August 7, 2019: The One-handed Economist


“Give me a one-handed economist!  All my economists say, ‘On the one hand…on the other!’”

-          Harry Truman                                   


Record U.S. Economic Expansion

Lost in the recent focus on tariffs and interest rates is the fact that the current economic expansion in the U.S. just became the longest on record.  Although the overall growth rate of this expansion has been anemic relative to previous expansions, inflation-adjusted wages have grown more robustly than previous expansions, a positive for the U.S. consumer (source: The Wall Street Journal).

As to the future, this is where Harry Truman’s two-handed economist comes in.  On the one hand, we have low inflation and interest rates, unemployment is low and real wages have grown, consumer debt service appears reasonable, and the U.S. economy is less susceptible to an oil price shock than in the past.  Additionally, perhaps the memory of the Great Recession of 2008-2009 has subdued animal spirits and is helping to prevent excesses that naturally lead to recessions; for example, The Wall Street Journal observed that household debt has not increased nearly as significantly as it did in the last expansion.

On the other hand, the federal government is running historic peacetime deficits despite a growing economy and has failed to address long-term budget challenges.  Interestingly, the only thing Democrats and Republicans seem to agree on is boosting spending and borrowing.  Other areas of concern include a potential tariff war, a significant rise in corporate debt, and the potential for asset bubbles resulting from continued extraordinarily low interest rates.

Howard Marks of Oaktree Capital recently pointed out that, “In recent years, the U.S. has simultaneously experienced economic growth, low inflation, expanding deficits and debt, low interest rates and rising financial markets.  It’s important to recognize that these things are essentially incompatible.  They haven’t co-existed historically, and it’s not prudent to assume they will do so in the future.”

At ten years and counting, the U.S. economic expansion has been impressively long.  Although we will surely experience a recession at some point, we continue to believe it is extremely difficult to predict the timing and severity of recessions.  Furthermore, we do not subscribe to an investment strategy that involves “getting out of” or “going all-in” the stock market in response to one’s expectations for the economy.  We will comment further on the investment markets in a future letter.

Interest Rate Reduction

As expected, last week the Federal Reserve reduced its target for short-term interest rates by one-quarter of a percentage point.  This was the first rate cut since the global financial crisis in 2008, the first cut with U.S. unemployment below 4%, and the first time since the dot-com era of the 1990s that the Fed eased policy with U.S. stocks at or near record highs (source: Capital Group).

What we used to call “unconventional monetary policy” has now become the norm in the U.S. and elsewhere.  Previously unthinkable negative interest rates have become commonplace throughout much of the world; perhaps this, as much as anything, forced the Fed to lower rates in the U.S.

As a reminder, the Fed’s target for short-term rates directly affects savers via yields on bank savings accounts, money markets, and shorter-term bonds.  Fed policy also affects borrowers via rates on adjustable rate mortgages and many other types of loans; for example, loans tied to the Prime Rate.

The Fed’s target for short-term interest rates does not, however, control fixed mortgage rates, a common misconception.  Fixed mortgage rates are directly influenced by longer-term rates, which are determined by the bond market.  Longer-term rates should represent the collective judgment of bond investors toward future inflation and economic growth (extraordinary central bank involvement notwithstanding).  As it happens, longer-term rates have been on the decline since last November, which has translated into a significant drop in fixed mortgage rates since then.  If you have a fixed mortgage, we recommend asking your lender whether it makes sense to refinance.


Hilsenrath, Jon. "After Record-Long Expansion, Here's What Could Knock the Economy Off Course." Wall Street Journal, 3 Jun. 2019. Web 31 Jul. 2019.  
"US Business Cycle Expansions and Contractions." ( the NATIONAL BUREAU of ECONOMIC RESEARCH. Web 2 Aug. 2019.
Marks, Howard. "This Time It's Different." 2019 Oaktree Capital Management, L.P. Memo to Oaktree Clients. 12 Jun. 2019.
"Fed rate cut shifts monetary policy into overdrive." The Capital Group Capital Ideas. Web 2 Aug. 2019.


Past performance does not guarantee future results.  Investment strategies discussed may not be suitable for all investors.  Diversification does not guarantee against investment loss.  The information provided here is for general informational purposes only.  The inclusion of specific securities within the context of broad economic commentary is not intended to be a recommendation.  Investors should thoroughly evaluate any security before taking action.  International investments involve special risks, including currency fluctuations and political and economic instability.  Opinions expressed are subject to change without notice in reaction to shifting market conditions.  Data contained herein is obtained from what are considered reliable sources.  However, its accuracy, completeness or reliability cannot be guaranteed.

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