2018

Share Price Drop is not about NGDP Expectations

tldr: Don’t worry When developing our NGDP forecasting methodology, which uses only data from the NGDP/NGDI time series as well as market prices, we ran a number of validation trials. These trials sought to show that the methodology was invalid. We did simulation studies, we did out of sample tests and weren’t able to find a problem, though the most impressive result came when we ran the system in a simulated daily forecast update against the ’87 stock market crash. The “Black Monday” crash of October 19, 1987 saw the S&P 500 drop 20% in a single day. However, nothing… Read More

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Pay growth fears strong but unfounded

The Week Ending Friday February 2nd 2018 A terrible Friday for equities and bond prices topped off a poor week overall. Some cooling off for equities from the super start to 2018 was probably inevitable. On top of a natural tendency to pause, some spurious hourly wage growth data on Friday seriously spooked markets. The All Private Employees Average Hourly Earnings growth hit 2.9% YoY for the first time since the recession. However, this 12-year old data series includes a lot of higher paid managers and professionals, who are definitely not hourly paid employees. Thus, the hourly earnings figure cannot… Read More

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The Employment Report: Yellen´s last

Economists call accelerating wages ‘best news’ in January jobs report. However, wage growth for 80% of workers (production & non-supervisory) has been stuck for quite some time. The panel shows what a non-inflationary boom looks like. Low inflation and falling/low unemployment in both cases. However, a real boom sees a robust growth in hourly and weekly earnings. During Yellen´s tenure, the overall labor force participation rate remained flat as a pancake after dropping significantly following the Great Recession. Meanwhile, prime age worker participation showed a slight increase halfway through her mandate but has flattened again. There was nothing special about… Read More

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The reality of “low inflation” which the Fed cannot grasp

Over the past 10 years, core PCE inflation has averaged 1.5%. The latest print is exactly there. For the previous 14 years, core PCE inflation averaged 1.85%. No one complained, in part because there was no magic 2% target. Inflation only had to be “low & stable”. The charts help explain. With stable nominal spending (NGDP) growth, you get stable inflation. With lower and stable NGDP growth, you get lower, but still stable inflation. So there´s no mystery. If the Fed wants inflation closer to the 2% target, it has to increase the growth rate of nominal spending. There is,… Read More

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The Week Ending Friday January 26 2018 This was quite a week. The S&P 500 rose 2.4%, Friday-to-Friday, the dollar index was down -1.7% and the GDP report was about as strong as expected, at least on the nominal figures we are focused on. Hard as it is to believe, WTI crude oil is selling for $66 a barrel, no doubt in part a result of the 9% drop in US crude stockpiles from this time last year. While we’re at it, let’s note the 5-year yield is at 2.47%, the highest level since 2011, though hardly back to a… Read More

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Celebration

With the GDP report we hear lot´s of celebratory comments. A typical one: The U.S. appears to have entered a stage of stronger economic growth, years into a historically modest expansion. Unfortunately, that´s not true. Just look at the chart. The “uptake” in 2014 was much stronger, but fizzled. This time, it´s weaker. Will it be more long lasting? The Fed seems to think that if you “drive slowly, you´ll grow longer”! In several other instances, even those characterized by deep depressions, the economy recovered. That simply has not happened this time. Observation: It is said that this expansion is… Read More

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"Drive slowly, grow longer"

Maybe Janet Yellen set it off with her comment in December “The global economy is doing well. We’re in a synchronized expansion. This is the first time in many years that we’ve seen this.” It was picked up in Davos: DAVOS, Switzerland—The world is enjoying its broadest, strongest growth in years, and everyone has an explanation, from the U.S. tax cut to the recovery in oil prices. Let´s check. World industrial production may be a good proxy for overall world economic activity. The chart indicates that it is not only the advanced economies such as the US, EZ or UK… Read More

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Week ending Friday January 19 2018 Yields rising across the curve is undoubtedly a good sign.  The chances of a March rate rise have consistently risen, as well as further hikes in June and a final one in the fourth quarter some time. The two year yield curve has also risen above 2% but does not yet indicate any rate rises in 2019. This rising short term rate environment has for the first time in a long while been matched by longer term yields. The 10 year yield is now above 2.5% for the first time since before the 2014… Read More

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“Peace with honor” regarding inflation?

From reports: Federal Reserve policy makers are openly voicing their willingness to accept above-target inflation even as price pressures are beginning to build. “Let me be clear: A small and transitory overshoot of 2 percent inflation would not be a problem,” William Dudley, president of the Federal Reserve Bank of New York, said in a Jan. 11 speech. “Were it to occur, it would demonstrate that our inflation target is symmetric, and it would help keep inflation expectations well-anchored around our longer-run objective.” If that sounds ridiculous it´s because it is! “Even as price pressures are beginning to build”. Inflation may… Read More

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Manufacturing Production is becoming irrelevant!

Overall, industrial production was up 3.6% year-on-year. That´s the best since November 2014 (3.7%). That´s however, mostly due to the aftermath of storms, cold winter affecting utilities, and mining. Manufacturing, the lion´s share of industrial production, has been moribund for several years. Impressively, as shown in the chart, while as a highly cyclically sensitive part of the economy manufacturing was traditionally viewed as a classic indicator of current business conditions, in the last five years it has completely lost relevance in the determination of real output fluctuations.  

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