November 2017

Nothing to write home about, be it growth, spending or inflation.

From the news: The U.S. economy is posting another quarter of solid growth. …Many economists are projecting growth of between 2.5% and 3% in the fourth quarter, putting the U.S. in reach of a milestone: Three consecutive quarters of above 3% growth for the first time since 2004-2005. Give me a break! This is the real growth picture since the economy left behind the doldrums of the 2008-09 Great Recession. More recently, since early 2015, mean growth has ticked down, but growth volatility has dropped significantly. Instead of “solid growth”, it´s more like a “Depressing Great Moderation”! Elsewhere, the nominal…...

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The economy has reached its destination!

From the news: The U.S. economy is running at its full potential for the first time in a decade, a new milestone for an expansion now in its ninth year. The chart illustrates “vividly”. To get that “encouraging” result, the CBO has applied the saying: “If the mountain won’t come to Mohamed, Mohamed must go to the mountain” in reverse, with the “mountain” (potential) coming to “Mohamed” (actual output). Yellen will be leaving with the feeling of “mission accomplished”, even if that is far from the truth. The charts below compare the recessions of 1990-91 and 2007-09 and the two…...

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Conflicting signals in US

Week ending Friday November 24th 2017 A surprisingly lively week in markets. Equities rose again. The USD weakened. Anyone would think that markets were anticipating an easier monetary policy in the US. One problem is that the best performing equities are those with overseas earnings, not just due to translation benefits from that weak USD but also from strongly performing overseas economies. Another problem is that the yield curve continues to flatten, as the short end yields drive higher and long end yields stays weak. The 10yr less 2yr has now fallen below 60bps. The yield curve is indicating a…...

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Macroeconomics is an eternally fruitful field for debate, as no one is ever wrong. There is always another calculus-strewn, opaque “serious” study to cite, or another country to praise or condemn, or an irrefutable theory to which to genuflect. When all else fails, there is resort to, “Just you wait. There will be consequences.” And so we have prominent macroeconomist Martin Feldstein this mid-November warning investors of a potential 38% plunge in equity values, when stock-market price-earnings ratio return to historic norms. And that $9.5 trillion reduction in wealth will savage US spending, which will cut overall GDP growth by… Read More

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What does the Fed really want?

It wants to establish a new monetary policy framework. Recently, several presentations have hammered on this point. In a recent speech, Chicago’s Charles Evans explains: Specifically, I will talk about Delphic communications as those associated with a well-functioning, well-understood monetary policy framework. A foundation for these communications is a variety of state-contingent responses to economic developments that are well understood and well expected by the public. I’ll refer to Odyssean communications as those arising when unexpected events expose weaknesses and shortcomings in a Delphic framework. In such times, the need for outcome-based policies is paramount, and policymakers may be compelled… Read More

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Bond markets continue to flash a warning

Week ending Friday November 17th 2017 A busy week in data but no major signals. Markets were volatile. The USD fell partly due to potential tax reform negatively affecting the deficit and partly due to EUR strength. The grinding flat of the US yield curve continued as the 10yr less 2yr spread dropped towards 60bps from 75bps. Short rates continue to climb higher, but are not budging longer rates. Monetary offset coming soon to the US? US politics was mostly center stage as tax cuts made more progress through Congress but with little clarity on related expenditure cuts. Financial engineering…...

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No sustained rebound in industrial production

Industrial Production benefited from a hurricane rebound in October 2017, rising 2.9% above October 2016. That is the highest year over year growth rate since January 2015. Note that from late 2014 to March 2016, industrial production was contracting, remaining at close to that low level until November 2016. The election certainly changed perceptions, at least for a while. The favorable base comparison, however, will soon begin to wane. The fact is that industrial output is now about even with the peak registered in November 2014, and about the same level obtained just before the end of the previous cycle,…...

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Retail Sales indicates the economy is dormant

Charles Evans of the Chicago Fed is downbeat on inflation, but upbeat on economic activity: The real economy in the U.S. is on solid footing, and I expect this momentum to carry forward into 2018. For some time now, activity in the U.S. has been led by solid gains in consumer spending; and more recently, growth in business capital spending has picked back up as well. With healthy labor markets and much improved household and business balance sheets, the fundamentals for continued solid growth in 2018 look pretty good. The news on inflation, however, has not been as good. Retail…...

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“Low” Inflation is neither “transitory” nor “mysterious”

In a speech today, Chicago Fed president Charles Evans said: Inflation has been too low for many years Indeed, inflation has underrun our target throughout most of the post-crisis period. Core inflation did briefly reach target in early 2012, aided by the pass-through of earlier increases in energy costs, but it soon retreated. In the summer of 2016, core inflation rose to just under 2 percent, but it then fell sharply last March and has remained in the 1.3 to 1.5 percent range since then. Many economists subscribe to the view that this latest drop in core inflation simply reflects…...

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Faulty, but dangerous, reasoning

From “Fed-watcher” Tim Duy: The Federal Reserve believes the economy currently operates close to if not a little beyond full employment. The unemployment rate fell to 4.1% in October, well below the Fed’s longer run estimate and the 4.4% low of the last cycle. And note the broader U-6 unemployment rate, which includes measures of underemployment, fell to 7.9%, the low of the last cycle. By these metrics, conditions are fast approaching those the late-90’s. I believe the economy will sustain enough momentum to hit that point within the next six months. We do not have much experience with an… Read More

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