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The global view from Camp Kotok

This is the first article in a two-part series about Camp Kotok, a yearly gathering of economists and financial professionals organized by Cumberland Advisors Chairman and Chief Investment Officer David Kotok. Click here to read the second part.

Camp Kotok's horizons extend far beyond the woods of Maine and the borders of the United States, but achieving a truly international perspective remains a challenge.

Every summer, David Kotok invites economists, money managers, other financial professionals and members of the financial media for a long weekend of lively debate and fishing at Leen's Lodge in rural Maine. Kotok leads Sarasota, Fla.-based Cumberland Advisors Inc. which manages $2.7 billion in assets.

Camp Kotok has pushed beyond its comfort zone to some extent. There is now another annual meeting in Montana in late August, and a smaller gathering took place in March in Argentina. The most recent event in Maine, from Aug. 2 to Aug. 7, had close to 50 participants, including international visitors and individuals with close ties to the nonprofit Global Interdependence Center.

The futility of focusing too narrowly on the U.S. has become increasingly obvious to everyone who visits Leen's Lodge with David Kotok. But it was still hard to break away from a U.S.-centric narrative, especially with a sky-high equity market, a new presidential administration and plenty of political uncertainty to dissect.

Inside and outside the box

A quasi-formal Saturday evening debate tackled questions about the future composition of the Federal Reserve and the central bank's plans for quantitative tightening, or QT.

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Big Musquash Stream near Leen's Lodge in Maine
Source: Katie Darden

Economic consultant and former Dallas Fed adviser Danielle DiMartino Booth said her money is on Janet Yellen remaining as Fed chair. Cumberland Advisors Vice Chairman and Chief Monetary Economist Bob Eisenbeis and Manulife Asset Management Chief Economist Megan Greene also said they could envision Yellen staying in her position.

Bianco Research President and Macro Strategist Jim Bianco disagreed.

"Yellen is toast," he said, adding that President Donald Trump's "platitudes" to Yellen are what he typically gives to people he is about to fire. Bianco expects National Economic Council Director Gary Cohn to end up leading the Fed.

With respect to quantitative tightening and interest rate hikes, debate participants tried to take a broader view. Even as the Fed plans to shrink its own balance sheet, other central bank balance sheets around the world are still increasing in aggregate, according to Bianco. "What will make a difference is when we get global QT," he said during the debate.

"We can't now ignore the international component and what it means for policy," Eisenbeis added in an interview on Sunday evening.

Many non-U.S. financial institutions can choose between negative interest rates at home and low interest rates in the U.S. As such, he said, 40% of the reserves at the Fed are owned by foreign largely European banks.

"A lot of the reserves people are concerned about are essentially sterilized because of this international arbitrage," Eisenbeis said, noting that these reserves will not be used to lend to U.S. domestic borrowers. The more the Fed raises rates, the more that arbitrage opportunity increases. More funds will flow into the U.S., pushing up the prices of Treasurys and pressuring interest rates. That may make it difficult for the Fed to achieve its policy objectives, Eisenbeis said.

Looking further abroad

Talk of the Fed and interest rates is a staple of Camp Kotok. But some attendees pushed for more attention to global matters and discussion of technological change and exchange.

The new owners of Leen's Lodge were introduced to an old joke Thursday evening: If you have 50 economists in a room, you'll hear 51 opinions. There may not have been quite that many views at Camp Kotok about global geopolitical and economic prospects, but there was no shortage.

McVean Trading & Investments Chief Economist Michael Drury said his goal in life is to prepare his children for a world in which China is in charge. There is no such thing as a U.S. economy, German economy or Chinese economy, said Drury, who chairs the Global Interdependence Center. There is only a global economy, and China is rising to the top faster than he expected. He thinks China is better positioned than the U.S. to assimilate technological advances such as driverless cars because it has fewer institutions to stand in the way and a government with more power to enact change.

Leland Miller, the CEO of China Beige Book International and a member of the National Committee on U.S.-China Relations, said "a wall is going to come down" with respect to Chinese import of U.S. technology. He cited Chinese efforts to stem capital outflows, as well as scrutiny by the Committee on Foreign Investment in the United States, which the current U.S. presidential administration wants to strengthen.

KPMG Chief Economist Constance Hunter does not think China actually wants to dominate the world stage. She pointed to turmoil in Syria, conflict with North Korea, muscle-flexing in Russia and stronger Sino-Russian relations as problems for the U.S.

"The world itself is more dangerous than it was a year ago," she said.