I’m away this week for my annual sojourn in Maine, a trip I’ve been making since 2007. Light posting this week, but here’s my 2019 write-up for Business Week. Enjoy!
Talk rates in the Maine woods with economists over good wine
Held just before the Jackson Hole Economic Symposium, the gathering is an opportunity for money managers, traders and economists to discuss important issues without restraint.
Business Week, August 27, 2019
Let’s get this straight: there is no such entity as the “Shadow Kansas City Federal Reserve Board.”
This is not a “first rule of fight club” situation. No one denies that a gathering of money managers, bond traders and economists has been taking place at Lynn’s Lodge on Maine’s Grand Lake Stream for decades. It is true that most conversations remain off the record or are governed by Chatham House rules, which do not permit identification of speakers without their permission. Many participants have ties to the Federal Reserve as current or former employees, but are not authorized to speak for the Fed.
The long weekend in Maine took place shortly before the Jackson Hole Economic Symposium, a 1982 event held in Wyoming and hosted by the Kansas City Federal Reserve. Therefore, the gathering became known in some circles as the “Shadow Kansas City Federal Reserve Board” because many of the attendees had Fed affiliations, more than a few of whom left for Jackson Hole right after the gathering.
The party does not claim any official imprimatur. Instead, “Camp Kotak,” as it has become known — David Kotak, chairman and co-founder of Cumberland Advisors, who started the meetings more than 20 years ago — is fishing and drinking and hiking and shooting and smoking cigars in the woods of Maine, all of which Might be great fun, but hardly a reason to gather every year.
The main draw is the opportunity to discuss and debate the big issues of monetary policy, economics and finance, away from the usual office routine, with a like-minded group of serious policy wonks and high-profile money managers. The dining room at the dinner represented about $2 trillion in capital, not counting the participants from the various governments and central banks around the world.
In the past, the topics of discussion were far-reaching; But this year, the focus was all the time on the Fed: whether it will cut rates and by how much; If the inverted yield curve is a bearish signal; Whether negative bond rates from Japan and Europe will make their way here. Perhaps the most spirited discussion was on the independence of the Federal Reserve in the face of constant pressure from President Trump.
Almost all participants related similar anecdotes about the president’s pressure on the Federal Reserve. Harry Truman famously called the entire Federal Open Market Committee to lunch at the White House, warning, “If you don’t lower rates, you’re doing Stalin’s bidding.” Lyndon Johnson invited Fed Chairman William McChesney to Martin at his ranch in Texas. LBJ threw Martin against the wall, saying, “Boys are dying in Vietnam, and Bill Martin doesn’t care.” Ronald Reagan’s Chief of Staff Jim Baker invited Fed Chairman Paul Volcker to the Presidential Library in the Oval Office of the White House. “The president is instructing you not to raise interest rates before the election,” Becker told Volcker as he sat next to Reagan.
In each of these instances, the US president’s pressure was personal, personal—and mostly effective. The idea of open conflict between a president and his own appointed Fed chair was unthinkable. Not just because it can crash the markets, but simply because adults don’t behave that way
Alas, those were simpler times, decades ago presidential tweets were a thing. Before public bullying and harassment campaigns, there was direct and personal persuasion. The record suggests that this was an effective way for presidents to influence monetary policy. Camp Kotak participants repeatedly pointed out that the current system was not only unpleasant but was never effective. The president calling out his hand-picked FOMC chair to an audience of 60 million-plus Twitter followers doesn’t seem to be having the desired effect.
At the Jackson Hole gathering, Fed Chairman Jerome Powell’s speech was a refresher on the history of monetary policy in the post-World War II era. The current situation section offered little comfort to a president clearly worried about a potential recession and its potential impact on his reelection chances. Powell seems to have figured out three important things:
1. In the current era of low rates, low inflation, and modest economic expansion, the Fed’s rate policy is having little to no effect in stimulating the broader economy. Consumers are buying big-ticket items like homes and cars, regardless of the modest increase in rates we’ve seen over the past two years; We are still at historically low and accommodating levels. It is worth noting that corporations are borrowing large sums of capital not to invest and rent, but to buy their own shares. Lowering rates won’t change that behavior; If anything, it will only encourage it more.
2. The Fed can’t offset an ill-advised trade war. The tariff has had the expected textbook response in economics, treating it as an unnecessary tax on consumer spending both here and abroad. If there was any expectation on the part of White House residents that this would wink at the Fed and cut rates, it seems they were mistaken. “While monetary policy is a powerful tool that serves to support consumer spending, business investment and public confidence, it cannot provide a settled rule book for international trade,” Powell said.
3. Perhaps No. 2 above happened because of the following: Powell assumed Trump couldn’t fire him—at least, not without causing a constitutional crisis. This last conclusion allows the chairman to focus on protecting his institution from undue pressure from the president.
Simply put, the Fed believes that cutting rates is not a faith pill for the president. So the Fed would rather wait to cut rates when it would be more effective—in a mild recession—than risk inflation rising from a more favorable position than we currently have.
To invite Camp Cote, you must tick three boxes: First, a group member must designate you as someone able to add to the conversation. Original ideas, thoughtful disagreements, and intelligent alternative viewpoints are all welcome. Secondly, you must get the thumbs-up from Kotok.
Third, the rule mandates that each participant bring a case of wine. There are some serious oenophiles in the group, and you’ll want to bring your A-game. A lot of thought goes into the wine selection, including 20-year-old Scotch whisky, rare tequila and the occasional brandy. This year I brought two cases of a delightful Spanish Albariño from Ramon Bilbao; It was an inexpensive (so two cases) and unexpectedly delicious treat. It made a surprisingly good impression in the face of over-represented and overpriced Napa Valley Cabernet.
Most evenings there is a featured discussion before dinner. Senators, governors and representatives attended. Every Saturday night there are heated debates. Topics include currency issues, recent crises and economic philosophy. The theme of this year’s Jackson Hole Economic Symposium was Challenges for Monetary Policy. So it was no coincidence that the debate in Maine this year, moderated by Jim Bianco of Bianco Research LLC, was on modern monetary theory, also known as MMT. The surprising consensus was that whether it came from the political left or right, MMT was inevitable. Expect future infrastructure projects, Medicare for All and/or tax cuts approved by Congress to be financed by bonds issued by the Treasury and purchased by the Federal Reserve. The group takeaway was as simple as it was chic: “Free money! What could go wrong with that?!”
One cannot assemble 50 economists and their ilk and expect to make predictions. All participants answer 25 questions about where they think various prices and economic indicators will be one year. The stock market, unemployment, bond yields, gold, gross domestic product, yen, euro, inflation, oil and other questions are not only discussed and predicted but gambled at $5 per forecast. I usually do very well, and this year I won $52. (The tie changes the payout.) There are large side bets, and some people have been known to make rather large and ill-advised bets while under the influence of alcohol. I did that too, but thankfully, the rules prevent me from going into detail.
There is a stable core of about 35 to 40 people, with a few newcomers every year showing up to shake things up. Not everyone gets invited back. My slot was opened a dozen years ago when a Chicago coin dealer decided to stand up in his canoe, capsize it, and send everyone and everything on board into the lake.
My own almost expired when I left a wet towel on the radiator to dry; It instead smoldered. Camp Kotak lore is that I almost burned down the cabin, and bank analyst Josh Rosner conducted a mock trial that evening to get me out for my recklessness and negligence. My defense: It was no accident; I was trying to kill Rosner and his snoring bunkmate and fellow bank analyst Christopher Hollen, so the rest of us could get a good night’s sleep. That this argument took over that day gives you some idea of the gallows humor of the assembled frustrated set – and why I still get the annual invitation.
Over the years, electronic media were heavily present (including Bloomberg Radio and TV). One Friday evening, August 5, 2011, a television truck was accidentally still present—it couldn’t get out of the cramped parking lot because a missing car key blocked the way—when Standard & Poor’s unexpectedly downgraded the credit quality of the U.S. television. The producer had the dream, a huge news event scoop, a live TV feed and dozens of tipsy economists happy to chat about it, alcohol-induced buzz be damned. This is the first person to share their views with the world on what the downgrade means. The consensus that it was much less important than people feared was borne out by the subsequent course of history.
Concerns this year focused on the many complexities of monetary policy. The inverted yield curve—when short-term bonds yield higher than the rates paid on long-term bonds—is worrisome, and the main question of debate was whether it portends a recession or whether interest rates are still too low. .
Yet the United States has one of the highest rates in the developed world, which is not ideal in the eyes of many economists. The risk is “massive inflows of U.S. currency” to capture that yield and an “overvalued dollar that is very strong.”
Negative interest rates were more worrisome for the group. The entire economic system, it was noted, was based on positive interest rates. And if rates in the US turn negative, as they already have in Germany and Japan, no one knows what will happen.
Here are photos and videos
Talk rates in the Maine woods with economists over good wine
Business Week, August 27, 2019