Market Stresses in 2015 Can Have Good Outcome

For the past few months, financial markets have been positioning for a change in Federal Reserve policy to move from “very easy and accommodative” to “easy and accommodative.” The decision of the Fed, finally, to raise short-term lending rates by 25 basis points was met with relief that months of will-they won’t-they were finally over. At the same time, the energy and commodity complex has continued to melt down as prices plummet. The result has been both an unusual amount of turmoil in fixed income markets and a rising chorus of voices anxiously drawing parallels to 2008-2009.

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Hey, Donald: Washington Is Working!

The view of Washington as a dysfunctional system is deeply entrenched—and of course it’s the most popular meme on the GOP campaign trail. “Nothing works in our country,” Donald Trump said again at Tuesday night’s debate, repeating his favorite (and seemingly most effective) appeal to a base that’s disgusted with politics as usual. Yet the past week has been a blow to cynics everywhere, because lo and behold, Congress, the White House, and the Federal Reserve all acted on vital economic policy and did so with minimal drama.

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How the Economy Helps Trump

The American economy suffers from a split personality, and Donald Trump appears to be the chief beneficiary of this illness. A study just released by Pew shows that for the first time in decades, the middle class is no longer in the majority in the United States. Instead, the upper and lower classes are. Now the middle class—defined as people earning between two-thirds and twice the median income (from $42,000 to $126,000 a year)—constitute just under 50 percent of the earning populace. Twenty-nine percent are in the lower brackets, and 21 percent in the upper.

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Are Robo Portfolios Ready for Black-Swan Events?

We’ve seen a significant move away from how most people invested in the 20th century—actively and with the at times costly advice and direction of advisors and brokers—towards a more digitally enhanced, passively implemented set of strategies. Some of that trend is inevitable and a useful addition to the suite of options. But as we have said, and continue to maintain, the rush toward passive investing is not without issues, and it must be balanced. There can be too much of a good thing. Today’s rush towards passive, ultra-low cost investing solutions must be tempered with questions: What is being gained? What potentially could be lost?

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Beyond Silicon Valley

Silicon Valley is often held up as the gold standard of revolution and transformation, but what if replicating the Valley isn’t the point? Other hives of innovation and growth buzz around the country and in almost every city around the world. Where will innovation happen, and how will what we build change as its venue changes?

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The Uberization of Money

Imagine that you want to buy a home. You might find a real-estate agent to show you around, which is a very 20th-century way of doing things. Or you might go 21st century and use the Web to research prices and available properties and to take a few virtual tours.

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Janet Yellen's Quiet Revolution

Donald Trump turned his rhetorical bazooka on Janet Yellen this week, accusing the Fed chair of being “highly political” and merely doing President Barack Obama’s bidding by declining to raise interest rates. In this as in so many things he says, Trump was issuing wisdom from his rear end, but the GOP candidate from clowntown did serve one useful purpose. He prompted us to ask yet again: What is Janet Yellen’s game?

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Ben Bernanke, the Grown-Up in the Room

Ben Bernanke’s new memoir, The Courage to Act, is neither easy nor scintillating reading. But clunky and dry as it is, the 600-page tome serves as a provocative reminder that not all high officials in our largely dysfunctional government are motivated by partisanship or the desire to protect bureaucratic turf. It offers proof that Bernanke and the Fed were the grown-ups in the room during a period of crises unprecedented since the Great Depression, regardless of whether you believe they have conducted themselves brilliantly or poorly.

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What Trade-Deal Critics Are Missing

The 12-nation Trans-Pacific Partnership trade deal signed Monday is poised to become an election-year piñata as the Obama administration works to get it through Congress. Hillary Clinton, who supported the TPP when she was secretary of state, came out against it on Wednesday: “I don’t believe it’s going to meet the high bar I have set.” Sen. Bernie Sanders, her rival for the Democratic presidential nomination, issued a caustic statement: “It is time for the rest of us to stop letting multinational corporations rig the system to pad their profits at our expense.”

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How Fed Inaction Changes the 2016 Election


It may sound like a Zen koan, but the longer the Federal Reserve declines to take action in coming months, the more its inaction will seem like action. To put the paradox another way, the Fed’s failure to raise rates makes it even more of an election cycle factor in U.S. domestic politics, keeping the central bank in the spotlight to an excessive and unconstructive degree, like a low-level fever that doesn’t keep you in bed but casts a general pall.

It has now been more than seven years since the Fed last raised interest rates, and the rationale for last week’s most recent decision came as something of a surprise to market players: In addition to seeing little evidence of inflation, the Fed in its statement also expressed concern about global volatility and continued instability.

That was not taken well by some. Said Rick Santelli of CNBC, he of Tea Party fame, the Fed has now expanded its mandate to become “the U.N. central bank.” Others wondered whether, in addition to its mandate to assure price stability and full employment, the Fed was now unofficially adding a third goal: maintaining global financial stability. And that, you can be sure, will be sure fodder for Republicans and not a few Democrats who already believe that the Fed is too powerful, too unaccountable and too focused on the needs of the financial system at the expense of average workers.

There are, of course, legitimate questions about whether the Fed and other central banks are erring in their multiyear course of easy money. The European Central Bank is now in the midst of its own policy of “quantitative easing.” While the European Union has ceased its economic free-fall, that is about the most that can be said of its current economic recovery. Japan has been in the midst of more than two decades of easy money and near-zero interest rates since the 1990s. It too has exhibited low growth. The United States has recovered from the worst of the global financial crisis of 2008-09, especially in terms of a low unemployment close to 5 percent and growth above 2 percent, but years of zero interest rates have hardly fueled a boom in anything other than some speculative stocks, urban real estate in select cities, and high-end art.

Because the Fed has given no clear sense of when it might actually start to raise rates, it thus has solidified its profile as an eternal Hamlet for months to come. The question "Will they or won't they?" has become tedious and borderline-obsessive. There was some hope that this conversation would come to an end; now it will simply go on, absent some major event that makes it irrelevant.

Lost in the market noise and the political spin, however, is precisely the point underscored by the Fed itself and Janet Yellen: It is a major actor on a complicated global stage that has a large cast of characters—one of whom, Chinese President Xi Jinping, is visiting Washington this week. Its mandate, based on legislation in 1913 and updated in the 1970s, speaks to a world that no longer exists. A mature governing legislature would, of course, update and refine that mandate to reflect changed global realities. But the American Congress today is incapable of that type of thinking, as least as a body; individual members are certainly able to recognize the ways in which an entire swath of laws and institutions are out of date. But good luck doing something about it.

Instead, the appointed officials of the Fed are left to muddle through and to try to reconcile a series of demands along with a political minefield. Markets want certainty, and politicians want transparency, and everyone wants more growth. The problem is that certainty is a myth; transparency is a code word for forcing a partisan agenda; and growth for mature economies facing technological disruption and labor competition globally is beyond the control of any one institution.

None of those realities plays well in an election cycle. The very messiness of a modern mature economy in flux may be why none of the Republicans during the last debate mentioned it much. There is no good sound bite. Meanwhile, both Bernie Sanders and Hillary Clinton have been advancing detailed economic plans, ranging from an end to short-termism on Wall Street to an attack on economic inequality. Worthy those may be, but they engage on a cerebral level rather than on the visceral, and hence get short shrift in our national discussion.

By not acting, the Fed feeds into an old red-meat political narrative of indifferent or downright malicious financial elites of the East Coast establishment making policies secretly and opaquely to benefit the interests of a privileged few at the expense of real hard-working Americans who suffer the consequences. Such a story was spun more than a century ago by the populist William Jennings Bryan and his doomed presidential campaign thundering that Americans were being crucified on a “cross of gold.” The Fed today isn’t responsible for that history, but surely it could be less tone-deaf to it.

Fed blame, however, is no more a winning proposition now than it was then. We can excoriate (or credit) the Fed all we want. Its inaction makes it easier for various actors casting about for sound bites and solutions to use the Fed as Exhibit A for why things aren’t better. Would that it were so simple.

The Virtues of This Boring U.S. Stock Market

So here we are, more than halfway through the year, and although there has been no dearth of daily news, it’s been remarkably static for many investments, particularly U.S. equities. Some sectors — energy and commodities above all — have been spectacularly weak as the global economy continues to adjust to massive supply and demand shifts, especially lower demand from China. A few sectors, notably technology, have done quite well, with several technology indexes up close to 10% year-to-date. But in aggregate, U.S equities have had one of their least volatile and least interesting six month periods in a very long while.

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