Nudge at Neptune

By Michael Ashton

Okay, I get it. Your stockbroker is telling you not to worry about inflation: it’s really low, core inflation hasn’t been above 3% for two decades…and, anyway, the Fed is really trying to push it higher, he says, so if it goes up then that’s good too. Besides, some inflation isn’t necessarily bad for equities since many companies can raise end product prices faster than they have to adjust wages they pay their workers.[1] So why worry about something we haven’t seen in a while and isn’t necessarily that bad? Buy more FANG, baby!

Keep in mind that there is a very good chance that your stockbroker, if he or she is under 55 years old, has never seen an investing environment with inflation. Also keep in mind that the stories and scenes of wild excess on Wall Street don’t come from periods when equities are in a bear market. I’m just saying that there’s a reason to be at least mildly skeptical of your broker’s advice to own “100 minus your age” in stocks when you’re young, which morphs into advice to “owning more stocks since you’re likely to have a long retirement” when you get a bit older.

Many financial professionals are better-compensated, explicitly or implicitly, when stocks are going up. This means that even many of the honest ones, who have their clients’ best interests at heart, can’t help but enjoy it when the stock market rallies. Conversations with clients are easier when their accounts are going up in size every day and they feel flush. There’s a reason these folks didn’t go into selling life insurance. Selling life insurance is really hard – you have to talk every day to people and remind them that they’re going to die. I’d hate to be an insurance salesman.

Continue reading Nudge at Neptune

Inflation Around The Corner? February Inflation Muted (Core 1.8% YoY)

By Anthony B. Sanders

Janet Yellen kept saying that inflation was just around the corner, but apparently she meant one of those long New York City blocks.

The February inflation numbers are in almost exactly as forecast:  According to the BLS, CPI MoM declined to 0.2% MoM while CPI YoY rose slightly to 2.2%. CORE CPI MoM fell to 0.2% while CORE CPI YoY remained level at 1.8%.


Meanwhile, The Federal Reserve is merrily raising its target rate and letting its T-note portfolio mature in the face of whimpering inflation.

Continue reading Inflation Around The Corner? February Inflation Muted (Core 1.8% YoY)

Post-CPI Summary

By Michael Ashton

Below is a summary of my post-CPI tweets.

  • OK, 15 minutes out from CPI. Exciting one after last month’s WTF print.
  • Last month remember core CPI was +0.349% m/m, highest m/m in 12 years. 1.846% on y/y, so almost printing 0.4% and 1.9% which would have been emotionally challenging for the markets and Fed.
  • For this month, 0.17% is rough consensus on core. For the economists. The Street is leaning short of that number. The story is that last month’s CPI was pulled higher by one-offs.
  • But some of those things they think are one-offs, like Apparel, weren’t. They were reversing previous one-offs.
  • Maybe some of them were, but I don’t see many. I think another 0.3% is unlikely but the market – both bonds and stocks – would react extremely poorly if we got it, even if it was just rounded up to 0.3%.
  • Anything 0.18% and higher will cause y/y core to tick up to 1.9%. To go to 1.7% you’d need 0.07%. So bigger risk of an uptick.
  • At some level this isn’t really a risk…it’s going to happen over next few months anyway. Mar-July 2017 was 0.9% annualized on core CPI.
  • This month we’re watching apparel of course (+1.66% m/m last month). Also used cars & trucks, which everyone thinks is going down but I think is still going up.
  • And medical care, which looks a little like it might be hooking higher but has a long way to go. Hospital services is one place we could see mean reversion. If I made point forecasts, I’d probably be roughly on consensus. But I don’t. I spend my time thinking about risks.
  • …and while some of the risks to the consensus are lower, they’re already incorporating some mean reversion. Underlying pace of inflation is ~2.4% ex- the one-offs, so 0.17% is a bit below the ‘natural’ current run rate. And as I said the Street is leaning shorter than that.
  • Anyway, we’ll find out in 10 minutes. Either way, I’m on the TD Ameritrade Network at 3:05 to talk about CPI. Also, if you missed it check out the Odd Lots podcast I’m featured on this week:
  • Going into the number, 10y Treasury yields are -1bp, Breakevens +0.25bp roughly, S&P futures +4.6.
  • Well 0.18% on core m/m, and 1.857% on y/y. Those economists are goooood. But that’s above where traders were looking.
  • Last 12 months. This does make the slope look less scary.

Continue reading Post-CPI Summary

Inflation, Deflation and Bond Market Returns

By Charlie Bilello

Inflation. Deflation.

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

The Inflation Scare of 2012

By Kevin Muir

I would like to take you back to 2012. Just a few short years after the soul-searching-scary Great Financial Crisis of 2008-9, market participants had finally given up their worry of the next great depression enveloping the globe, but had replaced it with an equally fervent fear that inflation would uncontrollably explode. The Federal Reserve had recently completed their second round of quantitative easing, much to the chagrin of a large group of distinguished economic thinkers who had gone as far as writing an open letter to the Fed Chairman pleading he reconsider the program.

Continue reading The Inflation Scare of 2012

Really Looking for Inflation, Part 2

By Jeffrey Snider

Continued from Part 1

What these unusually weak productivity estimates lean toward is, quite simply, the possibility the BLS has been overstating jobs gains for years. In early 2018, there is already the hint of just that problem in a 4.1% unemployment that doesn’t lead to any acceleration in wages and labor income. What it does suggest is that something (or several somethings) in these estimates is off somewhere.

For the unemployment rate, that already includes the participation problem in its denominator, but, again, that is not mutually exclusive of problems in the numerator (the increase in the number of payrolls). As nothing more than a rhetorical exercise utilizing nothing more than back-of-the-envelope counterfactuals (so take it in that spirit), if productivity had been more balanced and thus more consistent with how an economy actually works over the intermediate and long terms (not transitory), that would have meant by simple arithmetic either output was much higher or labor input much lower.

The Household Survey gained 1.44% per year during those same years, a lower rate than total hours worked reflecting the increase in full-time jobs as some part-time positions were converted back to the former pre-crisis status. Reducing the total gain in hours worked by more than a third (as shown above) would have lowered the increase in the Household Survey by more than 5.2 million at the end of 2017, leaving out how in every likelihood the reduction would have been more severe factoring less part-time jobs conversions.

Continue reading Really Looking for Inflation, Part 2

Really Looking for Inflation, Part 1

By Jeffrey Snider

Most people have been looking at Jerome Powell’s Chairmanship of the Federal Reserve as continuity, a comprehensive extension of Janet Yellen’s (and therefore Bernanke’s). This would by nature include all the nasty habits Chairman Yellen had picked up during her one term. At the top of that list is the word “transitory”, particularly how it came to be used during her tenure in a manner wholly inconsistent with its meaning.

This expression she applied mostly to inflation, or as if somehow a valid excuse for the central bank missing its inflation target (mandate) for the last half of Bernanke’s second term as well as the entirety of her own. Six years cannot fall inside the definition of transitory. But when you have no other alternate theory?

At his Humphrey-Hawkins mandated testimony last month, Jerome Powell briefly mentioned the other undershoot. This one happens to be the very factor that policymakers are counting on for transitory to end. Alongside a great many economic problems, worker wage rates have remained stagnant in nominal terms, and atrocious in real terms even with low calculated inflation.

Powell, however, is upbeat (when is he not?) Wages, he told Congress, “should increase at a faster pace as well,” for one because inflation has been “as likely reflecting transitory influences that we do not expect will repeat.’’ Weak wages are transitory, too?

Continue reading Really Looking for Inflation, Part 1

The Fed’s Accidental Preoccupation with Housing

By Michael Ashton

I get asked frequently about Core PCE inflation. Because the Fed obsesses over Core PCE, as opposed to one of the many flavors of CPI (core, median, trimmed-mean, sticky-price), investors therefore obsess over it as well.

My usual response is that I don’t pay much attention to Core PCE, for several reasons. First, there are no market instruments that are remotely tied to PCE, so you can’t trade it (and, for the conspiracy-minded among you, that means there is no instrument whose market price can call shenanigans if the government figure is ‘massaged’). Second, while PCE is interesting and useful for some uses – it measures prices from a different perspective, mainly from the supplier-side of the equation so that, for example, it captures what Medicare pays for care as opposed to just what consumers pay – those aren’t my uses. Markets respond to inflation, and to perceptions of inflation, but what the government pays for healthcare isn’t something we perceive directly.

So, I care about PCE more than, say, PPI, but only just. The only reason I care about PCE is that the Fed cares about it.

Now,  PCE differs from CPI in a couple of key ways – apart from the philosophical way mentioned above, that one measures the price of things businesses sell and one measures the price of things people buy. But those key ways are mostly interesting to pointy-head economists who are interested in calculating the third decimal point. Me, I’m just trying to get “higher” or “lower” correct. (Ironically, those folks who are interested in the third decimal point are the same folks who miss the big figure in front). So they wail at the following chart (source: Bloomberg), and moan about how the Fed has been unable to get inflation higher because of this persistent shortfall of PCE compared to CPI. Try harder!

Continue reading The Fed’s Accidental Preoccupation with Housing

Inflation is Not Under Control

By Keith Weiner

Let’s continue on our topic of capital consumption. It’s an important area of study, as our system of central bank socialism imposes many incentives to consume and destroy capital. As capital is the leverage that increases the productivity of human effort, it is vital that we understand what’s happening. We do not work harder today, than they worked 200 years ago, or in the ancient world. Yet we produce so much more, that obesity is a disease more of the poor than the rich. Destruction of capital will cause us to produce less, and that will mean reverting to a lower quality of life.

Keeping up with Inflation

Let’s start off by addressing how not to look at this destruction. There is a facile belief offered by both Fed propagandists and Fed critics alike. It goes like this. Increased quantity of dollars causes increased prices. Therefore it’s like a tax. And the way to measure your wealth is divide the liquidation value of your portfolio by the consumer price index. This tells you if your stocks, bonds, real estate, and the family farm could trade for more groceries and cars this year. Or less. In this view, you are hoping that somehow your assets keep up with inflation.

We insert the word somehow, because it is a kind of magical thinking. Everyone knows that a central bank cannot print wealth. If it could, Zimbabwe would be the richest country. Yet, if asset prices go up due to central bank policies, most asset owners feel richer. At least if consumer prices do not go up proportionally. One corollary of the fallacy of the Quantity Theory of Money is the fallacy of using consumer prices as the measure of economic value.

Why do we say this is not the method of looking at capital destruction? It’s because over the last 10 years, the Fed and other central banks have overstimulated capital destruction. And yet the above metric of the purchasing power of your estate has gone up. Everyone (at least those who own substantial assets) feels richer, despite economy-wide impoverishment.

If you were a doctor, and your deathly ill patient had a body temperature of 98.6F (37C), you would have to find another measurement tool. Clearly not all diseases cause a fever. Well, monetary doctors need to look past consumer price indices, inflation so called, and purchasing power of your assets.

Our first observation is that the purpose of a capital asset is not for spending. The prudent investor does not think about spending his savings, or selling the family farm. He says “I cannot afford that $300,000 Ferrari” if he has only a million or two in the bank.

Continue reading Inflation is Not Under Control

Mirage? Inflation Still MIA as Number of Options Betting on Rise in Short Volatility ETF Surges

By Anthony B. Sanders

Like a mirage in the desert sand, inflation is still missing in action (MIA).

Core Personal Consumption Expenditures (PCE) growth YoY remains at 1.5% for January. The PCE deflator YoY remained the same at 1.7%.


But the number of options betting on a rise in short-volatility ETF is surging.


Yes, inflation is still a mirage (at least to The Fed). That should put a lid on further rate hike/unwinding activity. Or not!


John Mauldin and Long Soapy Showers

By Michael Ashton

[biiwii comment: trying to ignore the imagery conjured up by the title, Mike… :-( ]

I feel like I am falling behind in my articles and commenting on other articles that people have recently written about inflation. After years – literally, years – in which almost no one wrote anything about inflation, suddenly everyone wants to opine on the new shiny object they just found. At the same time, interest in the solutions that we offer – investment strategies, consulting, bespoke inflation hedges, etc – has abruptly picked up, so it feels like the demand for these articles is rising at the same time that my time to write them is shrinking…

But I try.

I want to quickly respond to an article that came out over the weekend, by widely-read author John Mauldin. I’ve corresponded over the years from time to time about inflation, especially when he got way out on the crazy-person “CPI is made up” conspiracy theory limb. To be fair, I think he considers me the crazy person, which is why he’s never referred to me as the inflation expert in his articles. C’est la vie.

Continue reading John Mauldin and Long Soapy Showers

Inflation Surge

By Callum Thomas

This week the “Chart of the Week” is a rather peculiar indicator on inflation.  The global inflation outlook has been gaining considerable interest as the global synchronized economic upturn gathers pace and central banks start to think about normalizing policy.  Clearly some (e.g. the Fed) are more advanced on this than others (e.g. the BOJ and ECB).  Inflation has become the baby elephant in the room while the big elephant in the room is still the global turning of the tides in monetary policy.

Anyway, on to the chart (which featured in a discussion on the outlook for the US Dollar Index).  The dark blue line is a composite of terms from Google Search Trends designed to capture search interest in inflation (e.g. terms  such as “higher inflation”, “why are prices so high”, “prices going up”, “inflation protected”, etc).  The main point is that there seems to be a surge in interest in inflation, and that could be an harbinger of things to come.

Continue reading Inflation Surge