By Murray Gunn
When I was writing technical analysis reports for the customers of a major global bank, I received some interesting feedback from one of the bank’s relationship managers. The customers liked the reports, she said, but it would be good if I made them less “technical.” Making technical analysis reports less technical, hmmm. (To be fair, it is actually good advice because striking a balance between technical details and readability is an art.) Sometimes, though, an explanation of a concept cannot help but delve into some detail. So please bear with me on this one.
Evidence is emerging that banks in the U.S. are struggling to find the money required to fund their operations. The “Fed Funds Rate” that gets the headlines when it is changed by the Open Market Committee of the Federal Reserve is not the whole story when we are looking at the technicalities of the money market. That rate is actually the Fed Funds Target Rate (Upper Bound). You see, the Fed sets an interest rate range, currently between 2% and 2.25%. Every day, banks in America lend and borrow the reserves they hold at the Fed at a rate which fluctuates in between that range. That rate is called the Fed Funds Effective rate. If there is increasing demand for money from banks, the Effective Fed Funds rate will drift higher. Contrary to popular belief, therefore, the Fed does not control the Fed Funds rate.
Continue reading There is Evidence That Deflationary Forces Are Already Taking Hold in America
The following is excerpted from the Opening Notes segment in this week’s edition of Notes From the Rabbit Hole, NFTRH 525 (out on Sunday, November 11). It pretty much came out of nowhere after I did a comparison of Google searches for “inflation” and “deflation” while checking Google Trends for another aspect of the report.
The Google Machine Inspires a Discussion about Inflation & Deflation
Switching gears, while I was in the Google machine I decided to compare two terms that are at the heart of our investment management going forward; “Inflation” and “Deflation”.
It is no surprise that inflation is always much more often searched for because well, they are inflating in one form or another constantly. Whether it is through outrageously experimental monetary policy under the Bernanke Fed or supposedly sound fiscal policy under the Trump administration, it is all designed to raise prices and enrich asset owners, while leveraging debt (which is where the potential for deflation comes in).
Continue reading The Google Machine Inspires a Discussion about Inflation and Deflation
By Jeffrey Snider
It was never really all that much. The best that might have been said was that it was a pause in the building of renewed deflationary pressures. The dollar had “risen” again especially in April and May, but then traded sideways through July. It wasn’t a rebound or even much that was positive, just less immediate heaviness.
That appears to be over with now in August; always August. The dollar is on the move which means the eurodollar is deficient. The squeeze is back and it is being felt almost across the board. Copper is down again as is gold. The metals are, and have been for years, quite clear as to what all this is.
Continue reading Collateral Silos And The Deflationary Gold Rush
By Jeffrey Snider
I’ve seen a lot of commentary lately describe conditions as if things are calmed down. There was a bit of growth scare, a little T-bill indigestion earlier in the year. The Chinese are somehow both stimulating their export sector by devaluing CNY, and also controlling the price of gold while they do it. The contradictory inflation/deflation signals have apparently just canceled each other out!
There are, in reality, cycles within cycles. In March 2015, for example, the “rising dollar” paused after its first phase devastated some currencies and commodities (primarily oil, that anyone cared to notice). The economic damage hadn’t yet become visible, so the “supply glut” talk seemed reinforced by a lack of things happening right then. Until that August and CNY, kicking off the second half, or cycle within a cycle, it may have seemed like a lot of smoke with no fire.
It was the same way in 2008, too. The panic period can be broken down into two parts, the first finishing up with Bear Stearns’ near demise. In between March 2008 and July 15, optimism bloomed in official and unofficial ways. Policymakers were careful but still spoke especially in private as if their skillful handling of things had warded off the worst cases. Maybe even the US would avoid a recession altogether.
Continue reading Deflationary Decade(s)
By Michael Ashton
I’m a relatively simple guy. I like simple models. I get suspicious with models that seem overly complicated. In my experience, the more components you add to a model the more likely it is that one of them ceases having explanatory power and messes up your model’s value. In this it is like (since tonight is Major League Baseball’s All-Star Game I thought I’d use a baseball analogy) bringing in relievers to a game. Every reliever you bring in has some chance that he just doesn’t have it tonight, so therefore you ought to bring in as few relievers as you can.
Baseball managers don’t seem to believe this, so they bring in as many relievers as they can. Similarly, economists don’t seem to believe the rule of parsimony. The more complexity in the model, the better (at least, for the economist’s job security).
Let’s talk about demographics and inflation.
Continue reading Developed Country Demographics are Inflationary, not Deflationary
By Jeffrey Snider
Sometimes it pays to wait. Better to be sure than premature. In January 2014, the journal Central Banking handed out its inaugural awards. Among the recipients was Paul Volcker who was bestowed a lifetime achievement prize. The initial Governor of the Year honorific, something like a central banker MVP, went to Mario Draghi of the ECB. He graciously accepted in the glow of universal acclaim for the “unflappable conviction” of his July 2012 promise and the broad, cautious optimism it had provoked.
On behalf of the Governing Council, executive board and staff of the ECB, I’m honoured to be named governor of the year by Central Banking. Thanks to both the ECB’s actions and hard work by governments in implementing fiscal consolidation and structural reforms, conditions in financial markets have gradually eased since July 2012.
Just five months later the ECB was doing NIRP and a little less than a year beyond that the start of a QE program. This has as already expanded once, and as of the middle of 2018 it is still going.
Continue reading How to Totally Misinterpret Deflationary Impulses
I am sure you remember the lead up to Q1 2016. The US economy and stock market were transitioning from a Goldilocks environment and narrowly avoiding a bear market while the rest of the world was still battling deflation. Precious metals and commodities were in the dumper and try though US and global central banks might, they seemed to fail to woo the inflation genie out of its bottle at every turn.
Then came December of 2015 when gold and silver made bottoms followed by the gold miners in January of 2016. Then by the time February had come and gone the whole raft of other inflatables (commodities and stocks) had bottomed and begun to set sail.
As I listened to Mr. Powell speak about inflation yesterday my mind wandered back to Q1 2016 as I thought about the Fed trying to manage inflation at or around 2%. I also thought about how inflation tends to lift boats, not sink them. At least that is what it does in its earlier stages, in its manageable stages.
The balls out post-crisis inflation begun by Ben Bernanke was a massive market input and I suspect we have not yet seen its full effects – other than in US stock prices thus far. So dialing back to Q1 2016 let’s look at a few pictures, beginning with the Fed’s 10 year breakeven inflation rate, which bottomed… you guessed it, in Q1 2016. That means that ‘deflation expectations’ topped at that time.
Continue reading Inflation Trade, in Progress Since Gold Kicked it Off in Q1 2016
By Charlie Bilello
Two words often heard in conversations about the bond market.
Because bond investors tend to demand higher yields in periods of higher inflation and lower yields in periods of lower inflation or deflation.
Looking at a long-term chart of yields and inflation, the relationship is clear.
Data Source: Federal Reserve Economic Data (FRED).
Not as clear from this chart is how bonds have actually performed during various levels of inflation. What has been the best environment for bond investors historically: high inflation, low inflation, or something in between? To answer that question, we need to take a closer look at the data.
Continue reading Inflation, Deflation and Bond Market Returns