(Picture: Keep your eyes on the road. Inflation's right in front of you.)
CNBC reported today that Marc Faber expects QE4. Listening to what Fed Governor Jerome Powell had to say last night, we don't.
Marc Faber said to CNBC, "Brexit will give a perfect excuse to the Federal Reserve not to increase interest rates and be most likely to launch QE4."
Jerome Powell, last night however said several things that made us think otherwise.
Two things tell us that there will be no rate cut or QE4.
1) Markets (NYSEARCA:SPY) are not crashing
2) Fed already reached their dual mandate
Fed Governor Powell said that "markets were functioning in an orderly manner."
As we wrote, that the Fed is stretched and trying to tighten. Orderly markets give them no reason to stretch further.
If markets were crashing, possibly they would. But markets are not.
Dual Fed Mandate Reached
Mr. Powell showed mathematically that the Fed is almost at their 2% inflation mandate. Here's how he spoke to the numbers.
1) He said PCE for the year is at 1.6%.
2) He said the strong dollar, if it settles gives you another 25bp (.25%)
3) He said oil seeps into the core numbers if it stays here for the next year and means another .1%.
4) Elazar's Famous .05% (5bp) Rounding Factor (He didn't bring this up at this meeting.)
Let's do the math. 1.6 + .25 + .1 +.05= 2.00% on the dot.
This is very big news.
We are AT THE FED MANDATE and not even the Fed is talking about it.
"Not Worried About Deflation"
When asked about deflation he said, "I am not so much worried about deflation but rather a longer period of low growth and low inflation. That's the case I really worry about. If there was deflation we would have seen it following the last financial crisis."
The reason they are not worried about inflation is because inflation expectations are low.
But Fed Chair Yellen said last week that a pickup in gas prices should factor into these numbers going forward. As consumers pay more for gas their inflation expectations go up.
What a minute. I just stumped myself. Help me. Inflation expectations are what's holding the Fed back. It should go up because of gas prices. Skip the inflation expectations and jump straight to the gas prices. What am I missing? That's the formula that's holding the Fed back, meanwhile the prices themselves ARE already going up.
Don't Trust Fed Expectations, Just Look At The Numbers
But inflation expectations is what has the Fed worried inflation will not pick up. Who cares about their expectations? The Fed says they don't trust their own expectations (as we reported). Regardless of expectations, keep your eyes on the road driver, they ARE up.
In Fact Mr. Powell said, "GDP is slower than everyone expected. We don't have the ability to forecast. Humility is a job requirement."
So don't listen to expectations. Who needs expectations when the numbers already tell you we are there!
WE ARE THERE!
What are we all missing?
Full Employment and 2% Inflation Mandate Reached, What Now?
We're not growing very fast, in fact we're slowing. But congratulations, we've reached BOTH mandates. That means that the Fed will not ease and will not have another round of QE4.
Inflation the "next unexpected move"
As we reported, Greenspan said this week, the "next unexpected move is inflation." [Except for Elazar. Elazar expects inflation so it's not unexpected to Elazar's expectations.]
We are already at the Fed's 2% inflation mandate. The Fed raised their target inflation rate in an addendum with their last FOMC meeting.
The Fed's main measure, PCE in the last two months is up 8.4% annualized (based on current dollars). Mr. Powell said, "but it's very volatile month to month."
We say to Mr. Powell, "So are jobs numbers, but 2 months was enough to spook the Fed."
Fed and World Ignoring Inflation
The world is ignoring inflation. It's hear. It's rising and at Fed mandate if things stay the same. But nothing will stay the same. That's why we assume trends continue. If so, inflation will be passed the Fed mandate pretty soon, then it will eat into asset values and require higher market rates and Fed rates.
The more we hear about inflation from people that matter the more we are bothered that nobody's paying attention. CPI, PCE, import prices, oil prices, the dollar, all are inflationary of late.
The world's looking for deflation but prices are moving up. We think this is a bad sign for asset values as inflation and low rates will eat into the value of future cash flows and present valuations leading to lower markets.
It's also bad that not only are consumer expectations for inflation not up to date but Wall Street expectations for inflation are also not up to date. Too many people are listening to the Fed and not looking at the numbers right in front of us.
For those that say the Fed is purposely trying to throw us off by telling us not to listen to their expectations, there is truth to that. We think it's a strategy that they don't want us to believe them so they can sneak a rate hike passed us. (We wrote about it.)
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