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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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The Negative Yield Curve Haunts Global Economies

Market Monetarist and Mercatus Center scholar David Beckworth recently blogged that the “negative yield curve”—when short-term rates rise above long-term—is here already in some economies, and heading to the US. For the uninitiated, a negative yield curve has been a reliable precursor to recessions. Beckworth charts 2-year Treasuries vs.10-year: Ouch. David Glasner, proprietor of the always-thoughtful Easy Money blog, also treated the inverted yield curve, and his concluding money quote is this: Nominal GDP has been increasing at a very lackluster annual rate of about 4-4.5% for the past two years. Certainly, further increases in the Fed Funds target would… Read More

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The viewpoints of the world’s macroeconomists are becoming anachronisms, not updated for a global economy and housing costs. For starters, there are some storm signals out there in monetary-land; notably Far East investors are fearful of capital flight. “U.S. rate hikes have sorted emerging markets into winners and losers as investors pull capital from particularly unstable countries, though steep dollar debts may soon drag even Southeast Asia—fairly healthy so far—into the losers’ circle,” reported the Nikkei Asian Review. “The gap between key South Korean and US interest rates will widen further if the US Federal Reserve raises its key rate… Read More

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The Fed´s ‘model’ is screwed up

In Powell’s Fed Could Clear Up a Few Mysteries Puzzling Investors, we read: The Fed says unemployment is already running below the level that can be sustained in the longer run, but wages are crawling higher rather than taking off. What’s more, job growth hasn’t slowed down as much as you might expect in an economy with a big worker shortage. Fortunately, inflation is not a wage phenomenon. On the contrary, it is inflation that drives up wages. The late 1960s makes that clear. Note that wage growth only picks up after inflation has almost tripled! Comparing the late 1990s… Read More

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When ‘good’ is ‘terrible’

The headline: The Fed’s Biggest Dilemma: Is the Booming Job Market a Problem? Snipets: No question looms larger for Federal Reserve Chairman Jerome Powell than this: How low can the U.S. unemployment rate safely go? Only twice in the past half-century has unemployment fallen to its current rate of 3.8%—for a few years in the late 1960s and for one month in 2000. The ’60s episode spurred years of soaring inflation that would take a decade for policy makers to corral. The latter coincided with a technology bubble that, when it burst, caused the 2001 recession. It seems low unemployment… Read More

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“Construction in the residential market remained solid, though the shortage of labor and intense price pressures for building materials continued to act as headwinds.” The above paragraph is from the May 30 Beige Book, the Fed’s periodic wrap up of economic conditions in its 12 districts. Can you guess which of the 12 districts the Fed is describing?  Dallas, perhaps? No, the above is the Fed’s most-recent synopsis of housing markets in the Fed’s San Francisco 12th District, which is the West Coast. What is odd about the Fed’s resolute myopia is that there is a broad, bright-red common thread… Read More

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Keynes; “The difficulty lies, not in the new ideas, but in escaping from the old ones”

An old idea never relinquished is the one that sees inflation as a cost phenomenon, or the result of “cost-push.” A recent op-ed by Peter Hooper, managing director and chief-economist of Deutsche Bank Securities, and more significantly a 26-year veteran of the Federal Reserve Board in Washington, DC, provides a good illustration. According to him, “the Trump administration doesn’t seem concerned about this. It has taken at least six actions that have either actually or potentially boosted inflationary pressures. As a result, it has risked making our next economic downturn more severe.” The first is the “classic” Phillips-Curve reasoning: Historical… Read More

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In a depression, recession calls are even harder to make

The flattening of the yield curve has generated heated discussions about a coming recession. Some like Bullard, for example, caution the FOMC´s appetite to raise rates. Others like Deutsche Bank, say yield curve flattening belies strong growth outlook for U.S: “The risks of overheating and inflation are much higher than the risks of a recession. And the irony of this discussion is that the low level of long rates, and hence, the flatness of the curve, is increasing the probability of overheating even further. Lower long-dated yields keep financial conditions loose, heightening the risk of an upsurge in growth, not… Read More

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Monetary & Fiscal Policy shouldn´t mix

Sweden´s finance minister thinks it should: Sweden’s finance minister said it’s time to look deeper into the framework of central bank independence. In an interview on Thursday in Stockholm, Magdalena Andersson argued that more research and discussion will be needed on how central banks and governments can coordinate policy responses in a crisis situation. “Looking back on the wave of reforms that made central banks independent, it’s obvious today that it wasn’t well thought through,” she said. “There might be situations when fiscal and monetary policy need to work together in a way that’s not possible under the present regulation.’’… Read More

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‘Splitting hairs’ on inflation

When inflation remains low and stable for as long as it has, people get “worried” and start looking for signs that show that cannot be true. The chart below shows inflation of the core variety (which abstains from volatile elements to better show the inflation trend) for the past quarter century. Then, the ‘dumb views’ proliferate. A recent one is telling: Inflation has been a puzzle in the U.S. economy for years, failing to move up much when the unemployment rate tumbled. To resolve the puzzle, it helps to look at the U.S. as two economies: one for goods, another… Read More

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