Category Archives: The Fed

Why I Like The Dutch

Mario Draghi visited the Dutch parliament today and received an “unenviable grilling” from Dutch MPs for nearly two hours which, as the FT said, left the usually implacable Italian confrontational and riled up as tempers flared.

At the end of the meeting, the Dutch gave Draghi a gift – a tulip.

At least someone still has a sense of humor.

Consumer Prices

Everybody has a bias when it comes to measuring price inflation. Reports like the Devonshire one come out quite frequently, usually complaining that the government indexes understate inflation. They all say, well the numbers don’t reflect reality. The problem is, they don’t know what reality is any more than the government does. My reality and the next person’s are completely different because we buy different things. Cheap loans have allowed universities to raise prices in an outrageous fashion – but our kids have long since graduated so it doesn’t affect me, although anyone putting kids through college is being eviscerated. Consumers react to prices. Technology changes. Quality changes. Fashions change. And so on. All these things make any index pretty much useless, except for making political arguments. So one has to ask, in the famous words of Ms. Clinton – “What difference does it make?”

If you ask someone in Venezuela right now, of course, you would get an expletive for an answer. There is massive consumer price inflation because there are not enough consumer goods to meet demand, and so people are going hungry and without toilet paper. They are driving up prices, trying to outbid one another to compete for what little supply there is. But even in that desperate situation, there is no agreement on what consumer prices actually are, even by disinterested parties. The only way to fix the problem in Venezuela is to get goods back on the shelves. If the Venezuelan government can do that, then consumer prices will reflect the value of the bolivar and general world price levels.

There’s your clue. If you want to measure consumer prices, it is easy. Just use the Big Mac, as the Economist does. It works. 2016 USA Big Mac price inflation was 2.6%. Venezuela Big Mac prices in bolivars:

July 2014: 75

December 2014: 245

July 2015: 485

December 2015: 940

December 2016: 3550

Looks like a pretty decent metric. It tells you what you need to know – there’s a big problem.

But the economy does not run on Big Macs, and I’m interested in the inputs, not the outputs so much. And those are labor and energy. Nothing else much matters.

The End Of Volatility?

This morning, the VIX has a 9 handle. The stock market has gone 8 days without a move of more than 0.2%. Buffett, Grantham and others are arguing that this time really is different. In fact, they agree that the market has reached a permanently high plateau, although they do not dare us those words. Who are these people and what have they done with Warren Buffett and Jeremy Grantham?

Of course it is different. It is always different. History never repeats itself. In the first four months of 2017, according to Bank of America, central banks – mostly the ECB and BoJ – purchased more than $1 trillion in securities, a record rate. So of course that means blue skies forever.

And that blue sky is full of tree-tops. As the Chinese proverb goes, this too will pass. That massive liquidity pumping is not benign, it is a symptom of panic as economies refuse to respond to the therapy the bankers prescribe.

As John Hussman observes, these signs and portents are a call to lace up the gloves, not hang them up. Extended periods of low volatility and excessive bullishness are always followed by the converse. Commodities and trade are quietly collapsing, GDP barely has a heartbeat and subprime defaults are rising, especially in cards and autos, pension funds are struggling, valuations are beyond extreme.

Beware the gathering storm.

Fed Day

Fed says the economic weakness is “transitory.”

I say “We’ll see about that.” Of course, if “transitory” is referring to geological epochs, then I’ll agree.

Nothing Really Matters

Ooh yeah, ooh yeah
Nothing really matters
Anyone can see
Nothing really matters nothing really matters to me

Anyway the wind blows

— Freddy Mercury, Bohemian Rhapsody

Source: zero hedge, of course.

Trumpets

Markets are all excited because Trump declared that the dollar is “too strong” and Ms Yellen is “not toast.” Not crumpet either, I would say, and Trump clearly knows his crumpet.

One Picture

Inflation

There is much noise that the Fed will raise interest rates to combat “inflation.”

Over the last year to the end of February, wages are up 2.8% (nominal). The price of oil, as a metric for energy prices, is up 32%.

Guess what is driving “inflation.”

The Saudis are still pumping as hard as they can, but justifying it on the grounds that they are storing the above-quota output, not selling it internationally. It seems to me that a tank in Saudi and a tank in Oklahoma are pretty much fungible, except that we at least think we know how much is in the Oklahoma tanks.

The bottom line is that global inventories of oil are continuing to expand to new records, more or less on a daily basis. The EIA is forecasting that US shale is set to expand production by 109k barrels from March to April, rising from 4.853mmbpd to 4.962mmbpd, and offsetting OPEC’s entire February production cut.

At some point we are going to see a reaction and that will be the end of “inflation.” For a while, anyway.

Your Bubble Goes Here

From Bill Hester of John Hussman’s staff.

Unsentimental

The Atlanta Fed GDPNow forecast for Q1 GDP now stands at 1.2% annualized growth. This despite outrageously bullish sentiment everywhere you look.

1937, anyone?