This was a big week for people who follow macroeconomic news. The Federal Reserve kept rates and the dot plot unchanged, but the press release was carefully worded to be opaque. We’ll explain why. After more than a decade of near and even below-zero interest rates at the Bank of Japan, they finally responded to continuing weakness in the yen by raising rates to between 0.0% – 0.1%. The market laughed and continued to sell the yen. Congress plays with the idea of banning TikTok. We don’t think that’s actually a Constitutional issue, but the way the legislation is written indicates Congress is grabbing the right to shut down websites and platforms engaging in speech that violates their preferred narrative. That IS a Constitutional issue. We’ll have DKI legal Advisor, Phil Kessler, on to opine during Monday’s video version of the 5 Things. Dario Perkins has a laugh at inflation targeting while DKI describes the danger of slow stealth stealing by the government. And for the second week in a row, we express concerns about the commercial real estate market. This time we focus on vacancies in office buildings.

This week, we’ll address the following topics:

• The Federal Reserve concludes its March meeting. Decides to be all things to all people.
• The Bank of Japan raises interest rates above zero and it’s not enough.
• Congress may force a sale of TikTok, but that’s not the key issue.
• The 2% inflation target is random and unchanged.
• Commercial real estate disaster is starting with office space.

Ready for anew week of hilarious economic data? Let’s dive in:

1) Fed Keeps Rates Stable and Dot Plot Unchanged

The Federal Reserve concluded its March meeting and kept the fed funds rate unchanged. In late 2023, the market expected the Fed to lower the fed funds rate six times (1.50%). DKI was adamant in predicting that wasn’t going to happen. Coming into this meeting, the expectation for rate cuts had been reduced to three (.75%) for the year. There was also a fear that with last week’s stronger-than-expected CPI and PPI that the Fed would become more hawkish (hawkish means favoring higher interest rates). Within minutes of the dot plot being released, the market rose as the new data indicated the Fed is still projecting three cuts. (The dot plot is where Federal Reserve Governors indicate their expected level for the fed funds rate at various points in time.)

The market was relieved that most of the dots for 2024 remain in the 4.50% – 4.75% range indicating three rate cuts later this year.

DKI Takeaway: Chairman Powell’s press conference followed the usual script with nearly every reporter asking some version of when the Fed would lower rates, and Powell trying to avoid looking annoyed while reiterating that the Fed would remain “data driven”. I thought the most interesting part of the day came from some slightly inconsistent language in the press release. At one point it said the Fed would cut when it had greater confidence inflation was moving towards the 2% target. At another, it said that the “Committees strongly committed to returning inflation to it’s 2% objective.” One sentence implies they’ll reduce rates before we get to 2% inflation. Another implies they’ll cut when inflation gets back down to 2%. I believe this opacity is intentional and is designed to give the Fed room to justify a range or future policy options.

2) The Bank of Japan Goes Above Zero

DKI has spoken and written extensively over the past 18 months about how the Bank of Japan has put the world’s fourth largest economy on the verge of a sovereign debt default. The BoJ has kept its version of the fed funds rate below zero for nearly a decade. That’s allowed Japan to run up huge debt of over 260% of GDP at little cost. When other central banks raised rates, that made the yen unattractive and it fell from around 102 to the dollar to below 150 per dollar. That’s a problem in a country with few natural resources and a need to import energy. This week, the BoJ finally raised rates above zero.

Between negative .1% and .1% since before 2009.

Why the yen has collapsed in one chart.

DKI Takeaway: The BoJ was hoping that when it raised rates above zero, the yen would strengthen. Instead, it fell a small amount against the dollar. That’s because the increase was from negative 0.1% to a range of 0.0% – 0.1%. That was the smallest increase possible to get barely above zero. The market recognized this as meaningless window dressing and continued to sell the yen. Should the BoJ ever get serious about normalizing interest rates, it would strengthen then yen and result in an unwinding of the huge “carry trade”. That would mean giant sell orders in the US Treasury market and higher borrowing costs for the US government. That would be a problem for the US, but based on excessive caution at the BoJ, it’s a problem for another day.

3) TikTok Facing a Forced Sale, but What Comes Next?

The US House of Representatives voted 352-65 to force ByteDance to divest its subsidiary, TikTok. The company claims it’s not controlled by the Chinese government, and that ByteDance has many US corporations that own most of its stock. DKI suggests this is all a misleading smoke screen. They specific ownership of TikTok and ByteDanceis not the key issue, and typically, US citizens or companies own interests in Chinese companies through tracking stocks registered in the Cayman Islands rather than direct ownership of the companies. More importantly, the Chinese Communist Party (CCP) has a “golden share” representing approximately a 1% interest in ByteDance. That golden share enables the CCP to appoint a Director to the Board, provides the CCP with veto rights over business decisions, and ensures the CCP has access to data from ByteDance and its subsidiaries. The Wall Street Journal reports that “TikTok collects reams of sensitive data on U.S. users, including their locations, search and browsing histories, keystroke patterns, and biometrics.” That data is shared with the CCP.

ByteDance claims it’s not owned by the Chinese government. But as long as it’s required to pass on all user data to the CCP, the nice graph above is meaningless.

DKI Takeaway: Some are claiming this is a first amendment issue. That’s incorrect. There is nothing in the US Constitution requiring the US to allow foreign governments to spy on more than 100MM Americans. I’m concerned about a different issue. The law is being written in a broad way that would allow the US government to later shut down US-based websites and platforms for “misinformation” which has become an emotional term for speech considered inconvenient to people in Washington DC. It’s no secret that many in DC aren’t happy with Elon Musk’s version of free speech on Twitter/X, and would like to see it shut down ahead of the November elections. If Congress wants to prevent an enemy country from taking the action of harvesting data and spying on Americans, that’s fine. DKI would like to see the bill be narrowly written so that the free speech rights of all Americans using online platforms are protected. The first amendment governs speech not spying. Congress should preserve that distinction. We’ll explore this in greater detail in the video version of the 5 Things with DKI legal Advisor, Phil Kessler, who has well-founded opinions on the subject.

4) The 2% Inflation Target is Random and Unchanged

Almost 40 years ago a New Zealand finance minister was questioned on television about his estimate for a sustainable and healthy rate of inflation. He had difficulty answering the question, but settled on 1%. That later got adjusted to 2%, and by the 1990s, began to be adopted by central banks. As of now, the 2% numberremans unchanged despite some in the US government now calling for 3% – 4% inflation targets. DKI would like to remind you that the mandate of the Federal Reserve is “stable prices”. That means a 0% inflation rate.

Dario Perkins has a funny take on charting a number that’s been 2% for decades.

DKI Takeaway: I disagree with the often-repeated mantra that without inflation the economy would stall because no one would buy anything if they think the price will fall over time. I spoke with DKI intern, Andrew Brown. These items cover almost 100% of his spending; tuition, dorm/housing, food, car payment, auto insurance, computer for school. I’m confident that he wouldn’t delay any of that spending if he could get those items 5% cheaper next year. Stable prices encourage savings and investment which causes GDP growth. Inflation encourages immediate consumption. Inflation represents quiet slow theft of your savings by the government. Over a 40-year working career, a 2% inflation rate robs you of 55% of the value of your savings. Move the target to 4% and that theft becomes 79% of the value of your money. I know there are plenty of you who disagree and think we’ll have more economic growth (real not nominal) with higher inflation. Feel free to post your objection in the comments.

5) Commercial Real Estate Disaster Starting with Office Space

A couple of decades ago, there were great articles in the Wall Street Journal celebrating the revitalization of Pittsburgh. The previously dirty steel town was clean, thriving, and attracting young people who wanted to move there to enjoy the arts, an excellent symphony, and lively night life. It didn’t hurt that Pittsburgh is a great sports town with beautiful stadiums. This week, the Pittsburgh Post-Gazette reported that within four years, 50% of Pittsburgh office space could be vacant. Past a certain vacancy point, landlords will close the buildings because the operating expenses exceed the diminished rental income.

Pittsburgh is a beautiful place, but it’s among many cities facing vacancy problems. Photo from bizjournals.com.

DKI Takeaway: Last week, we wrote about potential problems in the warehouse sector of the commercial real estate market. That’s not the only sector facing issues. Last year, I was at an investment conference where many commercial real estate investors were telling me with confidence that work-from-home was dead and that they expected 80% of workers would be back in the office full-time and soon. Those projections now appear too optimistic and office vacancies are far too high. If you’re considering buying commercial real estate or stock in banks with substantial exposure to the sector, do your due diligence on where the market is heading. A lot of people aren’t willing to commute to the office five days a week and as of now, the work-from-anywhere crowd is winning this fight.

 

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