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Inflation has become a mystery!

From the WSJ: No number is more important for investors right now than inflation. The belief that it will continue to rise underpins the recent rally in financial stocks and the slump in government bonds. It is key to commodities, currencies and more. Yet investors are in a quandary: Theories used to forecast it just don’t seem to work. “I don’t think we know what inflation is. It takes so many different forms,” said David Lafferty, chief strategist at Natixis Global Asset Management, which manages about $900 billion. Inflation is this year’s “wild card,” Mr. Lafferty said. The Fed is responsible for… Read More

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93 months and climbing, already bronze medalist

This is already the third longest expansion on record, surpassing the 92-month expansion of the 1980s and only  lagging behind the 106-month expansion of the 1960s and the 120-month expansion of the 1990s. Why, then, all the unhappiness? The major reason, I think, is that this expansion was not preceded by a recovery.  The “natural order of things” is that after a deep recession, the economy goes through a period of recovery before embarking on an expansion. This is clear, for example, when you look at what happened following the deep recession of the early 1980s: Which contrasts with what… Read More

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The always-insightful Kevin Erdmann of the Idiosyncratic Whisk blog has just pointed out that combined commercial, industrial and residential loan volume at U.S. commercial banks has been going flat since October of last year. Add on, commercial property values in the U.S. have been flat since August, according to Green Street Advisors. But the U.S. Federal Reserve, under Chair Janet Yellen and facing 1.7% core inflation on the PCE index, is publicly primping for a string of rate hikes through 2017.  Although 2% on the PCE is the official Fed target—meaning one might expect a 1.50% to 2.50% band IT… Read More

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The trade deficit doesn’t foretell GDP changes

A banal assertion is often made in the financial press when trade deficit figures are released. If the deficit widens, the financial media will tell you that this is bad for the current-quarter GDP number. If the deficit narrows, you’ll hear the opposite. Once again, the financial media proves itself useless for anything more than presenting objective facts, as this analysis is 100% wrong. It is true, in an accounting sense that more imports means less net-domestic production. This ‘leak’ in national income to the outside world must be offset by either hoarding of the importer’s currency, sending the currency… Read More

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China And Japan’s (Disappearing) Debt Problems - “Escherian Economics”

The econosphere is again rumbling about Chinese debt and China banks, evidently forgetting the long serious faces made many times about Chinese debt and China banks in the recent past.  But China keeps growing. Yes, 2004 is ancient history, but China had a larger bad loan problem then, in a smaller economy. So what happened? Briefly, the People’s Bank of China prints money and buys bad loans, or gives money to banks (bail outs). Today, the PBoC has an inflation target of 3% and the nation has a 2.5% inflation rate, and a real growth rate of about 6%. Since… Read More

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If the Fed wants to cool the S&P500 there is only one winner

In a series of speeches and interviews, various regional Fed presidents have again reiterated their desire to raise rates sooner rather than later. Nothing new here as this occurred several times during 2015 and 2016 but resulted in just one hike in December each year. Things always get more interesting when a senior member of the permanent voters on the FOMC, from the Board of Governors or the NY Fed, suggests going sooner. Yesterday, after the market close, Bill Dudley, the number two on the FOMC and a permanent voter from the NY Fed, hinted “sooner rather than later”. Speeches from Brainard… Read More

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The growth Mnuchin wishes

Steven Mnuchin Interview: Treasury Secretary Steven Mnuchin laid out ambitious goals to secure a U.S. tax-code overhaul by August and to deliver economic growth at rates not seen in more than a decade. Mr. Mnuchin, in his first interview since his confirmation last week as Treasury secretary, said slower economic growth since the financial crisis had primarily been an anomaly and a result of Obama administration policies that can be reversed. He said the Trump administration is aiming for a sustained 3% or higher annual growth rate, a projection not widely shared by other forecasters. “We think it’s critical that we get back to… Read More

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UK RGDP saved by accelerating NGDP

The second estimate of UK RGDP released today showed an even more stark acceleration in UK NGDP than in the first estimate. Back in January, we had to use the Nominal (Current Prices) Gross Value Added as a proxy for NGDP as the headline number is only released with the second estimate. GVA is a good proxy for GDP as it is merely GDP less taxes on output, but still gets revised like all other national income data. There were the normal revisions to both RGDP and NGVA by the second estimate as more data for the final month of the quarter… Read More

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How to make the economy look good so monetary policymakers can “get a license to kill”

The concept of economic potential is key to the making of monetary policy. When there is a large positive gap – the difference between potential and actual output – the economy is in a recession. Such a situation requires monetary stimulus to trigger a recovery, i.e., the closing of the gap. The chart illustrates The 2001 recession lingered. The Fed policy rate dropped to 1%, but the economy remained in a slump. A recovery only began when the FOMC introduced “forward guidance” in mid-2003. When Bernanke took over the Fed, the gap had essentially closed. His policies, in particular the… Read More

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One is a waste of time, the other doesn´t want to waste any time

The “one” is Trump, the “other” Janet Yellen: As I noted on previous occasions, waiting too long to remove accommodation would be unwise, potentially requiring the FOMC to eventually raise rates rapidly, which could risk disrupting financial markets and pushing the economy into recession. The Fed waited more than seven years to begin the rate hiking process. Maybe she´s worried about who Trump is going to put on Board and if she´ll be on Board next year. However, trying to go faster will probably make her lose the status of “most successful fed Chairperson” ever she´s beginning to amass (1, 2):… Read More

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