Focus on the Fed — CEO Daily, Monday, 23rd October
Thirty years ago this week, while the world was still wondering whether the worst stock market crash since 1929 would lead to a 1930s-style economic bust, I wrote a column on the front page of The Wall Street Journal with the headline: “Silver Lining to the Crash?”
I mention it not only because it’s one I got right (I am less likely to remember those I got wrong), but because it points to an important parallel between then and now. Alan Greenspan was new at the Fed, having followed the legendary Paul Volcker, slayer of inflation. The markets were nervous that the new Fed chief might let inflation return, so they had pushed long-term interest rates into the double digits, and forced a reluctant Greenspan to tighten credit. The crash punctured the markets’ inflationary fears, boosted Greenspan’s credibility for crisis management, and cleared the way for an easier monetary policy and a healthier economy.
Today, President Donald Trump is on the verge of appointing another new Fed chief. It’s a curious job—overseeing a sleepy organization whose main task is contemplating minuscule changes in an obscure interest rate once every six weeks. Yet the Fed plays an outsized role in maintaining economic confidence, and economic confidence is critical to growth. It’s important to get it right.
The good news is that the candidates under consideration are all competent, with varying degrees of academic, financial and government expertise. Recent history has favored economists for the job, which would point to Janet Yellen or John Taylor. But Trump has a demonstrated preference for those who’ve achieved business success, giving an edge to Gary Cohn, Kevin Warsh and Jay Powell. Cohn crossed Trump over the Charlottesville riots and Warsh has a known preference for tighter policy, so I’d put my money on Powell as the likely choice.
If I’m right, odds are high that he—like Greenspan—will face a financial crisis early in his term. His experience and temperament make him well-suited for the challenge. But it’s a test unlike any other he’s faced, with the nation’s prosperity at stake. This one matters.
Separately, take time this morning to read Sy Mukherjee’s fascinating story about Intuitive Surgical. Never heard of it? The company makes surgical robots, has seen its market cap soar to nearly $40 billion this year, and earned the No. 5 spot on Fortune’s new Future 50 list—right after Salesforce, Tesla, Facebook, and Netflix.
More news below.
• Tesla’s Chinese Breakthrough
Tesla received approval to build a factory in China, something that will allow the company better access to a market that accounts for over half of the world’s electric vehicle sales. In contrast to many foreign carmarkers’ operations in China, the factory will be wholly-owned, limiting the risk of technology leaking to a state-approved local partner. However, as it will be in one of Shanghai’s ‘Free Trade Zones,’ Elon Musk will still have to pay the 25% import duty on sales into mainland China proper. Fortune
• Abe’s Election Win Sends Dollar, Nikkei Surging
The dollar surged to a five-month high against the yen and the Nikkei hit a 21-year high after Shinzo Abe’s Liberal Democrats won a resounding victory in Japan’s elections. Given Abe’s failure to generate a self-sustaining recovery so far, such faith in his ability to manage it this time is somewhat surprising. The victory gives Abe and his coalition partner another run at reforming the constitution, allowing him to pursue his goal of strengthening Japan’s armed forces. Fortune
• Fidelity Goes After Harassers
Fidelity Chairwoman Abigail Johnson has asked consultants to review past allegations of sexual harassment and other inappropriate conduct at the mutual fund giant, according to The Wall Street Journal. The WSJ reports that earlier this month Johnson approved the dismissal of star portfolio manager Gavin Baker, who is denying allegations of sexual harassment. According to the WSJ, a 2015 internal investigation into workplace conduct at Fidelity elicited multiple claims of gender-based bullying, notably at the company’s equity funds division. Fortune
• New Fox-O’Reilly Revelations Threaten Sky Deal
Fox News already knew that Bill O’Reilly had brokered a $32 million sexual harassment-related settlement when it offered him a $25 million contract extension at the start of this year, the New York Times reported. The NYT said that both Rupert Murdoch and his sons Lachlan and James were all aware of the incident. If so, concerns about the U.K. government’s review of Fox’s $15 billion for Sky Plc will be greatly amplified. If the U.K. strikes down the merger, Fox will find it hard to consolidate its European assets into a force capable of withstanding disruption from new market entrants. Gretchen Carlson, whose allegations against ex-CEO Roger Ailes started this snowball, called the revelations “horrifying”. NYT
Around the Water Cooler
• Wells Fargo’s Rot Reaches the Investment Bank
Wells Fargo’s woes continue to get worse. The bank has fired four senior foreign-exchange staff from its investment bank, according to The Wall Street Journal. That’s particularly worrying because the investment bank had until recently been largely immune from the conduct-related scandals sweeping the much larger retail bank, and strengthens suspicions of systematic governance issues. Separately, the bank has been warned by supervisors that it may need to raise its $80 million payout to customers affected by abusive sales of auto insurance products. Fortune
• Hubble, Bubble, Europe Trouble
The political mood music across Europe refuses to improve. Spain’s Prime Minister Mariano Rajoy formally initiated the process of imposing direct rule on Catalonia this past weekend. Rajoy is walking a tightrope, trying to keep Spain together without radicalizing the majority of Catalans who have so far been opposed to independence. Elsewhere, two of Italy’s richest regions, Lombardy and Veneto, voted in referendums to demand more autonomy (and, implicitly, to get Rome’s vacuum nozzle out of their pocketbooks), while the Czech Republic’s elections were won by a populist billionaire businessman and media mogul more aligned with the right-wing populists of Hungary and Poland than with the EU mainstream. BBC
• Hudson’s Bay Company CEO Departs
Hudson’s Bay Company CEO Gerald Storch abruptly resigned Friday, halfway through a strategic review at the struggling department store company. Reports suggest that HBC is looking to go private, while activist investor Jonathan Litt is pressuring it into realizing more value from its real estate, a phrase that, when used in conjunction with ‘retail,’ has been one of the more reliable portents of doom in the last 18 months. HBC owns Saks Fifth Avenue, Lord & Taylor and Germany’s Kaufhof, among others. Reuters
• Merrill Fined $45 Million in the U.K.
Bank of America Corp.’s Merrill Lynch was fined 34.5 million pounds ($45.5 million) for failing to report two years’ worth of exchange-traded derivatives transactions. It’s the first time a bank in the U.K. has had to pay a penalty on such trades under a post-crisis EU regulation on market infrastructure (EMIR) that tries to inject transparency into the financial derivatives market. Bank of America cut the fine by settling at an early stage of the probe, Bloomberg reports. Bloomberg
Summaries by Geoffrey Smith; firstname.lastname@example.org