where to from here?

I’m not a big fan of Lawrence Summers, but he had an interesting op-ed article in the Financial Times early this month.  He observes that, unnoticed by most domestic stock market commentators, the foreign- exchange value of the dollar has steadily deteriorated since Mr. Trump’s inauguration.  Currency futures markets are predicting a continuing deterioration in the coming years.  He thinks the two things are connected.  I do, too.

To my mind, what is happening  on Wall Street recently is that currency market worry is now seeping into stock trading as well.  If someone forced me to pick a catalyst for this move (I would prefer not to), I’d say it was the possibility, introduced in the press investigation of Cambridge Analytica, that what we’ve believed to be Mr. Trump’s uncanny insight into human motivation (arguably his principal redeeming feature) may be nothing more than his reading a script CA has prepared for him.  This would echo the contrast between the role of successful businessman he played on reality TV vs. his sub-par real-world record (half the return of his fellow real estate investors while assuming twice the risk).


The real economic issue is not Mr. Trump’s flawed self, though.  Rather, it’s the idea that public policy in Washington generally, White House and Congress, seems to have shifted from laissez faire promotion of businesses of the future to the opposite extreme–protecting sunset industries at the former’s expense.   In this scenario, overall growth slows, and the country doubles down on areas of declining economic relevance.

We’ve seen this movie before–in the conduct of Tokyo, protecting the 1980s-era businesses of the descendants of the samurai while discouraging innovation.  The result has been over a quarter-century of economic stagnation + a collapse in the currency.


More tomorrow.

the Larry Summers market rally

Summers withdraws

Yesterday evening, Lawrence Summers, President Obama’s choice to replace Ben Bernanke as Chairman of the Federal Reserve, announced he was withdrawing his name from consideration.

Global stocks and US bonds jumped on the news.  The dollar declined slightly, as well.

why the celebration?

The consensus view on Wall Street is that Mr. Summers would have begun to raise interest rates in the US much more aggressively than had been the Bernanke policy.  It isn’t clear that Mr. Summers’ view is wrong.  After all, the Fed is justifying its current super-accommodative stance by pointing to its mandate to fight unemployment , not the more typical central bank responsibilities to keep the economy on an even keel.

But Mr. Summers is also somewhat of a loose cannon.

For example, he was removed as president of Harvard after alienating the tenured faculty by his brusque management style.  He’s also suggested that the paucity of women scientists in the US may be due to genetic deficiencies in the female brain.  As well, in an article titles “How Harvard Lost Russia,” the Institutional Investor questions Mr. Summers’ defense of a protege, Andrei Schleifer, who was convicted of conspiracy to defraud the US for violating conflict of interest rules while working as a government adviser in Russia.

why the withdrawal?

Mr. Summers’ withdrawal comes after a series of prominent Senate Democrats publicly announced they would not vote in his favor.  The one who caught my eye is Elizabeth Warren of Massachusetts, who was a professor at Harvard while Summers was president.

who will the new nominee be?  

It’s hard to say.  The gracelessness with which Mr. Obama terminated Ben Bernanke a few months ago suggests there’s a big personal eqo issue involved.  Janet Yellen, the number two person at the Fed, and the “easy” choice, was never Mr. Obama’s favorite–maybe because she was an adviser to the Clintons.  I guess it’s possible that choosing Summers was less about him than about Ms. Yellen.

Since Mr. Summers’ abrasive personality and peculiar social views are as much a pert of his rejection as his economics, it could be that a new nominee will also hold Summers’ more aggressive interest rate views.

In any event, I think the present market advance is a one-day affair, that may well be reversed when a new Fed nominee more acceptable to the Senate surfaces.