2018

In his intro to the Congressional Hearing today, Powell said: “Monetary policy affects everyone and should be a mystery to no one.” Which brought to my mind Greenspan´s tirade shortly after taking the Fed´s helm: “Since I’ve become a central banker, I’ve learned to mumble with great incoherence. If I seem unduly clear to you, you must have misunderstood what I said.” -Alan Greenspan, 1987 The undeniable fact is that to the great majority of people, monetary policy will always be a mystery. It´s therefore an impossible dream to think it “should be a mystery to no one”. Greenspan recognized… Read More

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Having been on a “trade war watch” for several weeks it seems as if markets really aren’t considering Trump’s grandstanding such a big deal. Tariffs will hurt both the US and its trading “foes”, for sure, but not cause huge damage to NGDP growth. Perhaps these new trade barriers will reduce real growth a bit but not by much. The war generates headlines and pages of copy but signifies little. Some patterns of demand will switch as will some production. Trump is powerless to stop Harley Davidson setting up a factory in China to serve China. He can’t stop the… Read More

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Euro Area Woes

David Beckworth wrote an enlightening essay on the Eurozone in the National Review “The Euro Zone Should Integrate or Separate”. According to Beckworth: The Proximate Cause of Economic Pain As the above figures show, some euro-zone economies have fared much worse than others since the crisis. A major reason for that divergent performance is that one monetary policy cannot work equally well for very different economies. This challenge can be illustrated using Taylor Rules, which seek to establish what interest-rate targets the European Central Bank (ECB) should set based on changes in inflation and slack in the economy. Studies that estimate Taylor Rules… Read More

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Consumer spending: The headlines and reality

The headlines: 1 Consumer spending is bustling and likely propelled strong overall economic growth in the recently completed second quarter. 2 U.S. retail sales rose solidly in June as households boosted purchases of automobiles and a range of other goods, cementing expectations for robust economic growth in the second quarter. Reality: Retail sales remain depressed. Even ignoring the original trend path, the next chart illustrates, considering only the post-recession period, that between late 2014 and mid-2017, retail sales faltered, dropping below the new and lower trend path. The recent “bustling” is the result of sales climbing back to the lower… Read More

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The inflation report always electrifies

The release of the CPI report brings forth the usual ‘terrifying’ comments: U.S. consumer prices rose for a third straight month in June, eating away at sluggish wage growth and sending inflation to its highest rate in more than six years. That´s pressing the point too hard, as the chart illustrates. The next chart shows, on the same scale, the stable behavior of the core measure. The comment below exemplifies the degree to which the concept of inflation is misunderstood. The Fed has thus far assumed tariffs were too small to affect inflation. Maybe not much longer. Ian Shepherdson of… Read More

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The Federal Reserve’s preferred metric of inflation, the PCE-core, hit 2.0% year-over-year in May, reports the Bureau of Economic Analysis. Fed Chair Jerome Powell has stated the Fed’s 2% target is symmetric, which may be code words for “inflation a little above 2% is tolerable.” One might become cynical at the ease at which the pundits and analysts who before thundered about the threats of hyperinflation so suddenly going mute.  And, no less, with yawning federal budget deficits forecast into perpetuity. But with the GOP-Trump in precarious control of Washington, perhaps discretion is the better part of valor.  This may… Read More

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Contrary to popular opinion, the low rate of unemployment does not signal a strong labor market

Comments like this one: “This is a good job-creation number, but on the other hand we see still continued soft wage growth”, should signal that things in the labor market are not as good, or strong, as generally thought. A strong labor market is characterized by a high employment population ratio (EPOP) and a high labor force participation rate (LFPR). The ratio of these two quantities define the unemployment rate. Therefore, a low unemployment rate is consistent with both high EPOP and high LFPR as well as with a low EOPO and low LFPR, as long as their ratio is… Read More

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Moving to the 2018Q3 Year-Ahead Outlook

We’ve come to the end of the Q2 2018 forecast. This is a good time to review how the market outlook stands. Our forecast for year-over-year NGDP growth in 2019Q2 ended just hair over 4%, the forecast for the next quarter, which is currently only visible by mousing over the end of the plot, as there is only one day of data available for this current quarter, stands at 3.9%. Please note that the current forecast available on Hypermind is for 2019Q1. Hypermind traders have that figure at 4.4% or 4.5%, whereas our system sees it at 4.3%, so we… Read More

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We delude ourselves

From the WSJ: A U.S. economic expansion that just became the second longest in the nation’s history seems to be accelerating, rather than slowing down. Atlanta Fed Bostic: Let’s begin with how the U.S. economy is performing at midyear. It appears to be in a pretty good place. Unemployment is at its lowest rate since the early 2000s, and inflation is running close to 2 percent. As I’ve said recently, the economy is about as close to target as we’ve seen over this expansion. That does not mean that the FOMC can go on recess until conditions change. I think… Read More

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Week Ending Friday June 22, 2018 A super quiet week in equities and bonds, with just a modest rebound in the USD during the week and in oil prices at the back end. This is somewhat surprising given all the trade tensions, but US markets seem to be taking the threat or even the actuality of tariffs in their stride. Emerging markets and heavily trade-dependent European ones like Germany are much more affected, as you would expect. The positive trends, if not levels, in the US are still driving matters, offsetting trade tensions and political news. It is hard to… Read More

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