 Trump could set interest rates if elected ...
If elected President, some Trump advisers argue the president should be consulted on interest-rate decisions. Former President Donald Trump's political operatives are putting together a plan that would give him unprecedented influence over the Federal Reserve, including a provision that could make him an "acting" central bank board member, according to a report from The Wall Street Journal. It's a great idea. Announcements of changes to Fed rates would probably be announced to paying subscribers on Truth Social first, boosting subscriptions. Insiders will also benefit from membership of an exclusive hedge fund group in a new division of the Trump Media and Technology Group. Could that happen? Not really, or could it? The Dream of Fed Rate Cuts Is Slipping Away ... It's bad enough in the US at present. The Dream of Fed Rate Cuts Is Slipping Away, according to the Wall Street Journal. Investors are backing away from expectations the central bank will reduce rates in coming months. The next move could well up. 3 month Treasuries have risen to 5.5%. Twelve month Treasuries trade at 5.25%. Ten year bond yields have jumped 50 basis points to close at 4.7% this week. Traders are now betting on a rate hike. This shift comes after unexpectedly strong US economic data, combined with hawkish mutterings on the part of Fed officials. Options markets suggest there is a one-in-five chance of a rate rise within 12 months. What's the problem ... Markets are spooked by the rise in US inflation in March CPI basis to 3.5%. Core inflation excluding food and energy increased to 3.8% over the year. CPI inflation peaked at 9.1% in June 2022 in this cycle. It then fell to 3.0% in June 2023. It is now on the rise again. Bad. Growth is exceeding expectations. GDP growth accelerated to 3.0% in the first quarter of 2024 compared to 2.5% in 2023. Markets were slightly misled by the statement from the Bureau of Economic Analysis (BEA) which suggested real gross domestic product (GDP) increased at an annual rate of 1.6 percent in the first quarter of 2024. This is based on a quarter on quarter comparison. We always use the year on year data which confirmed growth of 3.0% year on year. That's the one to watch! Our current Friday Forward Guidance is or was, "We continue to model U.S. base rates peaking at 5.25% in 2023 moving to 4.50% in late 2024. We expect the first cut in June." This seems unduly optimistic. The latest thinking from the Federal Reserve, as of April 2024, indicates a cautious approach towards cutting interest rates. Persistent high inflation could delay any reductions until later in the year. Federal Reserve Chair Jerome Powell (time limited if Trump is elected) has expressed recent data have not provided greater confidence that inflation is fully under control. Instead, the data suggest inflation may remain elevated for longer than previously expected. This could extend the period of higher interest rates. Powell's comments imply the Federal Reserve might not proceed with the three quarter-point rate cuts this year that officials had projected during their March meeting. The Fed chair has indicated that if inflation persists at high levels, the Fed could maintain its current interest rate stance for an extended period. So what to expect now? We model U.S. base rates peaking at 5.25% with no further rate hike probable this year. We would now expect two rate cuts possible this year but beginning in July or possibly as late as September. All will depend on inflation and the growth rate. Surprise! Surprise! The cut to 4.5% may have to wait until Trump is in office (or in jail) ...
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 They say inflation's falling ... so far not fast enough. Headline inflation CPI basis eased to 3.2% in March from 3.4% prior month. Markets were disappointed. City analysts had expected a bigger drop. A fall to 3.1% had been expected. There's just no pleasing some folk.
Best not to look at the detail. Goods inflation fell to 0.8%. Service sector inflation eased to 6.0%. Add the two together and divide by two, headline inflation would have been recorded at 3.4%. Weight them effectively (Goods inflation 0.5099 and Service sector inflation 0.4900), the headline rate would have been 3.4%, down from 3.6% prior month. Disappointed by the drop to just 3.2%. Markets would freak at a real rate of 3.4%. As it was the Governor sought to allay concerns suggesting the numbers were in line with expectations. The Chancellor Jeremy Hunt suggested this was confirmation of a soft landing. "The economy has turned the corner. People are beginning to see that." "The plan is working. Inflation is falling faster than expected. It is down to the lowest level in nearly two and a half years." he said. The slower decline in inflation, reinforced speculation the Bank of England will leave rates higher for longer. Financial markets are beginning to think the first rate cut may not happen until November. That's a tough call. Ten year bond yields trade at 4.25 this morning up from 4.10 at close last week. Analysts think inflation will slip back to the official 2 per cent target in April, impacted by a reduction in the energy price cap. Ruth Gregory, deputy chief UK economist at Capital Economics said: "With utility prices set to fall by over 12. per cent in April, inflation will still just about fall below the 2 per cent target in the month." "As long as inflation continues to fall fast in the coming months as we expect, the Bank may still feel comfortable cutting interest rates in June." For the moment this remains our central outlook, with further cuts possible by end of the year, closing the year towards 4.5%. Comments from Andrew Bailey suggest the MPC is prepared to loosen monetary policy ahead of the Fed. "There is strong evidence, inflation is receding. The dynamics for inflation are different now between the UK and the USA." Hawks in the Bank will remain concerned about the high levels of service sector inflation and the latest earnings data. Average weekly earnings at 5.6% are incompatible with a 2% inflation target. Doves on the MPC will express concern about negative growth in the economy, sluggish retail sales, the slight rise in unemployment and the drop in vacancies. Food inflation eased to 3.9% in March and core inflation eased to 3.9% from 5.0%. As we said earlier this week, the bears are watching. Come the MPC meeting in June, the doves will hold sway. For scenario planners we caution, 4.5% base rates may well be the new benchmark. No return to Planet ZIRP. In the UK, prior to the Great Financial Crash [2000 - 2008] the average inflation rate was 2.0%, the average UK bank rate was 4.50%. Ten year gilt yields averaged 4.50%. Thirty year gilts averaged 4.60%. The average growth rate was 2.5%. The average unemployment rate was 5.0%. Earnings averaged 3.9%. This is our "return to the mean" outlook.  We have had a few days now to digest the latest GDP Data for the U.K. economy. It has taken a few days since, like the King of Siam …
"There are times, I almost think I am not sure, of what I know I very often find confusion in conclusion" Confusion was compounded this weekend by headlines which appeared to suggest the UK was escaping from recession, after set backs in the third and fourth quarters of 2023. Indeed the ONS commentary was upbeat. Real gross domestic product (GDP) is estimated to have grown by 0.2% in the three months to February 2024, compared with the three months to November 2023. It is confusing. I have concluded there is confusion in conclusion. There is a fashion to report growth as a month on month, or quarter on quarter, phenomenon. Call me old fashioned but the valid conventional measure of growth is year on year and not quarter on quarter. The data set [ED2R GVA at basis prices] confirms year on year, growth slowed from 0.6% in Q1 last year to 0.5% in Q2 and Q3, before slipping to -0.2% in the final quarter. The data suggests growth in January was down by -0.1% and down by -0.2% in February. The bears are watching. Barring a bounce back in March, the first quarter of the year, will confirm the UK is in recession, with two successive quarters of negative growth year on year. Slipping into recession, no turning the corner, no light at the end of the tunnel, no dawn of recovery, no green shoots, no bouncing back, no storm passing. The Prime Minister may think “Wages are up. Energy bills are falling. Pensions are going up. Tax cuts are now already happening and benefiting people. The chancellor may think we are "Breaking Through The Clouds" when he set out his vision for long-term prosperity in the UK, optimism despite economic headwinds. Hunt may believe the economy is "back on track". He has rejected the "gloom" about the UK's economic prospects and declaring "declinism about Britain is just wrong." Both Hunt and Sunak should take a hard look at just what happened in the final quarter of last year. There was some good news. Education and healthcare were up by almost 2%. Manufacturing output was up by over 1.2%. But construction output fell by -0.5%, retail and distribution was down by almost 1%. Accommodation and food down by 1.5%. Transport and storage down by over 3%. Into the first quarter of 2025 and the poor performance of the service sector continues, falling by 0.3% year on year. The latest jobs data suggest the unemployment rate is rising as vacancies continue to fall. The bright spot, the arts and entertainment sector is growing by over 6.5% this quarter compared to almost 5% in the last quarter of the prior year. Which just goes to show the information should all be shared with a pinch of uncertainty. Let’s hope we are back on track and breaking through the clouds. Technically we are in recession and the bears are watching ...  One of the world's richest people and the head of the nation's largest bank, join a group of business executives making bold prognostications about the potential of artificial intelligence, according to the Wall Street Journal last week.
Elon Musk and Jamie Dimon both say artificial intelligence could usher in dramatic change. It will be smarter than humans, transform society and surpass the collective intelligence of mankind in five years. "My guess is that we will have AI that is smarter than any human probably around the end of next year," Musk said in a recent interview. "AI is the fastest-advancing technology I have ever seen." Jamie Dimon, chief executive of JPMorgan Chase, told investors Monday that AI could be as transformative as some of the major technological inventions over the past several hundred years. "Think the printing press, the steam engine, electricity, computing and the Internet, among others," Dimon wrote in his annual letter to shareholders. "The AI race to build the next big thing has sparked a talent war in Silicon Valley. Tech companies have poured cash into AI at a breakneck pace." Google Chief Executive Sundar Pichai has said AI could be more profound than the invention of fire or electricity. Vinod Khosla, founder of venture-capital firm Khosla Ventures, declared last year that within 10 years, AI will take on "80% of the jobs that exist today." "The need to work in society will disappear within 25 years for those countries that adapt these technologies," Khosla said in an interview with The Wall Street Journal. The technology has also led to stark warnings about the future of humanity. Earlier this week, Japan's largest telecommunications company and the country's biggest newspaper cautioned in a manifesto unless AI is restrained, democracy and social order could collapse. In the U.S., the Biden administration last year invoked emergency federal powers to compel major AI companies to notify the government when developing systems that pose a serious risk to national security. Some say predictions of AI's transformative powers have been overblown. Gary Marcus, a cognitive scientist who sold an AI startup to Uber in 2016, said generative AI may one day approach a level where it can transform society, but there has to be vast improvements to approach the level of change produced by the internet or even smartphones. "Generative AI programs currently make too many mistakes, are unreliable and have a superficial understanding of the world," Marcus said. "It is implausible that AI will approach human intelligence by the end of next year. Surpassing all of human intelligence in the next five years is also far-fetched", he said. Marcus offered to wager $1 million with Musk that his prediction of AI becoming smarter than a human by next year turns out to be wrong. Damion Hankejh, chief executive of Ingk, a startup semiconductor company, says he is bullish on the future of AI, saying it will be the next tech renaissance. But he doesn't think current AI systems will advance enough to surpass human intelligence. It's never going to happen," Hankejh said."Digital math machines aren't brains." "There's a lot of hype in AI right now," says Angel Vossough, the co-founder and chief executive of BetterAI. "AI systems are good at analyzing large data sets, and can make predictions or speed up productivity. But they are nowhere near being as intelligent as humans", she said, "a big part of human intelligence is emotional intelligence." "AI needs to connect, understand and respond to human emotions in a way that actually feels authentic and meaningful" she said. "I don't think we are anywhere close." How To Organise for AI ... Just Say CAIO ... Chief AI officer CAIO is one of the hottest new job titles but some say AI strategy should be everyone's job. Many organizations have decided that AI is too important and complicated to rely on one executive to develop and manage their strategy. Organizations raced to develop AI ideas and leadership in 2023. President Biden ordered every federal agency to hire a chief AI officer (CAIO) by the start of 2024. Imagine that a CAIO in every government department in the UK. It could even lead to an end to fax machines in the NHS ... That's all for now. Let me know what you think. Have a great week ahead ... References Elon Musk and Jamie Dimon's AI Predictions and What They Mean for the Future of Humanity - Wall Street Journal. Joseph De Avila. 10th April 2024. Dimensions of Strategy on Artificial Intelligence ... our own series  Hey Buddy Can You Spare A Dime ... Or Make That Half a Billion Dollars ...
I guess we have all been there.. You start the week struggling to find half a billion dollars, then suddenly six come all at once. Better than real estate, the Trump fortunes were boosted by a social media maxi-meme valued, at one stage last week, at over $10 billion dollars. The move valued DJT's personal stake at $6 billion, catapulting Donald Trump into the top billionaires list ranking alongside George Lucas and Georgio Armani. They say you can't beat the market. You can't beat a social media application and nothing beats a maxi-meme. It's much more fun than real estate. You don't have to dress the figures or overstate the floor space. The market's imagination and momentum does the job. Trump's Media & Technology Group Corp. [TMTG], the main product of which is Truth Social, has been absorbed into Digital World Acquisition Company. DWAC is a SPAC, we hope its not a dog but more on that later. The initial share deal valued TMTG at $875 billion. Not bad for a business, which reported a net loss of $58 million in 2023, with total revenue of $4.1 million in that time. Not bad for a business which brings in little revenue, posts zero profit and has no indication it has a path to profitability that would justify a valuation of almost $1 billion, let alone a valuation of over $10 billion which the stock hit in the first week of trading. Not bad for a business which did not provide the Digital World Board with financial projections in connection with the due diligence process. Not bad for a business which has identified a material weakness in its internal control over financial reporting. The acquisition prospectus explains, Digital World may not be able to accurately report its financial results in a timely manner, which may adversely affect investor confidence and materially and adversely affect business and operating results. Not bad for a business which does not currently, and may never, collect, monitor or report certain key operating metrics used by companies in similar industries. KPIs like sign ups, average revenue per user, ad impressions, monthly and daily active users. That sort of thing. Why not? The prospectus explains, "Since its inception, TMTG has focused on developing Truth Social by enhancing features and user interface rather than relying on traditional performance metrics." "While many industry peers may gather and report on these or similar metrics, given the early development stage of the TMTG platform, TMTG's management and board has not relied on any particular key performance metric to make business or operating decisions." "At this juncture in its development, TMTG believes that adhering to traditional key performance indicators, could potentially divert its focus from strategic evaluation with respect to the progress and growth of its business." "TMTG believes that focusing on these KPIs might not align with the best interests of TMTG or its shareholders, as it could lead to short-term decision-making at the expense of long-term innovation and value creation. No short-termism in the TMTG board room. Well there you have it. No short-termism in the TMTG board room. Working for the long term to justify the market faith in the business. Presumably advertisers will have to take the performance figures in good faith or be prepared to lob a bit of cash into the Donald Trump coffers to make good the revenue targets. Not bad for a business which cannot assure investors that TMTG will effectively manage TMTG's growth. If TMTG fails to effectively manage its growth, business and operating results could be harmed. Another warning. Page 126 Prospectus. Not bad for a business which is now a Donald Trump company. The prospectus warns there are a number of companies that were associated with President Trump have filed for bankruptcy, including one with a DJT Ticker. The ticker symbol "DJT" was also previously used by Trump's Atlantic City casino business, Trump Hotels and Casino Resorts, which went public in 1995 and eventually filed for bankruptcy in 2004. The prospectus warns, there can be no assurances that TMTG will not also become bankrupt. The use once again of the DJT Ticker for TMTG, may well serve as a mega-warning from a mega-meme. I could have been so different. DWAC considered fifteen different deals in view of delays with TMTG. The Prospectus reveals Digital World sent an NDA to Target B, an American pet care company offering a technology platform to enable on-demand and scheduled dog walking, training, and other pet care services. In the end target B walked with another suitor. So there you have it. DWAC could have morphed into a doggie app. Cynics argue, there's time yet. Doggie App or Maxi Meme? Post Note ... DJT closed at $48.66 last night, down 40% from peak last week as the company announced "TMTG expects to incur operating losses for the foreseeable future," according to yesterday's filing with the Securities and Exchange Commission. ------------------------------------------------------------------------------- Notes On The Art Of The Deal ... Digital World [DWAC] Digital World [DWAC] is a special purpose acquisition company [SPAC] formed for the purpose of effecting a merger, capital stock exchange, asset acquisition, stock purchase, reorganisation or similar business combination with one or more businesses. Digital World was incorporated under the laws of the State of Delaware on December 11, 2020. In September 2021, the SPAC raised approximately $300 million dollars by the issuance of around 30 million shares marked at $10 dollars per share. Trump Media & Technology Group Corp. [TMTG] Trump Media & Technology Group Corp. [TMTG] is a Delaware corporation which aspires to build a media and technology powerhouse to rival the liberal media consortium and promote free expression. TMTG was founded to fight back against the big tech companies, Meta (Facebook, Instagram and Threads), X (formerly Twitter), Netflix, Alphabet (Google), Amazon and others. TMTG was incorporated under the laws of the State of Delaware on February 8, 2021. TMTG's first product, Truth Social, is a social media platform aiming to disrupt big tech's control on free speech by opening up the Internet and giving the American people their voices back. Truth Social was generally made available in the first quarter of 2022. Valuation At the time of valuation, the median enterprise value of the available "Trading Comparables" surpassed $324 billion. Specifically, the enterprise value of Twitter (now known as X), the closest competitor to TMTG's initial product, Truth Social, was $41 billion. Therefore, at such time, Digital World's management concluded that an initial valuation of $875 million, with the potential for an additional earnout of $825 million, was a reasonable assessment for TMTG's enterprise valuation in the Business Combination transaction. |
The Saturday EconomistAuthorJohn Ashcroft publishes the Saturday Economist. Join the mailing list for updates on the UK and World Economy. Archives
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