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The Inflation Trader
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The Inflation Trader has been a recognized leader in developing the U.S. inflation derivatives market. He traded the first interbank U.S. CPI swaps in 2003 and, as a dealer, was a primary liquidity-provider in that market for two large banks. He represented about one-third of interbank swaps... More
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  • Were The FOMC Minutes Really That Hawkish?

    I suppose I need to say something quickly about the FOMC minutes which were released yesterday, because the markets are seemingly gyrating on a "surprisingly hawkish" reading of them. The dollar is rising strongly, and part of the reason that equities slid in the afternoon yesterday was that it was perceived the Fed wouldn't be endlessly doing QE.

    The "surprisingly hawkish" part allegedly comes from this quote:

    In considering the outlook for the labor market and the broader economy, a few members expressed the view that ongoing asset purchases would likely be warranted until about the end of 2013, while a few others emphasized the need for considerable policy accommodation but did not state a specific time frame or total for purchases. Several others thought that it would probably be appropriate to slow or to stop purchases well before the end of 2013, citing concerns about financial stability or the size of the balance sheet. One member viewed any additional purchases as unwarranted.

    Various reports today focused entirely on this phrase. Bloomberg, for example, said "Fed board members said they will probably end their $85 billion monthly bond purchases, known as quantitative easing, in 2013, according to minutes of their Dec. 11-12 meeting released yesterday." Of course, they said nothing of the kind. This paragraph followed an extensive discussion about "several persistent headwinds" including the likelihood of tighter fiscal policy, and "[t]he staff viewed...the risks as skewed to the downside." There is far more negative in these minutes than there is positive. This illustrates the danger of taking a single quote out of context.

    But what is even more important is this: the Evans Rule is now parameterized. The statement about when officials think that QE will end is simply a statement about when they think the parameters will be realized. But who cares? Private forecasters are no worse than Fed forecasters! Personally, I thought that we'd breach those parameters fairly quickly, and my note on the subject was called "Objects In Mirror May Be Closer Than They Appear." The error here seems to be that people expected QE-infinity really meant that the Fed would be easing forever, and that was incorrect a couple of weeks ago...not yesterday.

    In any event, it doesn't matter because the real question isn't how much more water they add to the vat (that is, sterile reserves) but how (and if) they are able to remove the water that is already in the vat - which is trying very hard to get through the valve into M2. Again, I urge readers who took the end of the year off to look at my piece on this topic, "What Will the Fed Do When It's Finally Time To Tighten?" Money supply is accelerating again, +8.25% over the last year. And European M2 in November (numbers just out recently) accelerated to the fastest y/y pace since 2009.

    If this makes investors concerned about the sketchy valuations of fixed income and stocks, then good - those markets are frothy and I will welcome prices where long equity investing holds more long-term promise than it currently does. But the reaction to the minutes, in my view, is mostly a case of people failing to understand Fedspeak.

    (Note that this article also appears on my Wordpress site.)

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Jan 04 7:51 AM | Link | Comment!
  • Summary Of My Post-Employment Tweets

    Here is a summary of my post-Employment tweets at @inflation_guy, for those not on Twitter and those who just want to see them all together. I also include a chart and some commentary:

    • Ouch. #Canada added 1/3 as many jobs as the US did last month, and that nation has 1/9 of the population.
    • Awful payroll data - 34k lower than expected with an additional -41k revision.
    • Unemp rate fell from 8.254% to 8.111%, looks like a 0.2% fall but only b/c rounding. And it was all labor force shrinkage.
    • Saw comment that the unemp # matters politically. No it doesn't. These are numbers. What matters is what people feel is happening. And
    • ..and with employment, the man on the street doesn't need the government to tell him if the employment situation sucks.
    • Weekly hours back to where we started the year. And Participation Rate now at the lowest level since 1979.
    • One thing this ought to do is quiet the conspiracy theories about how Obama is cooking the numbers! Couldn't have cooked up worse.
    • Internals even worse: I follow "Not in Labor Force, Want a Job Now". Highest since they strted asking that qn: [Note: I include this chart below]
    • 7 million people aren't even looking for work, but want a job and would take one if offered. 7 million!
    • Don't worry too much about hourly wages meaning deflation is coming. Wages follow #inflation, they don't lead.

    Here's the chart referred to in the second-to-last tweet (Source: BLS):

    (click to enlarge)

    Republicans, don't cheer because we got a weak number. It isn't the number that causes trouble to the Obama campaign; it's the perception of the job market and that's not necessarily correlated to the number itself. Perceptions were already bad, and it's more likely this number is slightly understated.

    Democrats, don't cheer because of the decline in the Unemployment Rate. You might think it makes a nice talking point, but if you crow about the improving labor market people will think you're an idiot. The labor market isn't improving. It's stagnating, at best; at worst, the crisis in Europe and the weakening of growth in Asia is dragging our increasingly export-sensitive economy down.

    In fact, both sides of the aisle should be crying. But watch stocks jump! It's a little disappointing to me, actually, since more pundits will now get the QE3 call right. However, this number didn't "seal the deal" - it was already sealed, and the Fed was going to be easing next week no matter what today's number was.

    Sep 07 9:07 AM | Link | 4 Comments
  • Another Post Last Night - Not On SA

    Seeking Alpha has been having some issues picking up my articles recently. They usually get up here but sometimes it takes almost a full 24 hours.

    I wrote a decent article last night, entitled "Side Bet With Ben?" You can find it here.

    I think the SA people are trying hard to work out the workflow issues, so hopefully we can remedy this situation. Always remember you can get the article the moment I post it by following me on Twitter (@inflation_guy) or by subscribing to my blog directly - follow the link above and look for the subscription box. It's as free as Seeking Alpha.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Jun 15 8:43 AM | Link | Comment!
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  • In case SA doesn't publish my CPI tweet summary, like they didn't last month, here it is:
    Jul 17, 2015
  • Two days late, but I don't think SA ever picked up my CPI commentary:
    Feb 28, 2015
  • Wouldn't expect SA to post this one but if negative yields are causing calculation problems, try this:
    Feb 4, 2015
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