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The Inflation Trader

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  • Dog Bites Man: Markets Still Not Making Sense [View article]
    Well, for starters you listen to what they say. If they decide to begin to be aggressive, to shrink their balance sheet or to keep the excess reserves inert in some way, they will first have to start talking about it very aggressively. Because right now, no one believes they will do anything except maybe raise interest rates, and raising interest rates without removing reserves will actually increase inflation rather than decreasing inflation. (That's actually my vote for what is the most-likely Fed mistake in this cycle).

    But until they start talking not about "maybe some day" starting to increase rates, but draw a line in the sand and say "inflation can't go higher than this or we are going to respond aggressively and in this explicit way," it's not going to happen. Because they are going to give the financial markets a HUGE lead time before they make a meaningful change in policy.
    Jul 9 09:12 PM | Likes Like |Link to Comment
  • Dog Bites Man: Markets Still Not Making Sense [View article]
    They CAN act long before inflation gets to that level, but they could also have done it in the 1970s and chose not to. It isn't clear to me that the current Federal Reserve is any brighter or has any greater foresight than the Arthur Burns Fed. The question is not CAN they arrest inflation - of course they can, in the same way they can always ensure that deflation doesn't happen. The question is always whether they have the will to do so. The jury is out, but there seems to be no urgency even though median inflation is at 2.3% and rising, and policy takes many months before it has any impact on inflation...even if there AREN'T loads of excess reserves to remove first.

    I'm not saying inflation is inevitable. I am only saying it is inevitable if the Fed doesn't do something hawkish in 2013. Oh. Whoops.
    Jul 8 04:15 PM | Likes Like |Link to Comment
  • Dog Bites Man: Markets Still Not Making Sense [View article]
    Okay, then why did stocks go up last year, when interest rates were rising? If they go up when interest rates fall, but then go sideways or up when interest rates rise, then we simply have a perpetual motion machine and we should have the Fed continue to lower rates forever. Make them good and negative, in fact!
    Jul 8 12:29 PM | Likes Like |Link to Comment
  • Awareness Of Inflation, But No Fear Yet [View article]
    Over the last 3 months, the annualized rate of change of CPI has been 5.3%. Seasonally-adjusted, it was 3.2%. It seems to me that the BPP is right in there. Who is it that is keeping silent on the BPP? Certainly not me. I use it all the time to silence the naysayers who claim the CPI is off by 3-5% every year for decades at a time.
    Jun 26 08:32 AM | Likes Like |Link to Comment
  • Awareness Of Inflation, But No Fear Yet [View article]
    Thank you, thank you, thank you!! I have been wracking my brain for days trying to remember who that was so I could search my own commentary for it. Here is my article, which further links to the Wesbury article. Thank you for helping me find it!!

    Looking at it, I never saw #1 but something akin to #2 is happening - "noise" is partly code for "Medical Care inflation, which was holding everything down, is now moving up and that's what's causing the volatility." And there have been some murmurs about #3. Maybe they're just not in order. :-)
    Jun 25 04:35 PM | Likes Like |Link to Comment
  • The Fed's 'Own Goal' [View article]
    Wow, that's the first time I have ever been called a populist! I guess that means I am hiding my radically-conservative views better.
    Jun 21 11:53 AM | 3 Likes Like |Link to Comment
  • The Fed's 'Own Goal' [View article]
    You should go and re-read what you wrote originally. I have re-read it a bunch of times and you have absolutely no qualifier in there that SOME investors lost 70-98%. There is a world of difference between "SOME bank shareholders sustained losses from 70 to 98%", and what you said, which was "bank shareholders sustained losses from 70 to 98%." I acknowledge that you meant the former, but it isn't what you said.

    But I don't really care.
    Jun 20 12:48 PM | 3 Likes Like |Link to Comment
  • The Fed's 'Own Goal' [View article]
    Yeah, I hate to fly on airplanes. 100% of passengers die!*

    *100% refers to passengers on one particular plane. I didn't say that but I assumed you would understand.
    Jun 20 08:43 AM | 2 Likes Like |Link to Comment
  • Patience Is A Pain [View article]
    I almost forgot about this wager.

    March CPI: 236.604 (the base figure)
    April CPI: 237.163
    May CPI: 237.776 (released this week)

    We have had 0.495% core inflation so far (2.97% at an annual rate).
    With 10 months to go and 240.626 the push, Mr. de los Angeles needs aggregate core inflation to be 1.199% or less (1.44% at an annual rate). I need the over.
    Jun 19 10:22 PM | Likes Like |Link to Comment
  • The Fed's 'Own Goal' [View article]
    Hang on, I didn't say that the banks got off scot-free. Heck, I was on record early and often against the overreactions that led to the Volcker Rule, Dodd-Frank, extraordinary (and extra-legal) Fed actions, etc.

    But I am not putting words in your mouth. You said "bank shareholders sustained losses from 70 to 98%", and I did not infer from your statement that you meant MOST bank shareholders did fine, but in a FEW cases they lost a lot of money. You were making the point that the damage to the banking industry was enormous and the they suffered enough. I both agree and disagree. I agree that the damage was enormous, but it was the after-crisis reaction, the punitive legislation, the "fixing it" that did the damage. In the crisis itself, they didn't suffer enough. The Fed let one bank go and it scared the heck out of them. They ought to have used their authority to wind down insolvent banks to wind down a bunch of the bigger ones, splitting them into survivable chunks.

    Had they done so, I don't think we would be back in bubble-land in equities and headed back there in housing. Although probably, QE would have been even bigger so that the developing inflation problem would have been bigger. The federal deficit would have been even bigger, because policymakers just don't trust the free market to discipline and correct. There was some weird sense that somehow, all banks would have collapsed and we would have been back in the Middle Ages. Policymakers like to feel needed, I guess. But we would have had a sharp, painful recession, and then we would have had a robust expansion, rather than a long, painful recession followed by an expansion that feels like a recession!

    In any case, it seems like we predominantly agree that banks took more pain than the press acted like they did. I just think they should have taken more pain at the time, and then policymakers should have let the free market work.
    Jun 19 10:11 PM | 4 Likes Like |Link to Comment
  • Core And Median CPI Converging [View article]
    Yes, the main one is housing. The BLS assumes that the housing stock ages, so that all else equal a house this year is of lower quality than the same house last year. Thus, the same rent as last year implies that there was actually a little inflation since you got less for the same price (like smaller package for M&Ms).

    And since housing is such a huge component of inflation, it turns out that this hedonic adjustment just about cancels all of the ones in the other direction.
    Jun 19 12:54 PM | Likes Like |Link to Comment
  • The Fed's 'Own Goal' [View article]
    You mentioned AIG, FNM, and FRE - none of which are banks.

    You're right that you can't ignore the capital infusions at the bottom, but that doesn't take the small number of losses and turn them into 70-98% losses.

    I have been saying for years - since mid-2008, in fact - that banks have become a rotten investment and ROE would be low for years if not for generations. Not just asset turns but margins and leverage are also lower, and that means ROE must be lower. Banking as a business became a worse business and shareholders lost money because of that. But that's not the same as saying that investors lost their money because of crisis losses.

    Agreed the industry has shrunk, but again that doesn't affect the shareholders (in a negative way, anyhow). So I still don't think you can say that the banking industry was mostly wiped out, which seemed to be your claim.
    Jun 19 12:53 PM | 2 Likes Like |Link to Comment
  • The Fed's 'Own Goal' [View article]
    Well, your reasoning above was good but your data here is wrong. Only Lehman went out of business of large banks - I can't name another one. Actually, even Lehman was bought, but that's the only one where bondholders took losses I think. Bear's shareholders were mostly wiped out, as were Lehman's, but it certainly wasn't 70-98% of all bank equity!

    You might be thinking of bank stock prices, which fell 65% (basis the NASDAQ bank index) from 2006 to 2009, although a lot of that was a general market decline. But those shareholders still exist, and anyone who didn't sell is only down 24% today. And some day, they will be whole. That's not what we mean by wiping out shareholders.
    Jun 19 08:56 AM | 1 Like Like |Link to Comment
  • The Fed's 'Own Goal' [View article]
    JasonC...I think that's great reasoning.
    Jun 19 08:49 AM | 1 Like Like |Link to Comment
  • Core And Median CPI Converging [View article]
    1) 3.7%
    2) According to ECI 1.7%
    3) 1.02^6 -1 = 12.6%

    However, I will note that I don't think the average worker perceives himself as having lost 1/8 of his living standard over the last six years. Maybe, but people are pretty good at perceiving actual living standard changes to themselves over LONG periods of time. Maybe 6 years isn't long enough and 1/8 is too small a change, but if this were, say, 20 years...the per-year numbers would be similar...I think most workers wouldn't say "I'm living with half of the amenities and benefits I had in 1994." And this happens partly because (a) people are better at gauging long-term price trends than short-term price trends and (b) a majority of people receive better than the average wage increase. The average is the average of all wages paid, but it includes a continuing process of new workers entering at low wages and old people retiring at higher wages. So most people, even if the average wage was 0%, would see their OWN wages increase.

    I think that most of the time when people grumble about the declining standard of living, what they're really grumbling about is falling behind their mental image of where they SHOULD HAVE BEEN given what they imagined five years ago. It is fairly unusual for living standards to actually decline over a long period of time.

    That said, this is a pretty clever question. I wonder how people's perception of their own wage growth...which they COULD check by looking at historical pay stubs, but I bet most people would not remember correctly just recollecting...differs from reality. In any event I guess it's likely lots closer than their perception of inflation. Good thoughts.
    Jun 19 08:48 AM | Likes Like |Link to Comment