If we are getting a whipsaw back to risk aversion, it can only help the dollar

Outlook:

Today the data includes US CPI. We wonder if it matters... As already reported, CPI is okay in the US at a comfortable level over 2% (2.3%) and likely to push up a bit more in Jan to as much as 2.5%. For some reason that defies understanding, the Fed insists its PCE deflator at 1.6% is more representative and realistic. The discrepancy between the two numbers doesn't bother anybody. Nobody suspects any intent to deceive... The Atlanta Fed has the business inflation expectation down to 1.7%. It was 2.0% last November. Bottom line: nobody much cares, except the Fed and that only sometimes.

A better barometer of US economic health is retail sales tomorrow. This is the driver of the US economy and we have no reason to suppose it's faltering. If we are getting a whipsaw back to risk aversion, it can only help the dollar. And it seems as though historic new lows in the euro are not going to end anytime soon now that all the greens shoots got mowed down. We get more economic outlooks today and tomorrow from ECB economist Lane. See the weekly chart. Now that we have breaking successive lows, the last lowest low is 1.0340 from Jan 2, 2017. Yikes! It's not always true that the market seeks to match old lows, but it's not out of the question, either.

US Politics: Critics are up in arms over Trump violating the norm of independence of the Justice Dept (and its agencies, including the FBI). The Treasury and its key agency the IRS enjoy a similar independence. The whole political world (and not just the Dems) was rocked when Nixon purportedly had the FBI investigate enemies and pushed the IRS to audit them. Now it's a crisis that Trump is twisting the Justice Dept to change the sentence of a crony. The rule of law and the independence of legal institutions is what prevents tyranny. Here we go again: Trump thinks he is above the law and not a single Republican is objecting to this stance. Whether it's an authentic crisis remains to be seen. The judge can ignore the Justice Dept sentencing recommendation and do as he chooses. Congress can pass new laws to firm up the independence aspect, although it would take a two-thirds majority to survive a presidential veto and the Republicans are spineless, as we just saw in the impeachment vote. Or maybe a new president will respect the conventions, although that leaves the door open to another Trumpy jackass. Two things: whether the Dems botched the impeachment (we think they did), the Republican Senators who voted to keep out witnesses and to acquit will have a lot of answer for in November. Secondly, democracies can be fragile. Countries can break. Rome broke. Germany broke. The US can break, too. We like to think Germany got broken by the acts of a single man, but don't forget that already in the early 1930's, the voters were choosing Hitler.

The reasons for the fall of the Roman empire usually start with the barbarian invasions. Can we consider Russian interference with the electoral process an "invasion"? Why not? Trump would have us think it's Latinos that are the invading force. And yet immigrants are traditionally more patriotic and law-abiding than the native-born. And remember, the Goths, Visigoths and Vandals took over 200 years to get the job done in Rome... but they didn't have the internet.

Rome was also beset by income inequality, overspending on wars, and reliance on a shrinking pool of slave labor. Then the Roman empire was spit in two, with one capital in Rome and the other in Constantinople. This is comparable to the inability of the two political parties to act in a bipartisan way. Then there was corruption, including in the Senate and the rise of the Praetorian Guard. Romans lost trust in government. The Secret Service is hardly the Praetorian Guard, but the Justice Dept can be seen in that role, including choosing new emperors. A standard liberal arts education involves studying the Classics. Everyone now thinks taking courses in Latin and Roman history is a waste of time. Coding and programming are far more useful to kids today. Wrong. Rome is the single best lesson possible on how to lose a democracy.

Tidbit: Italy has a demographic crisis. Yesterday ISAT published data and Pres Mattarella said "As an old person I am well aware of the falling birth rate." (Mattarella is 78). Reuters reports "Italy's growing demographic crisis, with births falling and life expectancy rising, is one reason for its chronically stagnant economy, and the situation is getting worse." In fact, there were the fewest births in 2018 ever recorded. "This is a problem that concerns the very existence of our country," Mattarella said. "The fabric of our country is weakening and everything must be done to counter this phenomenon."

We all know about Italian mothers refusing the cut the apron strings and young men remaining dependent and at home well into their 30's. What we don't usually see is the population in outright decline. The Bloomberg report says deaths over births rose to 212,000 last year for the 5th year, the most since 1918. Not a typo—1918, or 101 years.

"Italy's population is about 60 million and Eurostat projections see it declining to less than 56 million than by 2050. That sets it apart among the euro zone's biggest economies: France and Spain will record population growth in the period, while Germany's will be little changed." Today Italy has 67 births for every100 deaths. Even ten years ago it was a more balanced 96/100. This implies a worker shortage and more importantly a shortage of younger people paying to the pension system that supports the existing pensioners. Pensions are nearly 17% of GDP. Immigration is not the answer, with the net only 143,000 last year.

An econ prof proposes a cultural change that would have more women in the workplace. "Higher family income would boost the fertility rate." Historically, this is incorrect. Higher family incomes reduce population growth and improve conditions, especially health and education. Reuters reports "The current administration has offered lower income couples grants of up to 160 euros ($175) per month to help cover costs during the first year of a baby's life and also promised young families up to 3,000 euros a year to cover nursery charges." This doesn't get your mother-in-law off your back. Notice that Japan has a similar situation—a culture of tyrannical mothers-in-law from whom new brides cannot escape because of a housing shortage. Newly married couples have to live with the in-laws. Italy would find it more effective to subsidize affordable housing for the newly married. Ask any young woman which she would rather have—a little more money or her own house. No contest.

 

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