Tons of talk and pixels being spilled over the imminent inflation threat. It bears an eerie resemblance to what we heard from the likes of Jerry Bowyer and Art Laffer two years ago. I’d fade it now, exactly as I suggested back then (here and here, the latter piece co-authored with Bonddad):
Exhibit A — The Chicago Fed National Activity Index (PDF)
When the CFNAI-MA3 value moves above +0.70 more than two years into an economic expansion, there is an increasing likelihood that a period of sustained increasing inflation has begun.
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Current read of CFNAI-MA3: +0.11, and that with three of the four subcomponents doing the heavy lifting while one — Consumption & Housing — remains mired near multi-year lows and shows no signs of recovering any time soon. We might actually get a good call out of Bowyer or Laffer before we get to +0.70 on CFNAI-3MA — it’s gonna be a while.
Exhibit B — The Money Multiplier — all that heavy breathing about the flood of liquidity that was going to pour into the system. Hyper-inflation! Except not so much, apparently. As David Rosenberg (who was spot-on in his assessment of the last bogus inflation scare) put it in his Monday note:
Fully 100% of both QEs by the Fed merely was new money printing that ended up sitting idly on commercial bank balance sheets. Money velocity and the money multiplier are stagnant at best.
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Those who still think the credit spigots are going to open any moment now, consider this: We know that consumer credit, ex-student loans, is still contracting. And we know from National Federation of Independent Business that “the vast majority of small businesses (93 percent) reported that all their credit needs were met or that they were not interested in borrowing.”
Exhibit C — This remarkable chart that I’ve cribbed from Minyanville, though the original source is Bloomberg. What happens if there’s no QE3?
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(The chart above was really a stunner.)
Exhibits D and E
Two more reasons with a couple of homemade charts: Inflation has a very high correlation to the labor market. Indeed, the roots of inflation are generally found in higher labor costs. We are just not seeing upward pressure on labor costs — there is simply still too much slack in the system and the Unemployment Rate is too high. Unit Labor Costs and CPI sport a high +0.88 correlation:
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Average Hourly Earnings and CPI have a +0.79 correlation:
The Fed is on the record with their assessment that any bout of inflation will be “transitory.” I concur, as does this new Chicago Fed paper, and our old friend David Rosenberg (last week):
The key to the outlook for inflation is not commodities — it is the labour market. We have a situation where wages in nominal terms are running at +1.7% on a year-over-year rate and productivity is running at +2.0%. So we have unit labor costs fractionally deflating as they have been consistently since 2009 Q1. Go back to the 1970s, and guess how many quarters unit labor costs deflated? Try none. By the end of the 1970s, unit labor costs had surged at nearly a 7% annual rate for the decade as a whole; not sub-zero as is the case today.
And the last word to Rosie (from Monday’s note):
And it remains a legitimate question as to how we end up with inflation as credit contracts. Not just in the consumer and housing sectors, but in the government sector too. The state and local government sectors have dramatically cut back on bond issuance this year and are cancelling capital projects in the process. We see on the front page of the weekend WSJ this headline "? Inflation Drives a Shift in Markets and right above it is Deadline Drama Over Budget. Not only is household credit contracting, but the same is happening at the government level. This is deflationary, not inflationary, and once commodities settle down "? they are volatile and self-correcting as we have seen in the past "? all this talk of inflation is going to subside pretty quickly.
Finally, on a semi-related matter, the NY Times ran an interesting piece that follows up nicely on my recent post highlighting the growth in student loans.
Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data, ability to repeat discredited memes, and lack of respect for scientific knowledge. Also, be sure to create straw men and argue against things I have neither said nor even implied. Any irrelevancies you can mention will also be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.
Interesting. So, overall inflation will be low, but the consumer is still seeing inflation on items they have to buy (food and fuel). No wage growth, no lending for capital projects/expansion, and more expensive food and fuel. That doesn’t seem like a good sign going forward.
Inflation and deflation are money supply terms. What we're seeing is the transfer of wealth and power to entrenched interests "” more political than monetary. Yes, the monetary aspect is inflationary by definition. No, we won't see hyperinflation (yet), or even classic wage/price inflation (again, yet), because the entire purpose of the policies put in place, to date, is not to ease the imbalances brought on by the credit crisis, but to further enrich and secure the positions of those at the very top, via constant and consistent wealth distribution to their demographic.
Employment and wages aren't declining because of an invisible force of free market capitalism. They're declining as a result of policy.
Doing some math, and it appears that GOP will take higher unemployment, deflation and big market corrections in return for the white house and both houses of congress.
All they have to do right now is force contraction in government spending (both federal and states) which will start the market correction and pessimism leading to more spending contraction, leading to more pessimism.
but the 2012 election is still very far, I wonder if they will play their hand too early(or in other words, can democrats make them play their hands early so that they can pin the blame for this downturn, just in time to go for more bigger stimulus and have a recovery by next July/August??)
There are few caveats….GOP is right now owned by the crazies, not a winnable team. No viable candidate yet to challenge obama.
I have few long positions(30%), but feeling a bit queasy since feels like there will be some market downturn atleast for next 4-8 months, due to all this political drama. I am thinking maybe going 100% cash again may not be a bad idea considering that maybe deflation will rear its head again?? (i work full time in a job hence not much time to be nimble…usually i invest for the long term using covered calls to balance risk/profit)
http://finviz.com/futures.ashx
even ‘Animals’ have been ‘coming off’.. http://finviz.com/futures_charts.ashx?t=FC&p=h1
and, ‘Dr. Copper’ http://finviz.com/futures_charts.ashx?t=HG&p=w1 has been having ‘problems’, N of ~4.45/lb. ..
even, Argent, has weakened http://finviz.com/futures_charts.ashx?t=SI&p=h1 now ~40 1/2 ..
Inflation is always and everywhere a political problem.
The removal of food and energy from core inflation isn’t because they go up, but because they are more volatile. The “So.. people don’t use food and energy!?” folks always and everywhere don’t know what they are talking about. It’s not a conspiracy, it’s the mathematics of delivering useful information to policy makers.
When your political party is dependent upon the homeschooled innumerates, the “tax cut for the rich will bring in more taxes” (aka Laffer’s Supply Side economics) can also sound compelling. It just doesn’t work in the real world …nor does including food and energy in a snapshot of inflation, only over the long term does including food and energy make sense.
If you don’t get that, stop talking about it until you do.
@Invictus – Thanks for the charts they are very useful. One further question which has been vexing me is the role of the housing collapse here. It has been the major driver behind the financial system failure and shows no signs of rebounding given the large supply of existing stock (and future stock given the foreclosure system hasn’t completed its work yet). Since housing is a large driver of jobs, how can we have inflation in the absence of a rebound? If one is to believe most of the macroeconomists out there we will stick with unemployment around the current levels for some time to come.
1. M1 Mult and anything showing low velocity/multipliers means inflation is QUICKER to cause pain. You have this perfectly backwards – there isn’t enough cash to be had essentially so higher prices sting immediately.
2. Tansitory inflation is irrelevant. What IS relevant is that wages are flat and cost of living rising – so every penny of price increase results in DAMAGE via lower spending and savings.
3. Margin compression is already baked in and getting worse. Revenues will begin to decline and miss.
4. The Fed is printing into deflation but that money is being handed to the very people who already have money and the only thing rich people ever buy is to buy workers (rented to them, bidding up yield/taking it, making life more expensive via inflation). The Fed policies in place are the precise opposite of what is needed (strong dollar policy) and proof of this is getting increasingly and brutally easy to see.
5. We’ve essentially hit debt saturation so any injected credit will default out of the system the same way air leaves a balloon with a hole in it. The Fed not only IS failng – but WILL fail at reflation because bad debts and excessive leverage were never allowed to contract naturally. But they will eventually.
[...] an increase in commodity prices. It’s a lot more complex than that. Barry Ritholz has a nice post illustrating many of the other pieces of the inflation puzzle. Many signs like the turnover of [...]
Techy, I too work a full time job, as you say, and have “not much time to be nimble”. I’m also at just 28.5% long equities right now. I’m concerned with the battle over the debt ceiling. I can see the diehards in the House actually getting to the point of holding out and not raising the debt ceiling. I’m not savvy enough to predict all the ramifications but I do understand it would be bad. I’m not sure what I’d move my investments to in the scenario.
The other fear I have is that the GOP may perceive they have a win-win, 1st they can stay on principle of shrinking government and successfully extract significant cuts in government spending as a “price” for raising the debt ceiling. The second preceived win comes if the economy then flattens or turns down again (as many dollars are pulled out of the economy) and this can be used to grow public unease and raise displeasure with the current administration – raising GOP prospects at least at the Presidential level?
Call me cynical. I honestly don’t know what the best economic policy is, but I can see the calculus above as a tempting one, that could derail the slow recovery that we’re experiencing.
Invictus, or anyone else for that matter, please look at “chart C” and tell me: what is so beneficial when we are forced to pay more for just about anything? What Is So Beneficial in higher prices, especially when 90% of the workforce do not get raises or get their salaries cut? (Unless you’re a speculator in the futures markets or an oil sheikh)
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