Join FXStreet's Senior Analyst Joseph Trevisani and Barbara Rockefeller, one of the forex market's best known and admired analysts, for a discussion of economics, leadership, history, and our particular political moment. Can the US economy repair itself? Will there be permanent economic damage from pandemic shutdowns, policy changes? Tune in and find out.
Joseph Trevisani: Hi Barbara... Before we start I want to say that I and my colleagues at FXStreet are very pleased to have you on our site and program.
Barbara Rockefeller: Thanks!
Joseph Trevisani: I have been reading your analysis for a long time and have always been impressed by its quality and your productivity.
Barbara Rockefeller: I spend about 4-6 hours per day just reading to try to find useful and relevant material.
Joseph Trevisani: Yes, it is a hunt most days for quality. We are in a most unusual time. It's almost like someone is conducting a grand economic and cultural experiment. The stresses that have been applied to our and the global economies are unprecedented... in this case, a true use of the word. Do you think we can have a normal recovery after this?
Barbara Rockefeller: Let me add that I do not read other FX analysts and commentators, out of fear of being influenced! when I do read some, always at FXStreet, I am amazed at how differently others see the world. The one thing that amazes me right now is that we have seen so much of what is happening now before, but sometimes not for a century or more. We have seen dictatorial behaviour, pandemics, and Great Depression-level economic disturbances. The problem is that we seemingly did not learn from history.
On the economics front, the recovery will not be "normal." Many smart people are trying to picture what the recovery will entail, but I think they are all getting it wrong. The single biggest difference will be the loss of jobs. Many jobs are going away forever, and "socialistic" solutions like a permanent income for all will become necessary. That means a huge change in taxation. The resulting social conflicts will be along the lines of the elite vs. The Takers, a different form of Piketty's income inequality discussion. One implication is that debt as a percentage of GDP will be evaluated very differently.
The EMU doesn't see it and perhaps never will, and that may condemn the euro, as though the euro doesn't already have enough structural problems. This is not to forecast the demise of the EMU, but to predict that it either reforms or gets split into two groups, those that care about debt to GDP and those who cannot/will not cover the current mandated rules. A big issue here is whether the US and UK provide anything resembling leadership. (We may say that Japan is already there, for all practical purposes).
Joseph Trevisani: You are right that this has happened before but this wholesale undermining of large sections of the economy not since the Depression. Neither the Reagan recession or the financial crisis is a good parallel. Jobs and consumption are key. The US consumer has always bounced back from debacles, I wonder if it is possible this time?
Barbara Rockefeller: When I say we don't learn from history, I am referring to the self-isolation and state-mandated quarantines put in place in 1918 – somebody just sent me a slew of cartoons from that year that could have been published this week, including the divide between the Bosses (who deny and downplay the risks) and the Workers, who are vulnerable.
The other parallel that nobody mentions is that the Great Depression was ended by WW II and the ramping up of defence production in the US. This is not to say the Great Depression caused WW II, although the hyperinflation and social unrest of the 1920s and 1930s in Germany certainly formed causative conditions. The match to the fuel was Hitler. Trump is a coward/bully and doesn't want to go down in history as a president who started a war, so war as an antidote to depression is not likely – but not impossible. The other factor in the post-war recovery was, as Greenspan notes more than once, technological innovation and new products. These days new products are digital, not physical, and do not require factories and workers. Besides, the soldiers returning from WW II got educations on the GI bill and entered the workforce as white-collar workers instead of fo blue-collar workers.
We have nothing equivalent going on today and Washington is too dumb and opposed to handouts to devise alternative job plans. The permanently unemployed is going to become a serious demographic in its own right.
Joseph Trevisani: I think you can make a case that the Depression was a major cause of WW2, in that without the economic dislocation and the collapse of Weimar... Hitler would never have come to power. Still, Trump was elected in peacetime and not as the result of economic trauma and he may win reelection.
As Churchill said: "The worst possible system except for all others." Is some form of permanent income a possible solution?
Barbara Rockefeller: While you are devising your next comment/question, let me add that the only adult in the room these days is Fed chief Powell. He absolutely gets it!
To respond to Hitler, let me say that I am not finding political commentary informing/contributing to FX commentary. I wonder why this is? Fear of offending readers on the far right, of course, but it seems obvious that you cannot ignore the political results of economic events. As a small example, the Trump base failed to get much benefit from, the tax cuts. The average worker got something like $400 while the fat cats with incomes over 250,000 got numbers like $12-14,000. And yet they are willing to overlook getting stiffed on taxes by attacks on China as the single party to blame for all our economic woes. They also seem not to know (or maybe not to care) that Trump lies when he says China pays the tariffs. It's downright weird that they do not see their own self-interest.
Joseph Trevisani: Self-interest is an oft-cited puzzle for politics when it is examined from an economic point of view... but politics, especially national presidential politics is an emotional game... and Trump has used that effectively, regardless of his actual policies. I think the idea of a semi-permanent income grant is getting a good deal of traction in DC? Could it pass? Could it work?
Barbara Rockefeller: Is there a parallel between Hitler blaming Jews and Trump blaming China? Not to the extent of a holocaust, but the same principle of avoiding responsibility and inability to devise workable policy responses to economic problems. We think we have solutions to inflation – I worked on the Fed funds desk at a bank during the Volcker Incident – Fed funds at 20%!! But we still do not have policy prescriptions for deflation and recession.
Joseph Trevisani: It is interesting that the solution to inflation cannot be reversed to fight deflation. I think the last three Fed presidents have been exceptional... But I think zero rates are a trap and I am glad Powell seems set against them. Though in practical impact there is not much difference between -0.1% and 0.25%.
Barbara Rockefeller: Ah, that's where Keynes' animal spirits come in. Deflation and human depression are almost certainly correlated. Sometimes my students used to ask why inflation at zero is "bad." After going through marginal cost/marginal return, I struggle to explain that the human mind wants to avoid losing more than it wants just about anything else. If a product you make costs 50 cents to manufacture and its selling price falls to 25 cents because of competition or loss of demand, you not only go out of business from the microeconomic reasons but also because you are discouraged from any undertaking/enterprise. What job is the person who used to run his own pizza parlour going to seek these days, or after these days, which will come in 2022?
Joseph Trevisani: Don't you think that most business owners will strive mightily to keep their businesses not only for income but for the sense of self-worth and purpose. That trait may provide more spark to a recovery than it is possible to put into an economic equation. Its the equivalent of goodwill on a balance sheet.
Barbara Rockefeller: Yes, of course, and the entrepreneurial spirit is strong in the US. The pizza parlour guy may start up again or start some other business, but not everyone can be an entrepreneur or has any skills at making a product, selling it and managing the business. Maybe the better example is the worker behind the counter – the cook. A corollary to the economic depression leading to psychological depression is that when inflation returns, and it will, we get a straight line upside recovery in activity!
Joseph Trevisani: True and I hope that my favorite restaurant in the city reopens. So you are optimistic about a recovery?
Barbara Rockefeller: The thing that worries me the most is that we have a pretty good grip on what moves the FX market – the indicators, the surprise vs expectations, etc. and it's not clear to what new variables we will be tracking six months or a year from now. It seems as though "excellence in management" a la Merkel is not valued as a factor, just as the US and dollar do not get points off for mismanagement. In fact, mismanagement that has led to a rise in risk aversion gets rewarded in the form of a stronger dollar. This is one of the many perverse things we see in FX but it bothers me.
As for recovery, yes, we will get a recovery and it may well be a V-shape after the L-shape. A lot depends on what gets invented/changed over the next two years. Optimism is the wrong word, though. For example, we will probably have self-driving cars by 2022, plus delivery drones (you gotta love Amazon) and some other high-tech, AI things I can't even imagine. With any luck, we will also have eco-friendly energy solutions, too. This will fuel the stock market and possibly even provide jobs, if not to the employment levels of recent years. Another place where the most money is to be made is biotech – longevity, regrowing bald men's hair, curing face wrinkles, etc. and oh, yes, curing Covid-19.
Joseph Trevisani: I admit to being with you on the bio regeneration idea... My kids are watching the Lord of the Rings and they are fascinated by the elves immortality... I also think that the recovery, once it gets started, will be stronger than currently predicted. The main reason being the human drive to reconstitute lives.
Barbara Rockefeller: I don't want to forget crypto. I have written it's not gonna happen in the west, for a long time, because we need money for transactions and to keep score. But it is almost certainly going to happen in China if only because as an official currency, it can be tracked precisely and capital flight totally ended (!). The state will know exactly what you have and how you spend it, which is a dream come true for a totalitarian state. This is an irony of all ironies because one of the reasons crypto became popular was to give the finger to The Man.
Joseph Trevisani: Truly the most powerful consequences are often the unintended ones... Cryptos electronic medium makes it possible to track everything... Unlike cash with is the ultimate protector of identity.
Barbara Rockefeller: Your optimism about the human spirit is nice and I mostly agree, but with the caveat that a bigger chunk of the US population and probably elsewhere, too, will be among the permanently unemployed and permanently unhealthy in both body and mind. Every once in a while you can see a documentary on PBS about conditions in Appalachia, which never recovered from the Great Depression. Upstate New York (near Adirondacks, where I come from) is similar. I am not a bleeding heart liberal but I see a rise in the dispossessed and impoverished. Not sure this is relevant to FX unless that group becomes so big that more Trumps are in our future.
Joseph Trevisani: I agree a permanent underclass is deadly for democracy. As for Trump, my view is less worried. It is also true that all members of a democracy need to feel involved. The election of Trump tells me that a large portion did not. Again the emotion factor in politics.
Barbara Rockefeller: Yes, Trump voters felt ignored and believed his false promises of "populist" solutions that would also entail kicking the elites and The Establishment in the rear end. Trump's appeal was always anti-elitist, which I am convinced arose from his being rejected, roundly, by the New York elite, the folks who ran the charities and went to the opera. His appeal was also racist, hard as that is to accept. His anti-immigration push is as much against brown people as against those "taking jobs" from the white lower classes. The Dems may not do any better at repairing immigration the next time out, assuming there is a next time, but every study shows that immigration is a strong contributor to US prosperity.
Joseph Trevisani: Immigration is both a guarantor and a symbol of US success I have two grandparents on the memorial wall on Ellis Island and I have shown them to my daughters.
Barbara Rockefeller: Can add that xenophobia and anti-immigration in Japan is a serious drawback to the economy although it helps inspire robotics. My own American ancestors came to the US in the 1600s but my vote is no better than yours. Many of the top "elite" in Washington are immigrants or the children of immigrants like that Colonel and the State Dept lady from Ireland who testified during the impeachment proceedings. That's something I hope will come to the fore again in the upcoming election. Immigration is a boon and a gift, not an albatross.
Joseph Trevisani: We agree immigration gives the US a disproportionate share of the most motivated and energetic people.
Barbara Rockefeller: I can add that having moved south of the Mason Dixon line two years ago (from New York and Connecticut), I am appalled at the stupidity, racism and anti-immigration position of my neighbours. I don't miss the blizzards, which was the reason to move, but I miss an intelligent conversation.
Joseph Trevisani: Well, I do admit that dinner and good conversation are one of the joys of life, and good wine too... Then straight to the CS FX interbank desk... In the wild good old days... On behalf of FXStreet and myself, I want to thank you very much for this discussion. It was most enjoyable. I have read and admired your work since my early days in the market. In partial payment of my debt, when you are in Manhattan I promise an excellent dinner and even better wine.
Barbara Rockefeller: Are we done? I need to go see how much money I lost today. Here's the story: my trading system has Rules by which you enter or re-enter or reverse positions. I disabled the Rule that says enter at x number of points below the open (for a sale) if the specified non-market price is not met. If I had not disabled that rule, I would be far richer but by disabling it, I didn't get any trades at all, I think, and on a day when we had a decent move for once. I have a trade copier program for some customers to track my master account trades and they are going to be mad at me for doing nothing on a day we finally saw some action. The recent zigzag chart patterns are very hard on a trend-following system so don't shoot yourself in the foot, too. Please tell me it's okay to exit this session now. Nice talking to you! Come by for a visit if you are in VA sometimes – visit Williamsburg, maybe.
Joseph Trevisani: Thanks, I'll remember when we take the girls again.
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