inflation (16)

Admin

Maybe you've never heard of MMT (Modern Monetary Theory). But no doubt, as the 2020 election nears, you will. It's the latest contentious buzzword to hit Washington, D.C.

The idea, despite its name, is not new or "modern." But it has set off a heated political and economic debate, with Fed Chairman Jerome Powell telling Congress last week that Modern Monetary Policy is "just wrong."

Does Modern Monetary Theory, or MMT, represent a brave new future of ever-expanding government spending to meet Americans' vital needs? Or is it a dangerous idea that could lead to runaway inflation, financial disaster and, ultimately, collapse?

The theory, in a nutshell, says that because the U.S. can borrow in its own currency, it can simply print more money when it needs to pay off its debts. All the Fed has to do is keep interest rates low. Simple. It's an increasingly popular idea among left-leaning economists.

 

Fed Chairman Powell: MMT Is 'Just Wrong'

Not surprisingly, however, when Fed Chairman Powe

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Admin

Macro And Credit - Buckling

Watching with interest the slowly grind higher in US interest rates with some weakening signs coming from US economic data such as the US trade deficit in goods getting spanked with orders for larger domestic appliances and other durable goods falling by a cool 3.7% from the month before, led by a hard drop in vehicle demand, when it came to choosing our title analogy for this week's conversation we reminded ourselves of "buckling" being a mathematical instability that leads to a failure mode. When a structure is subjected to compressive stress, buckling may occur. Buckling is characterized by a sudden sideways deflection of a structural member. This may occur even though the stresses that develop in the structure are well below those needed to cause failure of the material of which the structure is composed. As an applied load is increased (US interest rate hikes) on a member, such as a column, it will ultimately become large enough to cause the member to become unstable and it is sai

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Admin

I found this interesting (the rise) however I have my own reservations because of the possible change in rates and inflation in 2017.  When inflation rises, interest rates also normally rise to maintain real rates within an appropriate range. PE ratios need to decline to reflect the increase in the earnings discount rate. Another way to look at it is that equities then face more competition for money from fixed income instruments. The cost of equities must therefore decline to keep or attract investors.  Then there is the Rule of 20 to consider.  Rule of 20 equals P/E + long term interest rates (average of 10 and 30 yr bond rates).  If at or below 20 minus inflation -- the market is a buy.  If above 20 minus inflation -- the market is a sell. Today we're at just about 20.  I think I'll keep my cautious side up.  Keep moving up my alerts and stick to only brief swings.  Something tells me it's going to be an interesting year.  All focus on the Fed and inflation.  

During the past week (

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Admin

Is The Fed About To Experience A Repeat Of 2016?

In the most recent Summary of Economic Projections, Fed officials penciled in three 25bp rate hikes for 2017. The reality, however, could be very different. We all remember how “four” became “one” in 2016. The median dots are neither a promise nor an official forecast. As 2016 progressed, forecasts associated with a lower path of SEP “dots” evolved as the consensus view of policymakers. Will the same happen this year? I don’t think so; it is hard to see the Fed on pause for another twelve months.

As a starting point, I think it best to assume the US economy is near full-employment. But the US economy was near full-employment at this time last year as well. I think the key difference between then and now is that then the after-effect of the oil price slide and dollar surge placed a drag on the US economy sufficient to ease hiring pressure. At the same time, labor force participation perked up, setting the stage for a flat unemployment rate for most of the year. Inflationary pressures e

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Admin

It's Not What You Think. Market Myths Debunked

18059_mythfact2.jpg?width=400

"A lie told often enough becomes the truth" - Vladimir Lenin

Imagine for a minute you lived centuries ago when people believed the earth was flat, or the earth revolved around the sun, or that planets were Gods, or that disease was angry spirits or supernatural powers. You'd have an explanation for everything ... only it would be wrong. And that "wrongness" would stand in the way of true understanding and true progress until they were discarded as falsehoods.

And so it is with the Stock Market. Let me explain.

First, let me be perfectly clear. I'm a statistician so I'm not referring to philosophical or political or gut feelings or anything other than Statistical Misrepresentations. Fact, not opinion.

I can hardly go a day without reading an article or hearing a TV pundit or someone regurgitate misconceptions that are so integrated in our minds ... we believe them to be the truth.

These misconceptions cause us to make investing mistakes because we take them as axiomatic when they are

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Admin

Bonds Haven't Even Begun To Price In Trumpflation

Since the election the financial markets have been trying to price in “Trumpflation.” This is the idea that the combination of infrastructure spending, tax cuts, rising deficits, immigration curbs and protectionist policies could reverse the disinflationary trends we have witnessed over the past few decades and more dramatically since the financial crisis. The selloff in the bond market amid surging interest rates might be the single most important piece of evidence in this regard.

Over the summer I noted we were likely witnessing the final blow-off stage of the bond bull market (see this and this). Since then the long bond has fallen nearly 15% leading many pundits to conclude it has already begun pricing in the prospect of Trumpflation. However, if you look at the data, it appears it’s just not pricing in as much deflation anymore. In fact, by some measures the yield 10-year treasury bond would still need to double in order to finish the job.

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Don't Be Fooled The Bond Rally Continues

1291344?profile=RESIZE_480x480We’ve been bulls on 30-year Treasury bonds since 1981 when we stated, “We’re entering the bond rally of a lifetime.” It’s still under way, in our opinion. Their yields back then were 15.2%, but our forecast called for huge declines in inflation and, with it, a gigantic fall in bond yields to our then-target of 3%.

The Cause of Inflation

We’ve argued that the root of inflation is excess demand, and historically it’s caused by huge government spending on top of a fully-employed economy.  That happens during wars, and so inflation and wars always go together, going back to the French and Indian War, the Revolutionary War, the War of 1812, the Mexican War of 1846, the Civil War, the Spanish American War of 1898, World Wars I and II and the Korean War.  In the late 1960s and 1970s, huge government spending, and the associated double-digit inflation (Chart 1), resulted from the Vietnam War on top's LBJ’s War on Poverty.

By the late 1970s, however, the frustrations over military stalemat

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Admin

Five Reasons To Fear Deflation

1290958?profile=originalThe deflation scare is back, as Jon Hilsenrath and Brian Blackstone report on the front page of The Wall Street Journal. It’s worth taking a moment to contemplate why deflation is such a bad thing. After all, falling prices sound appealing to consumers, especially compared with the alternative of higher prices.

So why worry?cci.png?width=268

Here are five reasons:

1. Deflation is a generalized decline in prices and, sometimes, wages. Sure, if you’re lucky enough to get a raise, your paycheck goes further–but those whose wages decline or who are laid off or work fewer hours are not going to enjoy a falling price index.

2. It can be hard (though, as we’ve seen, not impossible) for employers to cut nominal wages when conditions warrant;  it’s easier to give raises that are less than the inflation rate, which is what economists call a real wage cut. And if wages are, as economists say, marked by “downward nominal rigidity,” then employers will hire fewer people.

As Paul Krugman put it i

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Admin

173120ac643884fb82dedc93275326e3.jpg?width=300Pretty much as I had expected.  Consumers are tapped out and you can blame inflation the Fed says doesn't exist the necessities, food and gasoline.  Certainly the packages have become small to mask the cost but we all know it's there, lurking.  We're getting less and less for our hard earned buck and $20 just doesn't buy what it used to....leaving less for dining out, electronics, clothing, vacations, etc.  

Retailers beginning to feel the pinch may shift to more coupons, clearance sales, preferred customer discounts.  Others will continue to tighten the belt internally moving more to cloud, temp agencies for personnel (a huge cost savings) and other cost-cutting measures.  Insurers for example have discovered that making lump sum payments to Doctors for Cancer patients saves them over 30%.

It won't take much, however, for overseas tensions to cause a spike in oil/gas prices and then what?  We're teetering on the spending cliff in my opinion and something has to give.........

From Gall

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Admin

Filling up at the pump yesterday, paying $3.79 for low grade made me wonder.  Aren't you supposed to be kissed before you get screwed over?  Captain Obvious over the last few years is the disconnect between gasoline demand/usage in the U.S. vs. price when it comes to the stinky stuff and that price chart certainly looks like a large, bull flag which should make your head spin at the potential increase ahead unless something changes.  Surely the gentleman next to me would have to sell a body part or small child to fill up his enormous SUV.  Fool with that huge tank but he thinks he looks slick.  The powers that be decided they wanted us to become accustomed to $3/gal and it seems that we have unfortunately but I have to keep saying it, the demand just does not justify the price of oil without a supply disruption or military crisis in the Middle East.  As much as I hate to say it, the Prius is beginning to look good.  Maybe a scooter?  It worked well for Larry Crowne.  Someone save me.

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Admin

Your hear the reassuring echos all of the time.  "Don't worry! The market will always come back."  But do they?  What about dividend reinvesting and adjusted for inflation?  Given the data, one can easily see why smart money continues to invest in bonds, annuities, universal life, etc.  Merely my .02 cents but remember, charts don't lie - people do.

Consider these two overlays — one with the nominal price, excluding dividends, and the other with the price adjusted for inflation based on the Consumer Price Index for Urban Consumers (which I usually just refer to as the CPI). The charts below have been updated through today's close.

The Big Three
The Big Three

The 'Real' Big Three
The 'Real' Big Three
Price Change
Price Change


The charts require little explanation. So far the 21st Century has not been especially kind to equity investors. Yes, markets usually do bounce back, but often in time frames that defy optimistic expectations.

The charts above are based on price only. But what about dividends? Would the inclusion of div

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Admin

When You Can't Even Afford To Rent

houseofdebt_20140428_1.png?width=559Numerous articles have noted a sharp rise in the price of renting an apartment or house across the U.S.  Many have also argued that the rise in rents disproportionately affects lower and middle class renters.

I know in my own situation, my rent increased 9% in 2013 and 10% in 2014.  Did our incomes increase by as much?  I wish.

Houseofdebt.org decided to take look by examining the great data available on rents from Zillow.

The chart shows general inflation (measured with PCE headline inflation) versus the increase in rents. Both series are indexed to be 100 as of November 2010 (the first month the Zillow data are available).

The pattern is undeniable: rents are rising much more rapidly than other consumer prices.

The Fed may be emphatic that we're not experiencing inflation but when it comes to housing, there's no denying the facts.  Gas at the pump has doubled since 2008 (isn't it convenient they exclude food and energy), food prices have crept higher but portions and package size hav

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Admin

Turnaround Tuesday Reads

  • Saving down, lending up and tapering combine in a perfect storm.  One of our favorite bloggers1290571?profile=RESIZE_480x480 CalifiaBeachPundit
  • More tech companies are experiencing DDoS cyber attacks including SAY Media (Typepad), Meetup, Basecamp, Vimeo, Bit.ly and others.
  • 51% of Americans are unsure of the validity of the Big Bang theory.  For many it's because it can't be seen or seems too far away  A look at the iron triangle of science, religion and politics,
  • For the first time in history, the rich find themselves working longer than the poor.
  • The Fed must choose:  more jobs or lower inflation.
  • Shipments through the port of Los Angeles jumped 34% spurring a bit of (recovery) conversation today on Wall Street
  • Google follows Facebook and Twitter with app-installed advertising.

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Admin
High cost of tuition and college loans ties with overall lack of money or low wages as the top concern of those aged 30 to 49. Housing costs also emerge as a relatively bigger concern for younger adults (14%)

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Admin

We Have No Inflation? What Of Cost To Rent?

1290449?profile=RESIZE_480x480It makes me insane when the Fed says inflation remains subdued.  Subdued?  idk where they live but my rent in 2013 went up 7% and this year, 9%.  A 2-liter bottle of CocaCola used to be .99 cents.  Now it's $1.99.  Don't even get me started on the ridiculous increase in crude oil versus a few years ago (doubled) and how small a bag of my favorite chips has become 1/3 the size for the same price.  Oh, that's right.  They don't include food and energy (the stuff that always goes up).

Last time I looked, housing cost was still included in inflation numbers but yet today a minimum wage person would have to work two weeks just to pay the rent.  Forget about the electric, cable, phone or food.  Oh wait, let's see if we qualify for a free Obama phone and food stamps (sarcasm).  I'm sorry but I hope they raise the minimum wage.  The government should not have to subsidize workers to survive because minimum wage has not risen along with cost of living.  They two should go hand-in-hand if you a

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Admin

Daily Reads

  • The argument to lift the ban on crude oil exports Bloomberg
  • How big oil (and Senators) are positioning at the Senate Energy and Natural Resources Committee Bloomberg
  • A 3pm gold "fix"?  This study says it began in 2004. Bloomberg
  • That's what I've been saying.  Fed may have to let inflation run hot to meet goals. Reuters
  • Markets spooked as confirmation came of Russian troops taking over two airports in the Crimean area of the Ukraine.  UN to hold closed-door session this weekend to discuss situation. Reuters

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