2017

Week ending Friday December 29th 2017 Equity markets ended the year at highs – helped by a two-week run of weakness in the USD. The broad USD index is now back below its two year lows, hinting at easier monetary policy ahead. Contra any such conclusion we have seen bond markets also had a good year, a surprising result given healthy equities but less given such weak inflation readings. Worldwide RGDP appears to be the healthiest in years even if not yet making up to trend levels. No major currency bloc seem to be lagging, except perhaps the UK. Our…...

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Will the Fed ‘Scrooge’ things?

Week ending Friday December 22nd 2017 This week we had some additional light shed on the current big question for market watchers: “what will Q4 NGDP growth be?” This is a weighty question because the foremost statistical driver of future NGDP growth is recent NGDP growth, one, two, three quarters back. The cumulative, quarter-on-quarter growth (think of a 4-quarter moving average of quarterly growth) has tended to foretell growth in coming quarters, so getting a strong Q4 after strong Q3 and acceptable Q2 would bode well for 2018, while a weak read would dash our hopes of an enduring “Trump…...

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Ignorance is costly

Recently, Bill Dudley “explained”: I don’t really completely understand why inflation is as low as it is right now. We would have thought that at this unemployment rate, we would be seeing more pressure on wages, and that that would be ultimately filtering into prices. It may just be that it takes some time—that you have to be at this unemployment rate for six months or a year or two years to actually see the consequences for wages and prices. But it’s not a bad place to be. It´s just the shoddiest labor market in modern times, even compared to…...

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The Fed Wants Higher Unemployment - NAIRU: On the Road to the Weimar Republic

The US Federal Reserve appears to be targeting a recession, posits the ever-observant Tim Duy, University of Washington prof, blogger and Bloomberg commentator. Why? NAIRU, or the great bogeyman, aka the “non-accelerating inflation rate of unemployment.” Readers might have thought NAIRU had been tossed out of the macroeconomic analytic tool-kit along with the Phillips Curve, and long ago, but no. After all, the 1990s did not result in runaway inflation, with relatively low unemployment and lots of prosperity. So what?  The US central bank still shudders at the thought of NAIRU, which it places now at about 4.6% or 4.7%.… Read More

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Week ending Friday December 15th 2017 An apparently stupid question in our header this week. But the answer will be surprising to many. The Fed raised its target rate 25bps on Wednesday but rates, rates in the sense of those that matter, market rates, fell slightly. Bond yields across all maturities above 12m fell on the announcement.  The Fed action actually made “rates” fall. Asimilar phenomenon was seen in November in the UK on the most recent Bank of England rate “rise”. The bond market was saying that the Fed has moved too far too fast, saying it doesn’t believe…...

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The Fed is “internally inconsistent”

We hear loud and clear from Yellen and several other participants that the rationale for hiking rates now and in the future, according to projections, is given by the Phillips Curve. According to the FOMC´s latest projections, unemployment is and will remain below its long-run sustainable rate and this should put pressure on inflation. That, however, is not what happens. Unemployment remains below the sustainable, or natural, rate for the next three years while inflation reaches target in 2019 and remains there. Maybe a 4% unemployment rate is consistent with inflation on target, so that the current and projected rate… Read More

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Retail Sales: Don´t forget we´re in a depression

Retail sales had a good month in November, at least when compared with the past several years. From the chart below, you see that the magnitude of the depression, which has been widening, was a tiny bit reduced with the November retail sales print. This post Harvey & Irma surge mirrors the surge in early 2014, which followed winter storms and historic colds of that season´s polar vortex. After that, sales went into a long “sleepy spell”, moving up very slowly. Early this year, they went into “coma”, simply not budging, being awakened by the August/September storms. Although many, even…...

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Inflation is traveling in the wrong direction. Instead of going “north”, it is slipping “south”.

Today´s CPI was less than expected, with the core version print at 1.7% y-o-y, down from 1.8% in October. Nevertheless, if Marvin Goodfriend´s nomination goes forward, the worry with nonexistent inflation will remain alive and well at the FOMC From an interview in March 2013: Tom Keene (at 10 min): Marvin, don´t you think we are going to see a dampening of GDP if we see a restricted Fed? GOODFRIEND: There is no way that this recovery can proceed with any degree of confidence unless the Fed makes sure that inflation does not move up. So I think the risks…...

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To link inflation and unemployment, you don´t need the Phillips Curve

Recently Joe Gagnon of the PIIE (Peterson Institute for International Economics) has used both the US and Japan to argue that there is no inflation puzzle. In other words, the Phillips Curve is alive and well. In the US piece, Gagnon writes: Some economists are puzzled over why US inflation has remained low while the economy has reached, or even exceeded, potential employment. Commentators have argued that central banks are wrong to place too much faith in the Phillips curve model, in which inflation responds to deviations from potential employment…, Yet inflation is behaving exactly as the Phillips curve would…...

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Bitcoin seems on an unstoppable tear. Rising from about USD 700 in January 2017, to about USD 11,000 in early December and now to about USD 15,000 as of mid-December, the cryptocurrency has ‘crushed its enemies, and seen them driven before it’. Many commentators claim Bitcoin is a bubble, after all, so the thinking goes, what do markets do but arbitrarily rise, and then randomly crash, causing havoc? Of course, Market Monetarists see things differently. We respect markets, fear them too, and completely reject the concept of a “bubble”. If the participants in the market decide Bitcoin is worth USD… Read More

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