their power to prevent Trump’s reelection.
 
The Federal Reserve is the only government agency with the power to create a major downturn in the economy.  The Fed did it before and can do it again.
 

​Joseph Stiglitz’s new book People, Power and Profits provides an updated manifesto for the progressive-socialist agenda.  His manifesto is a call to solve our nation’s problems by relying more on government and, therefore, less on individual economic freedom.   Specifically, this agenda calls for higher tax rates on the rich and businesses, rapid increases in federal spending, government control over markets and a massive increase in government regulations.
What Stiglitz fails to do is provide his readers with any historical context of how this agenda has worked.  Progressive-socialist policies are not new.  Over the past century the US experimented with these policies on five separate occasions: 1913-1920, 1929-1940, 1965-81, 1988-95 and 2004-15.  Unfortunately, these years were among the worst years in our economic history.  There was no increase in the value of the average worker take-home pay over this entire 52-year period.  Since 1900 all of our economic progress occurred when policymakers avoided Stiglitz’s recommendations.
Not only have Stiglitz’s policy recommendations failed in the US, they have failed whenever and wherever they have been implemented.  To one extent or another progressive-socialist policies are the norm throughout much of the world.  The US is the only major country that has rejected such an agenda and embraced individual economic freedom for most of its history.  This is why Americans enjoy living standards higher than 99.9% of those in the rest of the world.  
As with other so-called progressive economists, Stiglitz is preoccupied with equality.  This preoccupation leads him to praise policies enacted during the Great Depression of the 1930s.  Stiglitz isn’t the only progressive economist to extol the merits of the Great Depression.  Thomas Piketty, who wrote Capital in the Twenty-First Century, does so as well.  Their admiration for the worst economic debacle in US history relates to what has become their prime economic objective—income equality.  They apparently believe America is better off when incomes are more equal, even if it takes a collapse in the economy to achieve such an objective.
Research from the Fraser Institute shows income inequality is fairly stable whether countries are rich or poor.  The main difference is the poor are much better off in rich countries than in poor countries.  This is why so many people in poor countries want to come to America.
The main weakness of Stiglitz book is its dearth of meaningful data.  Without such data, the author is able to make outlandish, general statements about US history without presenting a scintilla of evidence.  Had the author seriously examined the history of US economic policies and their consequences, he would have concluded that the only time the US lost its way was whenever the country followed his agenda. 
In addition to dealing with economics, Stiglitz touches on climate science by repeating the progressive mantra “…excessive emissions of greenhouse gases present an existential threat to the planet....“  As with his economic statements, he fails to provide any evidence for such an existential threat.  As for economics, the historical evidence is clear—the real existential threat to prosperity is the progressive-socialist agenda.  

​In spite of the latest kerfuffle, the odds still favor an agreement on trade.  Even without an agreement, the recovery will continue and stocks will recover.
The main problem the US has in dealing with China is the country’s reputation as an unreliable partner.  China has a well-earned reputation for not abiding by its agreements. 
When it was admitted into the WTO it agreed to open its country to foreign financial institutions and to respect intellectual property rights.  China also agreed to respect international boundaries in the South China Seas.  China has consistently violated such agreements.
The Trump Administration has insisted upon certain guarantees that any agreements should have triggers that go into effect in return for violations.    Among these triggers, Trump has demanded that current tariffs on China continue and should only be removed as China complies with its agreements.
Trade negotiators for both the US and China had indicated they had reached agreement on 90% of their issues.  Then last week US negotiators received a revised agreement changing some of what had been agreed upon.  One major change involved China refusing to change its own laws to comply the agreement.  China would still agree to do certain things, but would not change its laws to make such changes legal in China.
Backing away from an agreement already reached reflects a lack of sincerity and trust.  Since these were already the main issues the US faced with China, Trump was forced to call their hand.  Either China was serious in complying with whatever the two countries agreed to or there would be no agreement.
The ball is now in China’s court.  China has to decide whether extending the current 10% tariff on China’s exports is an acceptable temporary penalty for assuring their compliance.  The alternative is an additional 15% tariff and a further disruption to trade. 
As he has all along, Trump is playing a dangerous game.  Tariffs are disruptive to both countries.  I had assumed the current dislocations from tariffs would slow real growth to the 3% area.  If Trump follows through and raises tariffs on China to 25%, growth in the US is likely to move closer to 2½%.  The disruption to China’s economy would be even greater as more production moves from China to other countries.
Avoiding tariffs is clearly in the best interests of both countries.  The main problem is President Xi Jinping.  He cannot be seen as caving in to US demands.  Any trade agreement between the two countries will have to be designed to allow Xi to save face.  Trump has negotiated enough deals to know that if the US fails to allow such a concession, the disruption from tariffs will continue. 
In a worst case scenario, another round of higher tariffs would be enough to slow the US recovery.  But it won’t be enough to stop it.  With the S&P 500 10% below its fundamental stocks remain a strong buy.

​Stock prices acted appropriately in response to the Fed’s announcement.  There’s no way to sugar coat what the Fed did.  Having already moved 25% of my equity portfolio to cash, I’ll now move another 25% to cash. 
The unanimous decision by members of the Fed’s Open Market Committee ignored all signals coming from both financial and commodity markets.  Instead, of looking at financial markets, which look to the future, the Fed looked backward at the economy and concluded everything was fine.  They ignored all signs suggesting the Fed was becoming overly restrictive. 
While it’s possible the financial signs are all wrong, it’s also possible the Fed is wrong. 
The prudent action would have been to postpone any move to make monetary policy more restrictive and wait six weeks for its next meeting.  Instead, the Fed decided to “dam the torpedos” and ignore the possibility it had already become restrictive.  It doubled down on any restraint by raising interest rates, continued to sell $50 billion in securities each month and laid out a plan for further restraint this coming year. 
The 600 point swing in the Dow that followed the Fed’s announcement strongly suggests the Fed is on the same path today that it took in 2008.  If so, stock prices will head even lower in the months ahead. 
As in 2008, the Fed will eventually figure things out and make the right move.  While I hope I’m wrong, the fact that today’s potentially destructive decision was unanimous and so hardheaded provides little comfort this Fed will do the responsible thing any time soon.
 

​The latest decline in stock prices and narrowing of yield spreads are signs associated with a recession and even a developing financial crisis.  The Fed’s current policies have all the signs of a policy mistake similar the one that produced a financial crisis. 
In 2008 the Federal Reserve failed in its primary mission.  That mission is to make sure there is sufficient money in the economy to prevent a decline in business activity. 
Monetary policy was once straightforward.  The Fed would buy securities to make money more available and it would sell securities to make money less available.  This straightforward approach ended in 2008 when the Fed changed its operating procedures.
In 2008, as the economy entered a recession, the Fed sold $300 billion in securities.  In retrospect, it should be clear that continuing to sell securities amid an economic downturn was a terrible mistake. 
The Fed belatedly did the right thing in the first half of 2009.  It purchased back the $300 billion in securities it had sold.  Almost immediately, the stock market began to recover and by mid-year the economic began to recover.
The Fed spent the next five years purchasing an additional $3 trillion in securities.  This was three times the amount it had purchased since its founding in 1913.  The purchases were so excessive that banks left $2 trillion of these funds on deposit with the Fed.
No one knows how such massive purchases of securities have impacted the monetary system.  Nor is apparent how the $2 trillion banks have on deposit with the Fed will impact the amount of money in the economy. 
This year, as in 2008, the Fed has again sold $300 billion in securities.  One difference this year from 2008 is that banks have shifted $472 billion of their deposits with the Fed into the economy. 
What isn’t known is whether the Fed’s sales of securities are powerful enough to overwhelm any stimulus from banks’ shifting of funds into the economy.  It’s conceivable that, as in 2008, the restraint from Fed sales of securities is the dominant force driving monetary policy.
The Fed’s ongoing experiments with monetary operations have created challenges in interpreting the impact of it monetary actions.  Given the unknowns surrounding monetary policy, the Fed’s most prudent course of action is to stop selling securities and pause with any further increase in interest rates. 
If the Fed pauses in its moves toward monetary restraint, it will reduce the odds of a recession and send stock prices sharply higher. 

​President Herbert (Trump) Hoover has proven he’s not the genius he thinks he is.  After igniting a positive surge in growth with tax cuts, Trump’s tariffs will undermine the very growth the President is looking for. 
While President Trump’s business instincts are often positive, they are consistently negative when it comes to international trade.  He and his advisers use highly-flawed numbers for trade deficits as a guide to unfair behavior by others.  However, trade deficits can appear to show serious problems where none exist.  A trade deficit can as easily reflect a desire among foreigners to invest in the US, as they can some insidious behavior.   
Trump’s imposition of high tariffs on imports of solar panels, washing machines, steel and aluminum, provides certain industries and companies with government assistance.  The assistance comes at the expense of companies and individuals who pay higher prices for these items. 
It might appear the benefits to some companies are offset by the higher costs to others.  This isn’t the way trade works.  The efficiencies from the complex interactions of market forces overwhelm those from government dictates.  This is why countries promoting free trade tend to have higher productivity and higher wages than countries that protect industries with tariffs.
When Trump decides to reward some and harm others he is following in the footsteps of President Herbert Hoover.  Hoover encouraged Congress to place tariffs on foreign goods to protect American businesses and workers.   As the Smoot-Hawley Tariff moved through Congress in October, 1929, the stock market crashed.  It was a prelude to the Great Depression.
Blaming other countries for unfair trade is easier than to admit to our own weaknesses.  One self-inflicted weakness has been our high tax and regulatory burdens.  Trump has been removing these. 
Whatever trade complaints we might have had against foreign countries, Trump’s tax and regulatory reforms have leveled the playing field.  They have given US companies a major competitive advantage over businesses in other countries.  Instead of allowing this benefit to play out, the President’s imposition of tariffs is in the process of undermining his greatest policy achievement to date.  This is hardly the work of a genius.