October 2018

The FOMC deceives itself

With all the talk about the economy being “in a good place” and being “strong”. A couple of examples. From Jerome Powell: Today I will focus on the Federal Reserve’s ongoing efforts to promote maximum employment and stable prices. I am pleased to say that, by these measures, the economy looks very good. I am glad to be able to stand here and say that the economy is strong, unemployment is near 50-year lows, and inflation is roughly at our 2 percent objective. Atlanta Fed´s Bostic “ups the ante” writing: The economy is in a good place. So good, in… Read More

Share

The “Bastiat Boom”

Retail sales frustrated expectations. It´s not that consumer spending is weakening but is now being properly measured again. After Harvey hit in August 2017, there were a lot of “broken windows” that had to be replaced. Auto is a case in point. Between May and August of this year, retail sales growth averaged 6.5% year-on-year. In September growth dropped to 3.1% (not seasonally adjusted). Some say it reflected Florence´s disruptions. That´s unlikely. In August 2017, retail sales increased 4.1% despite Harvey´s much greater destruction! The “windows replacement effect” has petered out, so now changes are reverting to type, a truer reflection… Read More

Share

The Fed´s monetary policy has become dysfunctional

Tim Duy is a well known “Fed Watcher”. As such what he writes does not necessarily reflect his views but what he sees as the Fed´s view. In “Fed intent on raising rates even if the economy sours”, we read: A combination of weak labor force growth, solid employment growth, a lower unemployment rate, and firmer wage gains will tend to support the Fed’s view that the labor market needs to cool substantially to prevent inflationary pressures from building. Regardless of the estimate of the neutral interest rate, central bankers probably won’t think policy is restrictive until they see a… Read More

Share

This week George Mason University icon Tyler Cowen interviewed Nobel Prize winner Paul Krugman, and the economic figure of Hyman Minsky came up. Krugman pondered if there was a “Minsky financial cycle” in the near future—often dubbed “a Minsky moment”—referring to a scenario in which elevated asset prices suddenly decline, triggered by a sudden market reappraisal of prospects.  To be sure, it can be argued asset values are high presently, especially in global institutional real estate, and especially in Asia. Also, the PE’s on the US stock market are well above long-term averages. Presently, the specter of higher interest rates… Read More

Share

China weighs on copper prices

Copper is a fascinating and important asset. Traders have known for decades that “Dr. Copper” can foretell recessions, and indeed, we’ve found that including front-month copper futures in our models improves their ability to forecast nominal GDP. Despite the general bullish turn in most asset prices, copper is down substantially from last year, trading around $2.60 per pound, from around $3.40 at the start of the year. I’d proposed in my last post on this subject that this was due to the increasingly weak Chinese economy. This thesis has held up upon deeper investigation. Eyeball the plot above, comparing co-movements between… Read More

Share

Late into the first quarter of the 21st century, the Fed is still in the Dark Age!

That was my take from Jay Powell´s NABE speech, where he placed the Phillips Curve at the center of the FOMCs decision-making process. Below I reproduce a few paragraphs of the speech, which will put my discussion in perspective: …For example, the medians of the most recent projections from FOMC participants and the Survey of Professional Forecasters, as well as the most recent Congressional Budget Office (CBO) forecast, all have the unemployment rate remaining below 4 percent through the end of 2020, with inflation staying very near 2 percent over the same period. From the standpoint of our dual mandate,… Read More

Share

The United States, in its finest hour, took on Imperialist Japan and Nazi Germany. Of course, that was WWII. To finance the war effort, the US issued $186 billion of war bonds, which provided the entire federal government with about three-quarters of its income during the war years. Taxes were raised also. But the lion’s share of funding came from borrowing, and the consequent run-up of the national debt, from almost 40% to 100% of GDP in four years. A lot of money was printed too, say economic historians. “The government used monetary policies to finance the part of federal… Read More

Share